Litigation Financing in India: Becoming Part of the New Normal

The novel coronavirus (Covid-19) crisis has necessitated significant changes in judicial processes. From virtual court hearings to e-filing documents, legal systems in several countries, including India, are reinventing and adapting to a new, Covid-19-affected world. The old is giving way to the new, and hitherto unknown concepts are emerging and gaining acceptance. One such concept is litigation finance, also known as litigation funding or third-party funding (TPF). Although TPF is at a nascent stage in India, it is an accepted in fact, thriving practice in countries such the US, UK, Singapore and Australia.

In most countries globally, litigation and lawsuits entail prohibitively high costs. Due to this, many litigants – both individuals and corporates – are unable to access the legal system for recourse. An unfortunate situation is one where plaintiffs, despite having a convincing case, abandon their claims due to lack of funds for litigation expenses. This is where litigation financing or TPF comes in.

   

TPF refers to non-recourse funding of a plaintiff’s litigation costs by a third party (investor) unrelated to the lawsuit. In exchange, the investor receives a portion of the monetary reward or settlement from the lawsuit if the ruling favours the plaintiff.

Two key questions may arise with regard to TPF – a) is it legal? and b) is it ethical? Over the years, these questions have given rise to misconceptions and resulted in the slow adoption of TPF in India. There is no express provision in any Indian law which prohibits third-party funding. In 2018, the Supreme Court provided ample clarification while adjudicating in Bar Council of India v AK Balaji: “There appears to be no restriction on third parties (non-lawyers) funding the litigation and getting repaid after the outcome of the litigation.”

The apex court has clarified that lawyers/legal practitioners cannot fund litigation; however, no such restriction is applicable to independent entities who are not parties to the litigation. The ruling also sought to dispel misconceptions regarding the morality and ethical principles of TPF transactions: “It follows that there is nothing morally wrong, nothing to shock the conscience, nothing against public policy and public morals in such a transaction per se, that is to say, when a legal practitioner is not concerned.”

In India, the enactment of the Insolvency and Bankruptcy Code (IBC), 2016 and consequent actions initiated by lenders against companies, particularly those in the infrastructure or Engineering, Procurement & Construction (EPC) sector, have brought TPF into mainstream discussions.

In March 2019, a TPF deal was finalized between Hindustan Construction Co. Ltd (HCC) and a consortium of investors led by global investment management firm BlackRock. Under the terms of the deal, HCC assigned its beneficial rights in a pool of arbitration claims and awards to the consortium for Rs.1,750 crores. In a similar TPF deal, Patel Engineering Ltd transferred its interest in litigation claims to investor Eight Capital Group for Rs 2,168.5 crore.

It is expected that disruptions and prevailing uncertainties of the Covid-19 pandemic will give rise to a new wave of litigation. Due to widespread economic distress, parties to such disputes may find themselves unable to bear the high costs of litigation or arbitration.

Large parts of the world, including India, have been under various forms of lockdown since March 2020. It is widely expected that this significant disruption will lead to a surfeit of litigation between parties for termination or non-performance of contracts. In the pre-Covid-19 world, the EPC sector was the first to explore TPF transactions in India. In the post-Covid-19 world, similar activity is likely to be seen in other sectors once the prevailing uncertainty settles down. Insurance and shipping are two potential sectors which may see higher litigation funding activity.

Monetization of pending claims through TPF ensures that the plaintiffs are not deprived of funds to pursue legal action. For corporates, there is another critical benefit – by receiving upfront payment under TPF transactions, cash-strapped companies can reduce debt and improve their financial position. Litigation financing has the potential to become an alternative long-term source of funding in India, particularly for stressed EPC companies in a post-Covid-19 scenario. For investors, TPF presents an investment option which is not linked to market fluctuations, which helps them diversify their portfolio and reap the returns from favourable dispute resolutions.

Wider acceptance of TPF in India will depend on many factors. In most cases, commercial disputes face considerable uncertainties and delays, and they have a higher risk profile which will make the financing of such deals difficult. Some form of regulation or legislation is also needed to make TPF transactions more acceptable, especially from an ethical perspective.

Deals involving litigation finance take longer to close due to their higher risk profile. In many cases, potential transactions are turned down after due diligence because of the wide disparity between projected litigation expenses and the claims which are likely to be received on successful resolution.  Other cases are rejected due to lack of credible evidence or failure to prove that the claim will justify the costs involved. Industry experts estimate that only 5% of deals become eligible for TPF.

The emphasis on time-bound resolutions under the IBC as well as the Arbitration and Conciliation (Amendment) Act will remove some of the timing uncertainty surrounding commercial disputes. These changes are expected to encourage the growth of TPF in India. As far as ethical issues are concerned, there are two ways to approach them: a) through self-regulation or b) through legislation. In India, the absence of a specific law makes the interpretation of TPF provisions a subjective exercise. It becomes imperative to bring in some form legislation or formal regulation to make TPF transactions more acceptable.

If properly developed and implemented, TPF can be an important innovation for both individual and corporate litigants who do not have sufficient funds for litigation expenses. It will provide greater access to justice, particularly to individuals and smaller companies who would otherwise not be in a position to continue legal proceedings against larger entities.

Syed Iqbal Tahir is a Supreme Court lawyer

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