What is third party litigation funding (TPLF)?

Third party litigation funding is a financial arrangement where an external entity, often a specialized investment firm, provides funding to a claimant or, in some cases, a defendant, to cover legal expenses. This funding is usually offered on a non-recourse basis, which means the funder only recovers their investment if the case is successful, either through a judgment or settlement.

Also known as Third Party Litigation Funding (TPLF), this model allows financially constrained litigants or law firms to access the necessary resources to pursue or defend legal claims. Unlike traditional loans, this is not treated as debt. Instead, it operates more like an investment, with repayments due only upon a favorable resolution.

The funding received can cover all litigation-related costs, including court filing fees, legal representation, documentation, expert witnesses, and other litigation overheads. This solution enables claimants to pursue meritorious cases without bearing the financial burden and risk of prolonged legal battles.

How Do Funders Assess Case Merit in Third Party Litigation Funding?

Funders evaluate the potential success and profitability of a legal case through a structured due diligence process. This assessment is essential before approving financial support. The key evaluation criteria include:

1. Legal Viability

Funders review the foundational legal elements of the case to ensure it is not frivolous and has a high chance of success. This includes analyzing legal claims, evidence, and legal counsel’s opinion.

2. Comprehensive Due Diligence

Once a case shows promise, funders dig deeper into legal strategies, opposing arguments, evidence, and procedural risks.

3. Risk and Return Evaluation

They assess litigation risks, enforceability of a judgment, the defendant’s ability to pay, and expected timeframes. The potential financial recovery is weighed against these risks.

4. Quality of Legal Representation

The experience and track record of the law firm or lawyer managing the case significantly influence the funder’s confidence. Many third party litigation funding providers partner with trusted firms to improve outcomes.

5. Claimant Credibility

The background and legal history of the claimant are evaluated, as their integrity and reliability may impact the course of litigation and negotiations.

6. Transparency

Funders require complete disclosure from the claimant to build a trustworthy relationship and to avoid surprises during the litigation journey.

7. Final Decision

A funder’s investment committee usually makes the final call based on the case’s strategic fit and risk-return profile.

How Does Third Party Litigation Funding Work?

Here’s how third party litigation funding generally functions:

1. • Initial Review: The claimant and their legal team assess the case’s strength before applying for funding.

1. • Application & Due Diligence: A detailed application is submitted. The funder conducts legal, financial, and strategic evaluations.

1. • Funding Agreement: If the case qualifies, a litigation funding agreement (LFA) is signed, detailing the funder’s share, terms, and non-recourse nature.

1. • Funding Disbursement: The funder releases capital to cover legal costs, ensuring the case proceeds without financial disruption.

1. • Case Outcome: If the case results in recovery, the funder receives their agreed share. If unsuccessful, no repayment is required.

Third Party Litigation Funding in India

While the concept of third party litigation funding in India is not entirely new, it has gained legal clarity and recognition in recent years.

Legal Framework in India:

A landmark ruling by the Supreme Court in Bar Council of India v. A.K. Balaji (2015) confirmed that:

• • Non-lawyers may fund litigation and recover from the proceeds.

• • Lawyers themselves cannot fund cases or operate on a contingency basis.

Some states such as Maharashtra, Gujarat, Karnataka, and Madhya Pradesh have amended their Civil Procedure Codes to recognize third party funders and, in some cases, involve them as parties to the litigation.

Limitations:

• • Indian lawyers are barred from entering into contingency or success-fee-based arrangements.

• • TPLF agreements that appear exploitative or against public interest may be challenged in court.

• • There is ambiguity regarding the scope of foreign investment in India’s litigation finance market.

Despite these challenges, rising legal costs and increased awareness are contributing to the growing relevance of litigation funding in India.

Advantages of Third Party Litigation Funding

For Claimants:

1. • Reduced Financial Burden:
     Litigation funding removes upfront legal expenses, allowing individuals and businesses to pursue valid claims without financial strain.

1. • Risk Mitigation:
     As funding is non-recourse, claimants bear no financial liability if the case is lost.

1. • Access to Quality Legal Services:
     Funding enables claimants to engage experienced law firms or legal experts, even if they are otherwise unaffordable.

1. • Cash Flow Preservation:
     Companies can continue operations and avoid tying up capital in costly legal battles.

1. • Support for Valid Claims:
     Funders conduct stringent evaluations, ensuring only strong and legitimate claims are supported.

1. • Strategic Advantage:
     The involvement of a reputable funder signals the strength of a case, which can pressure opponents to consider early settlements.

For Investors:

1. • Attractive Returns:
     Successful claims yield high returns compared to traditional investment options.

1. • Market Expansion:
     TPLF is a growing global industry, and early investors can benefit from this expanding market.

1. • Diversified Investment:
     Litigation finance offers a unique asset class, independent of stock markets and real estate.

1. • Non-Market Correlated Returns:
     TPLF investments are typically unaffected by market volatility, inflation, or economic cycles, making them more stable.

Who Makes Key Decisions in Litigation-Funded Cases?

In third party litigation funding arrangements, the claimant retains primary control over key legal decisions, such as whether to settle or go to trial. The funder’s role is mainly financial.

However, in some cases, such as with firms like LegalFund, the funder may also offer case management services. These include legal support, strategic input, and connecting the claimant with experienced advocates or firms to maximize efficiency and outcomes.