Litigation Financing
What is Litigation Financing
From a bare reading of the term “LITIGATION FINANCING,” it is clear that the finance used in litigation is called litigation financing. It is also called professional funding, settlement funding, third-party funding, third-party litigation funding (TPLF), legal funding, lawsuit loans. In England and Wales, it is known as litigation funding. Wikipedia defines Legal financing as a mechanism or process through which litigants (and even law firms) can finance their litigation or other legal costs. The Third-party funding firm funds the claimants or Law firms/ lawyers in exchange for an agreed percentage of the proceeds from a successful claim.
The TPLF company covers all kinds of expenses that are required for the adjudication of a case. Such expenses are like legal fees of the lawyers/firms, research, depositions, interrogatories, motions, conferences, preparation of witnesses, hearings, subpoenas, appeals, as well as court fees, consultants, and investigation related expenses. TPLF works on a beautiful mechanism known as “Non- recourse,” which makes it more lucrative for claimants to consider it. The Non-recourse is a system where the claimant has to pay the funder back only if the claim is successful. If the claim is unsuccessful, the claimant doesn’t pay back anything to funders or funding companies. It has been in India for a long time, and since it is a non-recourse funding, most businesses think of it as an alternative option for their high-cost litigation. The funding company has no rights to manage the litigation process, nor does it have any rights to control settlement decisions. It is only entitled to receive the updates of the case progression to manage its investments. It provides a helping hand to corporate in utilizing their capital for operations and other business activities irrespective of litigation challenges they face.
Types of Litigation Financing
SINGLE CASE FINANCING
It provides funds on the basis of single case to the claimants, lawyers or law firms.
PORTFOLIO FINANCING
It approves funds to claimant for the bunch of cases or multiple claims at one go.
how does it Work?
1.
The detailed information regarding cases or claims need to be submited by the claimants, lawyers, or law firms before the Litigation funding Companies.
2.
The Legal team will start the due diligence of the cases. The submitted cases are analyzed based on the facts or research. And if approved, the case is processed for further action.
3.
Now, the analyzed cases or claims are generally put up before the investment and funders team to evaluate the monetory or financial aspects of the case or portfolio cases.
4.
In the last stage, if all departments of funding process are satisfied, then the funding process gets started in a phased manner, and accordingly, the procedure of litigation is initiated.
“LITIGATION FINANCING is a risk-free opportunity for the claimant when they go with any litigations”
background of Litigation financing
Litigation Financing has been in the limelight for the last few decades but, India has seen its existence since 1825 and before.
1.
England & Wales has legitimated Litigation Financing since the passing of the Criminal Law Act 1967, backed by, Code of Conduct of Association of Litigation Funder. Section 58B of the Courts and Legal Services Act, 1990, in the UK permits litigation financing. According to a study undertaken by Law firm “Reynolds Porter Chamberlain”, the size of the UK litigation funding market has doubled over the past three years with the pipeline of court cases.
2.
Australia allowed commercial litigation funding in the late 1990s. The Australian federal government introduced new regulations designed to improve transparency in the litigation financing and to increase the accountability of funders operating in Australia. On 24 July 2020, the Corporations Amendment (Litigation Financing) Regulations 2020 came into effect to regulate it for the betterment of all stake holders involved.
3.
In the UAE, different laws apply to the mainland and free zone areas. While the mainland is subject to civil law based on sharia law, as apportioned by the federal constitution between the federal government and the seven emirates. And the financial free zones have their own set of legal systems and bodies of courts primarily based and modeled around English common law. Hence, acceptance of Third-party Financing as a matter of public policy. Its agreement is governed under UAE Civil Code and Dubai International Arbitration Centre Rules (DIAC).
4.
Most European Countries are civil law jurisdictions following the principle “sui generis” which means what is not prohibited is allowed. Their Litigation Financing is unregulated; therefore, litigation Financing companies are not subject to any specific rules and they can operate and many are operating. Also, the principle of ‘maintenance and champerty’ is not known in the Continental of Europe. So the Litigation funding companies are mostly self regulated and doing their business to serve the claimants in litigation.
5.
Litigation Financing commenced in Germany in 1999 and provided claimants, who otherwise would not have the ability to finance their case, with an avenue to justice. In Germany, since the late 1990s, about ten providers established themselves in the market; the German Bar Association (Deutscher Anwaltverein) provides an overview on their website. The pioneers were FORIS, who are a listed stand-alone entity and many other.
6.
TPLF is relatively new to Switzerland. Triggered by the commercial success of FORIS AG in Germany in the late 1990s. FORIS AG entered the Swiss market in 2000. The introduction of SchweizerischeZivilprozessordnung in 2011 requires Claimants to pay for the costs of legal proceedings. This rule specifically allows Claimants to use TPLF to pay the legal costs. And large commercial disputes are usually brought before the courts or arbitration centre, particularly in international contexts.
7.
Singapore has introduced the third party funding since 2017 with the amendment of the Civil Law Act (the CLA). Until then, TPLF was considered unlawful under the general principles of maintenance and champerty. In 2017, Singapore decided to abolish the common law torts of maintenance and approved the use of funding in only for international arbitration and related proceedings. As a result, the first litigation funding agreement was reported in 2017, and since then there is a clear law to support TPLF.
8.
Hong Kong permitted third party funding in international arbitration. On 14 June 2017, the Arbitration and Mediation Legislation (Third Party Financing) (Amendment) Ordinance 2017 entered into force. The Amendment Ordinance effectively excludes the third party funding of arbitration and mediation proceedings from the doctrines of maintenance and champerty and presents a framework for these funding arrangements.
9.
Litigation Finance in the U.S.: Before the 2000s, the U.S. litigation financing industry was largely confined to personal injury cases. And the commercial litigation funding commenced in 2006 when Credit Suisse Securities founded a litigation risk strategies unit (which has since disbanded). And In the last few years, the commercial litigation finance market has grown tremendously and is now used by companies and law firms extensively for raising capital and eliminating the risk of litigation.
10.
The third-party litigation funding in Israel has recently been to light, although the courts have not provided comprehensive rulings on the Israeli court’s approval regarding all of the issues related to litigation funding, the courts have shown a positive interest in favour of litigation funding. Over the past three years, it became an accepted part of the litigation landscape. While some of the positive judgments regarding litigation funding have related to liquidation cases, the courts have also favoured funding in general litigation.
benefits of Litigation financing
To Claimants
1.
Uplift Financial Burden from Claimant
If the venture of the claimant goes financially unsound or faces high-cost litigation or legal issue then TPLF Company allows such claimants to continue their litigation without worrying about any financial issue or unsuccessful claims.
2.
Maximizing the assets of the Company
The ongoing Litigation or legal process can hurt the Profit and Loss Statement and other operations of the company. To maximize the capitalization of assets of the company, Litigation Financing can be a good source.
3.
Enhancing Quality of Legal Advice
Claimants may lose their case if no proper legal representation is provided. Litigation Financing determines the merits of the case, evaluates the viability of their claims, and maximizes their potential value. It helps claimants to afford the best possible counsel to fight against the well-funded opponent.
4.
Encourages claimant to go for legal rights
Despite having a meritorious case, many claimants delay or drop the case agreeing to the out-of-court settlement, because of lack of funds. Litigation Financing discourages opponent’s dominance on the claimant and encourages claimants to keep fighting for their rights.
5.
Manages Risk of Litigation
In Litigation, although, there is a legal expert to give you some speculation or insight into the cases. Still, a minor statement or other flaws can change the entire outcome. So to manage the risk for the company’s well-being, it’s better to go with TPLF.
6.
Easy Availability of Funds
In banks and other funding sources, the claimant has to pay high interest on the principal or the collateral security with time taking process. But in the Litigation financing mechanism, a claimant can easily avail funds on a non-recourse basis.
To Investors
1.
Growth Perspective
Litigation Financing is an underdeveloped market; the growth potential is immensely great and effective. The strategized capital deployment in this market can give high returns.
2.
High Return on Investment
Investment in litigation financing provides more returns than the investment in FDs, mutual funds, gold, land, and even equities. It gives a stable return up to 25-30% and more on the investment.
3.
Risk-free Opportunity
There are no external market players who control or affect the returns. Hence, ROI on litigation financing is free from market fluctuations or even inflation. It only depends on the case’s merits.
4.
New Asset Class
In India, there are many Asset classes for the investors to invest in. Now, TPLF is also a better alternative asset class to diversify their portfolio, along with using the old way; also exploring a new emerging industry with high returns.
To Society
1.
Access to Justice
Litigation Financing enhances the access of justice to the claimants in the enforcement of their legal rights.
2.
Creating Financial equality
Litigation financing minimizes the gap of financial inequalities among the businesses and in society.
Litigation financing in india
Legal Status in india
India has adopted many English practices during the colonial era, but Indian laws were silent on the principle of maintenance and champerty. Many instances were there stating the uncertainty in the legality of the restrictions of this principle. In the case of Gorse & Anr v. Amirtamayi Dasi, it concluded that champerty and maintenance are unlawful in the Presidency Towns and any such agreement on the ground of public policy would be void. The conflict was resolved in Ram Coomar Condoo v. Chandra Canto Mukerjee, where it held that the statutes of champerty and maintenance were specifically made for England to prevent false suits which were being carried out by the judicial officer on the King’s subject for their self-interest. Such laws were special and hence, not valid in India.
The situation is the same in India since then. No statute expressly addresses litigation financing. Section 23 of the Indian Contract Act 1872 states that an agreement is void if the court thinks its object or consideration is opposed to public policy. In Pannalal Gendalal & Anr v. Thansingh Appaji & Anr, it was held that for a TPF agreement to be void, it must be shown that such agreement is against public policy or justice, morality, equity and a good conscience and any funding agreement to be opposed to such restriction must be an extortionate one or made from the improper object.
Though there is no restriction to enter into litigation financing, the court in the case of Dr. V. A. BabuLegal v. The State Of Kerala, held that such agreements become per se illegal in which advocates are involved. Recently, The Supreme Court of India in the Bar Council of India vs. A.k. Balaji & Ors. held that based on the conjoint reading of the Bar Council of India Rules strongly suggests that advocates of their clients cannot fund litigation. There appears to be no restriction on third parties (non-lawyers) funding the litigation and getting repaid after the outcome of the litigation. In simple words, the claimant can enter into third-party financing agreements with LITIGATION FINANCING Companies who are not advocates.
Statutory Recognition
Litigation Financing has no specific statutory recognition in India. Even the Arbitration and Conciliation Act 1996 gives no mention of litigation financing. The only possible litigation financing agreements are those, which are valid contracts under the Indian Contract Act, 1872. Apart from this, a favorable reference of such arrangement is provided in the report of Justice B.N.Srikrishna “High-Level Committee to review the Institutionalism of Arbitration Mechanism in India”.
Some of the states such as Maharashtra, Madhya Pradesh, Gujarat, Uttar Pradesh, Andhra Pradesh, Orissa, and Tamil Nadu have amended Order XXV of the Civil Procedure Code to consent to third-party Financing. These amendments empower civil courts to have the power to ask the financing party to pay for securing costs in a litigation matter. Civil Procedure Code, 1908 under Order XXXIII provides for the suits by the indigent persons but the remedy is not available for the financially strong parties. Litigation financing is an appealable option to the parties regardless of their financial status.