Litigation funding is where a third party provides the financial resources to enable costly litigation or arbitration cases to proceed. The litigant obtains all or part of the financing to cover its legal costs from a private commercial litigation funder, who has no direct interest in the proceedings. In return, if the case is won, the funder receives an agreed share of the proceeds of the claim. If the case is unsuccessful, the funder loses its money, and nothing is owed by the litigant. Litigation Financing is a very old concept and has been permitted in England and Wales since 1960’s. Third-party litigation funding is permitted in India. There is no specific public body that oversees or governs third-party litigation funding. However, the terms of such contract are subject to the Indian Contract Act, 1872.
Litigation Financing has been a little-known concept for litigants and law firms in India. Some of the world’s top litigation financing firms are planning to open their offices or representative offices in India to tap Indian Market which is full of opportunities. Litigation Financing would safeguard the litigants to lose huge legal costs in big-ticket claims, on the other hand it will give a chance to Litigation Financiers to get higher returns on their investment when decisions come in favour of the party to whom they are backing. These transactions are non-recourse, means there is no recovery would be made if the judgement is not in favour of the litigant.
The corona virus pandemic has hit the economic growth of India and lots of businesses suffered huge losses, causing more legal contractual disputes between the companies in India. Indian companies have only one option to fight the case and pay hefty legal fees to lawyers who are very expensive. Companies are not able to meet the working capital requirement due to payment of hefty legal fees to the lawyers. Number of cases having good merits are going uncontested in India. Last year two notable examples of third-party funding have raised awareness amongst corporate finance advisors to see litigation funding as an alternate means of financing: the monetisation of arbitration award in Hindustan Construction Company and Patel Engineering. Major infrastructure companies in India are struggling with stressed assets and huge pending claims, litigation funding would definitely help them to settle their claims.
India has more potential in the monetisation of claims than London, Singapore, and Hong Kong. The return on this type of financing is more than 50%-100% in some cases which is considerably better return on any investment done in any conventional corporate finance deals in the Indian Market.
Indian legal sector is growing very fast for last few years. However, the clients are still very conscious spending money on litigations even having good merits. Litigation Funding would be welcomed by the clients and will have excellent future in India. However, India needs a strong regulatory framework focusing disclosure, qualifications and conduct of litigation funders.
(The articles is authored by Mr Priyanshu Kumar, Managing Director – Head of Legal & Corporate Advisory, MP Morgan Capital)