What is Litigation Funding?
Litigation funding, popularly known as third-party funding is a practice of financing litigation for an individual (plaintiff) by a third party (unrelated to the litigation). The third party’s consideration in such a transaction is an agreed-upon percentage of the financial recovery or share in the property that may happen in favor of the plaintiff in the litigation that is being funded. Litigation funding is significant as fighting cases in courts is an expensive affair and involves a series of expenditures like lawyer’s fee, arbitrator’s fee, court fees, and several other miscellaneous court-related expenses. The main objective of litigation funding is to provide plaintiffs with access to justice by enabling them to enforce their legal rights. Litigation funding can effectively be used to cover the cost of any form of dispute resolution mechanism. It can be availed for civil or commercial disputes, class action suits, insolvency proceedings, etc. Normally, litigation funding is not provided for criminal or matrimonial cases. The consideration for funding companies is completely contingent on the outcome of the case i.e., if a litigant is unsuccessful, the funding company bears the entire loss.
Process of Litigation Funding
- As a first step, the prospective litigant approaches the funder with an inquiry regarding litigation funding of his case. The funder considers the case as a financial asset to decide whether to finance such a case or not.
- Funder shall further assess the case to check if the legal matter meets their investment criteria or not. For this, the funder conducts due diligence of the case, considering all possible factors including expected timeframe, potential receivables, the risk involved, estimated maximum cost, and winnability of the case.
- As the next step, the funder makes a proposal to the litigant setting out the funding terms. The funder also puts forward a financial solution to the litigant, which may be about financing a single case or portfolios of multiple cases.
- After performing all the legal due diligence with the help of an attorney keeping in mind the considerations of legal privilege and confidentiality, final approval of the case for litigation funding is given by the funder. After negotiations between the funder and the litigant, all terms and conditions of the funding agreement are finalized.
- Finally, the signing and execution of the funding agreement by the litigant and the funder take place. During the contract period, periodic reporting on the progress of the case and invoicing of the legal costs is performed.
- After all the formalities, capital is provided by the funder for covering all the legal expenses relevant to that case. Generally, funds are provided only for a fixed period of time and on a non-recourse basis i.e., the funder would only receive his repayment only if the litigation is successful.
Benefits of Litigation Funding
Litigation funding is beneficial in several ways:
- Litigation funding increases the access to justice specifically for individuals with low financial means and accessibilities. It also helps individuals with low finances to fight cases on their merits without incurring substantial personal costs.
- Litigation funding acts as a cost management tool for large corporate houses as they can avoid spending huge sums of money on legal expenses.
- The litigation funder performs legal due diligence and provides support to the litigant beyond funds. Funder keeps a close eye on the proceedings of the case and may provide professional support to the litigant as and when required.
- Through litigation funding, the burden of loss is shifted from litigant to the funder.
- Litigation funding is highly flexible as it can be provided at any stage of the proceedings and can continue till the enforcement of the judgment, subject to the agreed-upon timeframe between the parties if any.
Challenges to Litigation Funding India
Though litigation funding is legal and recognized in India, it has not emerged as a specialized sector in India to date due to the following challenges:
- The primary motive of litigation funder is to get their investment and returns back usually within a period of 5 years. For this to happen, the complete proceedings of the case need to be executed within at most 5 years. But in India, due to a shortage of judges and various other reasons, a case, on average takes longer than 5 years to conclude.
- It is common practice in litigation funding that lawyers also share the risk in investment by working on a contingency fee basis. This way lawyers also have a personal stake in the case and thus are believed to put greater efforts to win the case. But in India, lawyers are strictly prohibited to act on a contingency basis.
- Another important challenge is the confidentiality and privilege of the litigant. However, this challenge can be overcome by ensuring a well-drafted, robust, and lucid agreement between the litigant and the funder protecting confidentiality and taking care of the conflict obligations.
- In litigation funding, funders usually like to invest not more than 5% of the estimated recoverable amount, with a hope to earn 25% of the amount recovered. This type of financial agreement is new in India, and it might be hard to explain to people the reasoning behind such deals.
Litigation funding has huge potential to significantly improve access to the justice system by enabling common people without enough financial resources to fight civil and commercial litigations at a fair and just level. Third-Party Litigation Financing has not yet emerged as a specialized sector in the Indian environment due to the various challenges mentioned above. But since the situation in India is changing gradually, with increased legal awareness, litigation funding will surely emerge as a significant part of the financial and legal sector of India in the near future.