Third-Party Funding Of Litigation In India: An Asset Class In Waiting
Why Cyril Shroff believes third party funding of litigation enables a financial level playing field between disputing parties.
Bloomberg reports that litigation finance, as an asset class, has outperformed private equity, real estate, credit and hedge funds. Despite this, litigation financing, also known as third-party funding (TPF), is a yet-to-be-found asset class in India. In fact, at a recent gathering of legal professionals, we were surprised to find that more than 70 percent of the audience believed that third-party funding of litigation was prohibited under Indian law. This is a staggering number, and one that, in many ways, explains the lack of development in:
- this area of finance,
- risk management in litigation, and
- class action suits in India.
Awareness will form the first step in the development of this space. In this article, we set out the facts to clear some common misconceptions, explain the what, who and how of third-party litigation funding, and set out some notes for food for thought as this space develops.
TPF is the non-recourse funding of litigation costs of a disputing party, by a funder, in exchange for a share in the monetary award of the litigation if successful, or settlement amount.
Five Common Misconceptions About TPF In India
The Supreme Court in Bar Council of India v. AK Balaji (2015), has clarified the legal permissibility of TPF in litigation and observed that “There appears to be no restriction on third parties (non-lawyers) funding the litigation and getting repaid after the outcome of the litigation.” The (Indian) Code of Civil Procedure, 1908, (Order XXV Rule 3) as amended by a few Indian states including Maharashtra, Karnataka, Gujarat and MP, expressly acknowledges the role of the third-party financier of litigation costs of a plaintiff, and sets out the situations when such financier may be made a party to the proceedings. However, as on date, there is no legislative instrument that regulates such funding.
It is well established that lawyers in India are expressly barred from funding litigation when representing the disputing party or accepting a success based fee. Such a restriction does not however extend to third parties providing litigation financing.
TPF is not alien to the Indian legal market. Many a mukadma (case) have been bought and sold in the unorganised market by opportunistic investors and desperate litigants, often resulting in the transfer of the very asset that is the subject matter of the litigation. Formal arrangements built on risk-reward share on an arms-length basis, are however yet to come of age in India. Increasingly, Indian infrastructure companies struggling with stressed assets and huge pending claims are exploring TPF. Indian parties in foreign seated arbitrations are also opting for TPF.
An Indian startup venture is already on ground operating as a crowd-funder aggregating caused-based TPF for litigants.
Representative suits, consumer class actions and most recently, securities/shareholder class actions, are all legally permissible suit formats in India. While it is true that the class action regime is in its nascent stages, this has largely been so on account of the lack of a “Plaintiff’s Bar” that established class actions on the back of contingency fees in the west. We believe that the advent of TPF in India will provide the much needed infrastructural platform for classes to come together and receive funding to pursue legitimate actions of enforcement of rights.
While in other jurisdictions, the development of TPF has followed successful class actions, it is perhaps likely that in India, TPF will lead the establishment of a sophisticated class action regime.
TPF enables the creation of a financial level playing field between disputing parties, and in this, improves the structural infrastructure for access to justice. Drawing on litigation financing allows parties to leverage capital to enforce their rights. This non-recourse finance with zero cost of capital results in increased operating profit and market value without any impact on EBITDA.
Importantly, TPF balances the bargaining power between parties and encourages settlement driven by merits of the case and not by imbalance in risk tolerance.
The objective analysis of the dispute from the funder can bolster assessment of “winnable” claims – which has significant advantages to the party and also to the justice system as it would weed out weak claims. Parties will also benefit from the experience and expertise of a repeat-player in the litigation space, including the funder’s ability to ensure greater discipline from lawyers and other intermediaries.
Most recently, Singapore introduced the amended Civil Law Act and the Civil Law (Third-Party Funding) Regulations, 2017 making third-party funding in international arbitration and related proceedings legal. On the same lines, Hong Kong enacted and amended its legislative framework to enable third-party funding in arbitration and mediation. Both Hong Kong and Singapore have witnessed rapid changes in the culture of their legal bar with the introduction of these systems.
The control of a funded litigation depends on two factors – the legal requirements in India and the funding contract. Many common law jurisdictions prohibit exercise of control over litigation by the litigation financier. A few Indian cases in the past have reviewed the “degree of meddling” while allowing funding. A funder may monitor a case, which is different from controlling. An overview of the funding process may provide some clarity in this regard.
Fundamentals Of Third-Party Funding
TPF may extend to all dispute resolution mechanisms – courts, tribunals, arbitration and mediation. TPF can cover legal counsel’s fee, court/tribunal’s fee, cost of expert witnesses, pre-deposit, adverse costs order, and other dispute-related expenses.
In addition to specialised third-party funders, investment banks, hedge funds, insurance companies and pension funds also invest in legal claims as an asset class. Funders may have ready investible capital or may raise funds for specific claims in an ad hoc manner.
Increasingly, litigation financiers are leveraging technology to provide for crowdfunding platforms for TPF. The largest TPF funder in the world has an investment portfolio of approximately $2.4 billion with a market capitalisation of around $3.2 billion.
Disputes that attract TPF generally include commercial contracts, international commercial arbitration, class action suits, tortious claims like medical malpractice and personal injury claims, anti-trust proceedings, insolvency proceedings, and other like claims that have a calculated chance of resulting in a substantial monetary award. Generally, claimants are the recipients of TPF as they may receive a monetary award or settlement in case of a successful outcome, since litigation financing is premised on a contingent share in such monetary award. There is however an upcoming trend for insurance and other risk transfer arrangements for both claimants and defendants.
Arbitration – An Immediate Business Case For TPF
While, the market for traditional litigation finance will evolve more organically given the unique factors of the Indian market, we believe that institutional arbitration of commercial disputes presents an immediate business case for TPF given the higher predictability of the time to resolution (since arbitral awards have to be issued within the prescribed time period) and the greater sophistication in the process.
Food For Thought: Notable Gaps In TPF In The Indian Market
While we perceive a demonstrable demand for structured and professional TPF to facilitate the pursuit of viable claims, a few sticky areas of concern given the peculiarities of the Indian market are:
- There is limited precedent in India for the grant of exemplary or ‘blockbuster’ damages for commercial disputes.
- Funders often use historical data to carry out a risk-assessment analysis before taking up a case. Such relevant data is a work in progress in India and will take a few years to consolidate.
- Factors such as roster changes during the progress of the case lead to an inherent unpredictability in the system that is not conducive to risk assessment or time to resolution of any given case.
- Enforcement of TPF agreements will be subject to judicial scrutiny in light of the 1876 Privy Council decision in Ram Coomar Coondoo v. Chunder Canto Mookerjee, where the Court permitted third-party funding on the grounds of promoting access to justice, but held that “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 therefore, 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.”
- Funders often prefer sharing the risk of their investment with lawyers appearing for the funded party, by requiring the lawyers to work on a contingency fee basis. This aligns the incentives of the lawyers and funders. This practice is impermissible in India.
- The permissibility of foreign investment in third-party funding of disputes in India, is yet an evolving area in India.
Notwithstanding these gaps, we believe that India will witness the rise of TPF as an asset class. It’s already an area of tremendous focus at the firm, its clients and policymakers. The time has come to bring this (funding) party home.
Cyril Shroff is Managing Partner at Cyril Amarchand Mangaldas. Amita Katragadda is Partner in the Disputes, Governance and Policy Practice at the Delhi office of Cyril Amarchand Mangaldas.
The views expressed here are those of the authors and do not necessarily represent the views of Bloomberg Quint or its editorial team.