LITIGATION FINANCE

By – Khushi Chaudhary

” The return on this type of financing is more than 50%-100% in some cases which is a considerably better return on any investment done in any conventional corporate finance deals in the Indian Market.By business world ” ~Business World

Litigation finance or litigation funding is non-recourse funding where a third party provides the financial support which enables the litigant to bear the costs of litigation or arbitration disputes.

The litigant obtains all or part of the finance depending upon the predetermined terms of an agreement to cover its legal costs from a third party financer or a commercial funder having no interest in the lawsuit. 

After the resolution of a dispute, if the case is won by the funded party, the third party or the commercial funder receives an agreed share of the amount as the outcome of the successful litigation.

But if the case turns out to be unsuccessful in that event there is no recovery mode from the disputes in hand and the disputing parties are under absolutely no obligation to repay the funder for their investment.

Litigation funding has gained immense traction amongst investors in the last couple of years. 

It’s not only the lack of liquidity that drives a decision to seek third-party investors but as disputing parties now seek investors for reasons of mere convenience, cost-effectiveness and risk-sharing.

Moreover, when the claimant decides to pursue a claim under litigation or commercial arbitration, they are taking on financial risk.

The risk not only includes the irrecoverable operational cost but also the risk of having an unsuccessful claim at the end of the dispute resolution process.

Therefore, Adopting litigation financing in this way can shift that financial burden to a third-party funder, who not only has their risk-assessment team but also carries a diversified portfolio of case investments.

From the viewpoint of investors, litigation finance is a good investment that stays unaffected by any other business cycles and markets. Hence, in times of economic downturn when other investments may not yield benefits, litigation finance seems to be unaffected. 

The coronavirus pandemic has hit the economic growth of India and lots of businesses suffered huge losses, causing more legal contractual disputes between the companies in India. Indian companies have only one option to fight the case and pay hefty legal fees to very expensive lawyers. 

And therefore it becomes difficult for the companies because of their inability to meet the working capital requirement due to payment of hefty legal fees to the lawyers. The number of cases having good merits remains uncontested in India. And here litigation finance comes into the picture.

Last year two notable examples of third-party funding have raised awareness amongst corporate finance advisors to see litigation funding as an alternate means of financing: the monetisation of an arbitration award in Hindustan Construction Company and Patel Engineering.

Major infrastructure companies in India are struggling with stressed assets and huge pending claims; litigation funding would help them to settle their claims.

Litigation finance is a very old concept and has been permitted in England and Wales since the 1960s having a code of conduct for litigation funders facilitated by their ministry of justice. In Australia, corporation amendment (Litigation Funding) regulations 2020 were introduced to provide regulatory oversight on the funders.  Similarly in the United States, the litigation funding transparency act of 2019 was enacted which requires disclosure of funding in litigation. 

In India, there is no piece of legislation that regulates third-party funding for litigations and/or arbitrations in India. However, the Supreme Court of India in the case of Bar Council of India v. AK Balaji expressly clarified that There appears to be no restriction on third-parties (non-lawyers) funding the litigation and getting repaid after the outcome of the litigation… Third-Party Litigation Funding / Legal Financing agreements are not prohibited“.

In a country like India, where the economic policies are framed in such a way as to always open doors for foreign investments and multinational corporations, disputes and differences are bound to arise between parties.

Nowadays there’s an upward graph of economic activities that has led India to become a hub for commercial arbitrations.

Thus, it cannot be denied that India would eventually require a comprehensive and progressive legal framework that would facilitate convenient dispute resolution, provide maximum judicial support for arbitration, and minimize judicial intervention.

However, it is well-established law in India that advocates are expressly prohibited from funding any litigation and/or arbitration when representing a party in the underlying dispute. This in turn could raise eyebrows for funders that seek contingency fees of legal counsel as a critical factor to determine an investment decision.

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