Litigation is an expensive affair. The recent reforms in the law of relating to commercial disputes and alternative dispute resolution have done little in reducing the costs of litigation. Litigation Funding could provide claimants with access to justice by enabling them to enforce their legal rights while being cushioned from the burden of excessive expenditure incurred in the form of lawyer’s fees, arbitrator’s fees, court fees and other miscellaneous litigation-related expenses.
Meaning and scope of Litigation Funding
Litigation Funding, also known as “Third-Party Funding” or “Legal Finance” may be understood as the non-recourse financing of the costs and expenses of a litigation by a Funder (who is personally not interested in the subject matter of the dispute), in consideration of receiving a proportion of the monetary award of the litigation, if successful. Litigation Funding can be utilised to cover the costs of any form of dispute resolution mechanism, including traditional litigation in courts, or arbitration proceedings. The funding company covers all the costs of the Litigant incurred in the litigation, including counsel’s/advocate’s appearance fees, court’s filing fees /arbitrator’s sitting fees, pre-deposit, adverse costs order and other expenses. Litigation Funding can be availed of for civil and commercial disputes, including contractual disputes, insolvency proceedings, class action suits, etc. The funding companies usually do not fund matrimonial cases, criminal proceedings and, for technical reasons, patent related litigation.
Litigation Funding is usually availed of by Plaintiffs and Claimants, since the concept is essentially based on the consideration being the contingent share in the monetary award. However, there is no bar on Counter-Claimants and Defendants availing of Litigation Funding; to this end, the Litigation Funding Agreement is in the nature of an Insurance or Risk Transfer Agreement.
If the litigant is unsuccessful in the case, they usually don’t have to pay the funding company anything, and the funding company bears the entire loss.
How Litigation Funding Works
Firstly, a prospective litigant approaches a Funder that will consider commercial legal matters as financeable assets. The Funder would then conduct a due diligence of the Litigant’s case, considering various factors including the prospective receivables, expected time-frame, risks involved, “winnability”, etc. and accordingly put forward a finance solution to the Litigant, which may be about financing a single case or portfolios of multiple cases.
The capital thus provided by the Funder is then utilised for covering the costs and expenses of the case, and is usually provided for a fixed time limit. Usually, such capital is provided on a non-recourse basis, i.e. the Funder would receive his repayment out of the fruits of success, but would not be entitled to any return in case of an unsuccessful litigation.
Litigation Funding can be provided at any stage of the proceedings, and can continue until disposal of final appeals and enforcement of the judgment, subject only to an agreed time-frame between the parties, if any.
Legality of Litigation Funding in India
In India, while s. 23 of the Indian Contract Act, 1872 provides that an agreement is void if the Court regards its object or consideration to be opposed to public policy, the strict rule of champerty and maintenance has been held not to apply in India. The Privy Council in its landmark decision in Ram Coomar Coondoo v. Chunder Canto Mookerjee (1), for the first time, permitted third-party litigation funding, holding that:
“Their Lordships think it may properly be inferred from the decisions above referred to, and especially those of this tribunal, that a fair agreement to supply funds to carry on a suit in consideration of having a share of the property, if recovered, ought not to be regarded as being, per se, opposed to public policy. Indeed, cases may be easily supposed in which it would be in furtherance of right and justice, and necessary to resist oppression, that a suitor who had a just title to property, and no means except the property itself, should be assisted in this manner.
But agreements of this kind ought to be carefully watched, and when found to be extortionate and unconscionable, so as to be inequitable against the party; or to be made, not with the bona fide object of assisting a claim believed to be just, and of obtaining a reasonable recompense therefor, but for improper objects, as for the purpose of gambling in litigation, or of injuring or oppressing others by abetting and encouraging unrighteous suits, so as to be contrary to public policy, – effect ought not to be given to them.”
Similarly, the Hon’ble Supreme Court in Re. G, Senior Advocate (2), while finding a lawyer guilty of misconduct on grounds of funding a litigation, observed that the rigid English rules of champerty and maintenance do not apply in India, so if such an agreement had been between third parties, it would have been legally enforceable.
The Apex Court has further reiterated this position of law in Bar Council of India v. A.K. Balaji & Ors. (3), when it observed as under:
“38. In India, funding of litigation by advocates is not explicitly prohibited, but a conjoint reading of Rule 18 (fomenting litigation), Rule 20 (contingency fees), Rule 21 (share or interest in an actionable claim) and Rule 22 (participating in bids in execution, etc.) would strongly suggest that advocates in India cannot fund litigation on behalf of their clients. There appears to be no restriction on third parties (non-lawyers) funding the litigation and getting repaid after the outcome of the litigation……” (emphasis supplied)
Having said that, the field of third-party Litigation Funding has not been well-regulated in India, albeit things are changing gradually. The Hon’ble Allahabad, Bombay and Madhya Pradesh High Courts have amended Order XXV, Rules 1 and 3 of the Code of Civil Procedure, 1908 by inter alia empowering the Court to implead and demand security from any third person financing the litigation. However, unlike foreign jurisdictions, Indian law remains silent as to the permissibility of third-party litigation funding in arbitration and alternative dispute resolution proceedings.
Challenges to Litigation Funding in India
As stated earlier, third-party Litigation Funding is legal and recognised in India, and a Litigation Funding Agreement would be recognised and enforced by the Indian Courts, provided that the terms and conditions therein are reasonable. In spite of this, Litigation Funding has not emerged as a specialised sector in India, inter alia for the following reasons:
- The Funding companies are usually looking to get their investment back, with all profits accrued, within a period of five years. This mean that the legal proceedings as well as the execution proceedings must be completed in five years time. Due to shortage of judges, cases in courts can take longer than five years and execution can take even longer. Even in an arbitration proceeding which is completed in a shorter time frame the claimant still has to approach the courts for execution.
- Funders often prefer that the lawyers also share the risk of their investment by working on a contingency fee basis. This way the lawyers also have some skin in the game, which funders believe leads to the lawyers taking greater efforts to ensure a favourable outcome. In India, lawyers are not permitted to act on contingency basis.
- Funders usually invest 5% of the recoverable amount, with a hope to get 25% of the amount recovered, i.e. If the claim is for Rs. 1 Crore, the funding company will look to invest upto Rs. 5 Lakhs, and if the 1 Crore is recovered they will keep 25 lakhs while the litigant keeps the balance 75%.
Needless to say, Litigation Funding has a tremendous potential to improve access to justice in India by enabling common people and small businesses, who ordinarily cannot afford to bear the heavy expenses of civil and commercial litigation, to enforce their legal rights by approaching the court for relief. However, it has not yet emerged as a specialised sector largely due to the aforementioned systemic challenges, as well as due to the unpredictability of the legal system owing to a dearth of regulation, as well as the general lack of legal awareness among common people.
Having said that, the situation is gradually changing, and with an increase in legal awareness and once the systemic bottlenecks are dealt with, Litigation Funding is likely to emerge as an important part of the financial sector and can eventually make India’s justice delivery system more efficacious and accessible.
The above article is co-written by Vikrant Shetty, Partner, Taurus Legal and Articled Clerk Rishab Murali.
1 (1876-77) 4 IA 23
2 AIR 1954 SC 557
3 (2018) 5 SCC 379 at pp. 411-412Disclaimer: The views or opinions expressed are solely of the author.