Litigation finance set to become an effective tool for dispute resolution

The need for litigation finance is on the rise due to increasing globalisation and the liberalisation of funding regimes across jurisdictions. With suitable conditions in the Indian market and support for litigation finance in the Indian law, third-party funders and service providers such as law firms, practi- tioners and arbitral institutions have come together to form the Indian Association for Liti-gation Finance (IALF).

The IALF aims to promote the growth of litigation finance in the Indian market and create a level playing field for all stakeholders (funders, lawyers, experts and clients). The IALF will comprise members from across segments – dispute resolution, including adjudicators, funders, lawyers, experts, etc. Membership will open once the working group comes up with relevant instruments applicable to the IALF, which will include articles of association, rules of governance, code of conduct, guidelines and the procedure for dispute resolution. The working group will appoint a board of directors, a dispute resolution board, a CEO and a chief disciplinary officer. The IALF will be a self-regulating and educating body for people to discuss, learn and thrive in the business of litigation finance.

At the launch and signing of the IALF, industry experts shared their views on the importance of litigation financing globally, the rise of third-party funding for dispute resolution in India and the emerging opportunities in the
Indian market…

Litigation financing in India

There is not enough market awareness when it comes to litigation financing in India, where it has so far been a lesser-known concept, with cases few and far between. The growth of litigation in India can be attributed to the growing trend of international litigation, amendments to various laws and rise of international disputes. There are mass claims owing to rising bank frauds. Litigation financiers act as partners who bring in specialized capabilities of managing litigation and charge on a success basis. Commenting on the litigation financing industry, Prateek Bagaria, Partner, Singularity Legal says, “The Indian market has been a busy participant in the growing international litigation finance industry and, in fact, there are reported examples of foreign parties being funded for claims against Indian parties. The
usual focus is on the infrastructure industry, which has seen significant claims and awards, especially against Indian state-owned enterprises/state agencies”.

In India, there is a traditional notion that litigation financing is a business. This calls for a change in mindset. The concept of third-party funding must be welcomed. Indian courts will be ultimately guided by foreign jurisdiction. Initially, the majority of judges will be wary, but they will accept the concept over time. In litigation financing, the third-party funder needs long-term money, which comes from investors. Hence, it is accountable for the equity capital of investors. At the same time, the third-party funder needs dispute cases seeking financial resolution. Third-party funding can improve access to justice because the funder understands that the claimant company’s right to compensation needs to be recognized by the tribunal and thus dedicates its legal expertise to better understand the realistic compensation while working on the recoverability of future judgements. It can monetize or de-risk the claim by externalizing the funding for all the proceedings.

The third-party funder needs to have a close look at the jurisdiction – whether the tribunal is competent for a case or the legal merits are strong enough for the third-party funder to put money at risk on the case – and understand the consistency of the theory that gave rise to the dispute. The international funding community is gearing up for India and is supporting Indian businesses. There has been meaningful improvement in the Indian legal framework for arbitration, insolvency and enforcement, which has boosted the confidence of funders in the Indian market. It is extremely important to gain local knowledge and understand the associated challenges for better risk management. There are many Indian businesses with substantial unrealized value tied up in late-stage arbitrations, particularly in the construction and infrastructure sectors. There is huge scope for litigation financing in this space.

The Indian government has allocated $1.4 trillion for the period 2019-25 for the infrastructure sectors. In the next two to three years, India is poised to become the third largest market for construction and infrastructure. This makes it a crucial market for litigation financiers. In the latest budget (2021-22), the government has proposed to set up a development financial institution (DFI), allocating Rs 200 billion for the same. The DFI will be able to lend around Rs 5
trillion to infrastructure projects for the next three years. Thus, the infrastructure sector is a potential market for litigation financing. Almost 70-75 per cent of the disputes are in the infrastructure sectors, including energy, transport and construction. The infrastructure sectors, being capital intensive, will benefit if litigation financing is streamlined in the times to come.

Besides, there is a need for third-party funding in the public sector as well. The insolvency and bankruptcy domains are struggling to take shape in India. One of the major reasons is the unavailability of finance. If litigation finance is introduced for companies in liquidation, it will have huge benefits. There might be an issue in recognizing the funding agreement as a valid agreement, where a certain amount goes to the funder if the case is successful. Therefore, some level of change is required for making third-party funding a work able model. The biggest beneficiary of third party funding would be micro, small and medium enterprises and start-ups.

“Bundling a portfolio of cases in one funding package allows the client to seek funding for a broader range of disputes and allows third-party funders to diversify their risks.”

Tom Glasgow, Chief Investment Officer (Asia), Omni Bridgeway

Litigation financing as a risk management strategy

Litigation financing is essentially being used as a corporate financial risk management tool in a sophisticated way. Litigation finance is unlike a typical bank loan or insurance. It is the only form of finance that allows leveraging value in complex contingent plans. Thus, third-party funders treat litigation and arbitration as a valuable asset class unlike most traditional financial institutions. Litigation financing is done on a non-recourse or limited recourse basis with no negative impact on the balance sheet of a business/ client. “The bundling of a portfolio of cases in one funding package allows the client to seek funding for a broader range of disputes and third-party funders to
diversify their risks,” says Tom Glasgow, Chief Investment Officer (Asia), Omni Bridgeway.

Realistic budget for litigation financing

The heart of any funding decision is economic analysis. Funders will fund the case if the ratio between the investment and the expected damage ensures a decent return and the claimant also gets a fair share. The budget prepared by lawyers decides the investment made by funders. If the budget keeps changing, there is a risk midway, which makes the case economically unviable for both the funder and the claimant. Thus, budget adherence is very important. One way is to have a capped budget, whereby lawyers carry the risk of exceeding the agreed budget. As budgets are central to the funding decision, lawyers must adopt a forward-looking approach while preparing the budget. Most importantly, the budget should be realistic and comprehensive.

“The Indian market has been a busy participant in the growing international litigation finance industry and, in fact, there are reported examples of foreign parties being funded for claims against Indian parties. The usual focus is on the infrastructure industry, which has seen significant claims and awards, especially against Indian state-owned enterprises/state agencies.”

Prateek Bagaria, Partner, Singularity Legal

Transparency and disclosures

The relationship between arbitrators and any entity that has a direct economic interest in the dispute should be considered in the circumstances of the disclosure. Recent laws mandate the disclosure of third-party litigation funding arrangements to other parties in a case. There are some bilateral investment treaties that explicitly discuss disclosure obligations in the funding arrangement. This is important to avoid any conflict of interest from an institutional standpoint. In third-party funding, a concentrated segment of the funding industry invests in international cases and there is a symbiotic relationship between funders and a small group of law firms related to other law firms and some leading arbitrators. All this calls for transparency in third party funding. It is extremely important from an institutional point of view that the arbitration process remains unbiased, independent and impartial.

In sum

Litigation financing is capable of creating a level playing field for the parties involved. It also has the ability to bring in more objectivity with a third party involved. This ensures better representation and risk management. In litigation, companies incur huge expenses, which take a toll on their business. Banks do not provide funds for litigation. Third-party funding ring-fences a company’s working capital and internal accruals, and does not impact the dividend payouts and expansion plans. This makes litigation financing worth evaluating.