Understanding the business of litigation funding: The Indian landscape
Comprehending the approach of ‘litigation funding’
The appetite for ‘litigation funding’, amongst claimants as well as investors, has never been greater. Over the last decade, this appetite has been pushed to greater lengths and breadths as a result of widening globalisation and liberalisation of funding regimes across jurisdictions. In fact, ‘litigation funding’ is now considered to be the new ‘normal’ for capital infusion for furthering resolution of disputes, in both domestic litigation as well as international arbitration. As a direct consequence of this advancement, it is now more important than ever for lawyers to have the best understanding of the concept of ‘litigation funding’. In essence, if one has to simply describe ‘litigation funding’, it refers to third-party financing of some or even all of the legal expenses that are associated with one or more legal disputes in exchange for a certain share of the proceeds recovered from the resolution of the underlying dispute(s).
The business of ‘litigation funding’ for investors and disputing parties
The first and foremost, and probably the most critical attribute, of litigation funding is that such transactions are non-recourse. In other words, in the event that there is no recovery made from the dispute in hand, the disputing parties are under absolutely no obligation to repay the funder for their investment. However, this setting is quite justified taking into consideration that if these claimants really had to bear costs of enforcing their rights under a claim, they would simply not have their day in court against well-resourced and adequately funded respondents.
Nevertheless, litigation funding has gained immense traction amongst investors in the last couple of years. In fact, it is not just the lack of liquidity that drives a decision to seek a third-party investor now, as disputing parties now seek investors for reasons of mere convenience, cost effectiveness and risk sharing. Moreover, the moment a claimant decides to pursue a claim under litigation or commercial arbitration, they are taking on a financial risk. This risk encompasses not only irrecoverable operational costs of pursing the claim, but also the risk of having an unsuccessful claim at the end of the dispute-resolution process. Adopting litigation financing in this way can shift that financial burden to a third-party funder, who not only has their own risk-assessment team but also carries a diversified portfolio of case investments.
From the viewpoint of investors, litigation funding is good investment that stays unaffected by any other business cycles. Hence, in time of economic downturn when other investments may not yield benefits, litigation funding seems to be unaffected. In fact, as a general consensus, litigation finance is best known to provide extremely high returns to investors. Off lately, this form of investment has also gained attention from hedge funders. The probability of high returns is primarily driven by low investment compared to significantly higher returns for investors, as investors often end up with multiples of the initial investment made.
Third-party funding in the Indian scenario
As on date, 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 there is liberalisation of economic policies and doors are thrown open to foreign investments, disputes and differences are bound to arise between parties. In fact, it is this upward graph of economic activities of recent years that has led to India becoming one of the most upcoming hubs for commercial arbitrations. As a result, it cannot be denied that India eventually would need a comprehensive and progressive legal framework that would support convenient dispute-resolution, providing for maximum judicial support for arbitration and minimal intervention. However, it is well-established law in India that advocates are expressly barred from funding any sort of 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.
Recouping the investment under law
In a commercial dispute, perhaps the most important aspect is to maximise gains, especially from the point of view of the investor and the claimant. One of the ways in which a claimant and / or investor recoups the investment and maximises their gains is by claiming the costs of the proceedings undertaken to adjudicate the dispute. In international commercial arbitration, especially those regulated by international arbitral institutions such as the International Chambers of Commerce (ICC ) and Singapore International Arbitration Centre (SIAC), the operational costs can form a substantial part of the claim, even going as far as being 10% of the total claim amount. The courts in England & Wales have recognised the criticality of the huge costs undertaken by investors and / or claimants for arbitration in the case of Essar Oilfields Services Limited v Norscot Rig Management PVT Limited. The commercial courts in England & Wales have dismissed a challenge to an arbitral award which awarded costs of the third-party funding to the claimant, while holding that under the Arbitration and Conciliation Act, 1996, the power to award costs, includes the costs of third-party funding as well.
The judgement of Essar Oilfields Services Limited v Norscot Rig Management PVT is significant for two major reasons. First, with the inclusion of third-party funding as part of costs awarded in the arbitration, the court has given legal backing to any arbitrator providing for the costs of the third-party funder. This has a cascading effect as on the basis of this legal backing, more and more arbitrators are now going to be open to awarding such costs, resultingly booming the whole investment sector. Secondly, even though this is a decision of the English courts, the law on arbitration in England & Wales is based on the UNICTRAL rules and is very similar to those of other jurisdictions, including India. At various times, in order to seek precedent in arbitration law, courts in India have often referred to English decisions.
Having said that, it remains to be seen whether this particular decision will carry the weight of a precedent in India, considering the present unclear landscape of third-party funding as a whole in the jurisdiction.
Our experience with third-party funded arbitrations
We, at Advani and Co., have been involved in a number of international arbitrations which have been funded by a third-party funders. Recently, we appeared for a company in an ICC Arbitration in Singapore, fully funded by a French investment group. Our experience has been quite positive with regards to engaging with third party-funded arbitrations. To briefly state, there are two major advantages to third-party funded disputes. First, any funder who has any interest and decides to fund a dispute is obviously extremely diligent in choosing one. For the same, there are various stringent processes which the lawyers as well as the claimant have to get through to get funding approval, the largest part of which is claim analysis. This is beneficial both to the lawyer and the funder as it incentivises the lawyer to thoroughly present the case to the funder as well and put its best case forward for approval. This process only helps in making the claim stronger. Second, it frees the shackles off the lawyers as well as the claimant from those of litigation fees. In big commercial disputes, litigation fees are a huge deterrent to approaching adjudication, and it is not uncommon, especially in these trying times, for parties to have issues in fully paying up the litigation fees. Not receiving fees of course has a negative effect on the dispute as the lawyers do end up losing some incentive to perform as well as they can.