1 Litigation Financing

Litigation Financing

By: Anant Maske and Utkarsha Mehrotra (K J Somaiya Institute of Management)

Introduction

We want to live in a world where peace, equality, and justice prevails. But, these come with a price which is not affordable for all. Martin Luther King Junior has rightly said that “Injustice anywhere is a threat to justice everywhere”. Today, the global population has access to justice irrespective of the region or area. However, the availability of a sufficient amount of funds to gain access to that justice is still a major barrier for a significant percentage of the global population. To address this money problem, litigation financing or third-party financing came into existence. Litigation financing is based on a non-recourse type of funding wherein the funding entity provides funds to the party for the litigation. In return, it expects a monetary reward if the litigation is successful. Litigation financing covers costs pertaining to litigations in courts, commercial contracts, personal injury claims, international commercial arbitrage, insolvency proceedings, and anti-trust proceedings.

Process of Litigation Financing

The process of litigation financing is very simple and clear to understand. The claimant who is not capable of funding his/her litigation is funded by a third-party financer. The third-party financers include hedge funds, insurance companies, pension funds, and investment banks, among others. If the litigation is successful, the third party financer recovers his/her costs incurred during the litigation and charges some additional money as its fee. If the claimant fails to win the litigation, the third-party financer walks with no reward, and this is the risk the financer has to take in the litigation financing. Return on investments in litigation financing can be around 4-5 times and even more in some cases. Additionally, returns on these investments are not significantly affected by external factors such as fluctuations in stock markets or other economic factors. Of the key litigation financers, which include IMF Bentham, Burdford Capital LLC, Vannin Capital, and Longford Capital Management, among others, Burdford has a market capitalization of around US$ 4 billion.

Evolution of Litigation Financing

Since its early days, litigation financing has been used to fund the claim holders and gain monetary rewards out of the litigation. However, like any other market, the litigation financing market is also expanding its range to expand its global footprint. Apart from the non-recourse funding and single case finance, litigation financiers are also involved in cases such as portfolio financing, defense side funding, and monetization of claims, among others.

Comparison of returns from Litigation Financing with returns from other investments

The defense side financing involves financing the defendant where the defendant is sued for breach of contracts or agreement, disputes pertaining to ownership of companies, real estate, or other liquid assets. The recovery of the money for the financers in such cases comes from the profits that the defendant earns from the assets for which the defendant was sued initially. Portfolio financing is another segment where the litigation financers have their eyes on. In this type of funding, the fund providers invest in a set of claims which are litigated by a law firm or some individual. There is a lower risk involved in portfolio financing as compared to a single claim financing as in portfolio financing, and the risk is distributed amongst a set of claims which is not possible in the single claim which has just two outputs.

Monetization of claims is another evolving type of litigation financing applicable in timeconsuming cases where the financer provides funds to the claim holder in order to cover the claim holder's servicing debt, operating expense, and R&D, among others. So for the claim holder who has scarce resources to run the business, this type of funding will aid in keeping the operations of its business running till the settlement is done.

Indian Scenario for Litigation Financing

As rightly said by the honorable President of India, Shri. Ram Nath Kovind “India has acquired a reputation of an expensive legal system. In part, this is because of delays, but there is also a question of affordability of fees.”

According to a 2015-16 survey, it was found that litigants spend on legal costs in lower courts alone was up to ₹ 30,000 crores. Studies conducted by DAKSH, a civil society organization, revealed that the average cost (other than fees of lawyers) incurred by a litigant is ₹1,039 per case per day, and the average cost incurred per day due to loss of pay/business is ₹1,746 per case. Moreover, the number of hearings in a case also adds to the cost of litigation. In such a situation, what options lay before people who cannot afford the triune expense of advocate fees, daily costs, loss of pay, and a possible additional pay-out in the event they lose their case?

In 1876, in Privy Council in Ram Coomar Coondoo v. Chando Canto Mookerjee (1876-77) 4 IA 23, Litigation Financing was permitted on the grounds of promoting access to justice. Though, it had been in India from way back in the 18th century and has always been allowed. As per Bloomberg reports, in a recent gathering of Indian legal professionals, more than 70% of the audience believed that litigation finance is prohibited under Indian Law, and this is when its popularity has skyrocketed globally to the extent that litigation finance, as an asset class, has outperformed private equity, real estate, credit, and hedge funds. This is an alarming number and depicting the lack of development in this area of finance, litigation risk management, and class action suits in India.

Challenges for Litigation Financing in India

A quick return on investment is what every investor seeks before investing in any product or asset. However, in the Indian litigation system, there is a huge time-lapse that is incurred to resolve litigation. Other proceedings such as arbitration which are completed in a short duration, are also stretched as the claimant has to approach courts and face bureaucratic red tapes before the execution. Investors also prefer lawyers to have a stake in the rewards from the claim so that they make more efforts to win the case. However, acting on a contingency basis is prohibited for lawyers in India; it restricts them from working for monetary rewards. Owing to this, there is a blurry image of the future of litigation financing in India.

Future of Litigation Financing

Litigation finance has witnessed appreciable growth in the recent past but, there is a significant number of entities who possess the knowledge and awareness related to litigation funding but have not utilized it yet. Among various factors that are expected to drive litigation financing in the coming years, one factor is huge capital entering markets which will ultimately provide more opportunities for fund providers to invest in litigation portfolios and complex cases. Countries like Hong Kong and Singapore have also opened their doors for funders to expand their operations pertaining to litigation financing. In developed countries like the U.S, court decisions and regulations are now alleviating the concerns and fears related to ethics of causes related to litigation financing, which is a positive sign for the players involved in the litigation financing market.

Additionally, the Covid-19 pandemic has affected various economies severely. Owing to this, the growth of many economies across the globe has slowed down. As the economies slow down, the sources of capital in the country get affected significantly, and this is expected to fuel the growth of litigation financing in the coming years.

REFERENCES

1. http://www.cyrilshroff.com/wp-content/uploads/2019/06/Third-Party-Funding-in-

India.pdf 2. https://westfleetadvisors.com/wp-content/uploads/2018/11/WA-Guide-to-Litigation-

Financing.pdf 3. https://www.aspen.co/globalassets/documents/reinsurance/whitepapers/litigationfunding.pdf 4. https://finshots.in/archive/rise-of-litigationfinancing/?utm_medium=Share&utm_source=Finshots_App_User 5. https://lakewhillans.com/articles/litigation-finance-2020-flavors-of-litigation-finance/ 6. https://dakshindia.org/litigation-funding/ 7. http://third-party-funding.org/chambers-ranks-third-partyfunders/#:~:text=In%20Band%201%2C%20Bentham%20IMF,according%20to%20Cha mbers%20and%20Partners)