Litigation Funding

What is litigation funding ?

Litigation financing refers to the funding provided for legal disputes, often called professional funding, third-party litigation funding (“TPLF”), legal funding, lawsuit loans, or settlement funding. In England and Wales, it is commonly known as litigation funding. According to Wikipedia, legal financing is a process where litigants or law firms secure financial assistance to cover their legal expenses. Third-party funding firms provide the financial backing to claimants or lawyers in exchange for a predetermined share of any successful claim’s outcome. TPLF covers a range of costs related to the litigation process, including legal fees, research, depositions, interrogatories, motions, conferences, witness preparation, hearings, subpoenas, appeals, court fees, consultants, and investigative expenses.  

Is it legal in India ?

Is this permissible under Indian law?

  • India has inherited many legal practices from English law due to its colonial history, but the concepts of maintenance and champerty are not explicitly addressed in Indian statutes but through a series of judicial pronouncements.
  • For example, in Gorse & Anr v. Amirtamayi Dasi, the court ruled that champerty and maintenance were unlawful in the Presidency Towns, holding that any agreement based on these principles would be void due to public policy concerns. However, in Ram Coomar Condoo v. Chandra Canto Mukerjee, the court provided further clarification. It explained that the statutes on champerty and maintenance were enacted in England to prevent false claims driven by personal interests. These laws, being specific to the English legal context, were deemed inapplicable to India.
  • Since then, Indian law has not explicitly addressed litigation financing. In Pannalal Gendalal & Anr v. Thansingh Appaji & Anr, the court ruled that for a third-party funding agreement to be considered void, it must be shown that the agreement contradicts public policy, morality, equity, or good conscience, and must be extortionate or driven by improper motives.
  • Further, in a more recent case, the Supreme Court of India in Bar Council of India v. A.K. Balaji & Ors. held that according to the Bar Council of India Rules, advocates are not allowed to fund litigation on behalf of their clients. However, third parties, who are not lawyers, can legally fund litigation and expect repayment based on the case’s outcome. In simple terms, claimants can enter into litigation financing agreements with companies that specialize in this, provided these companies are not run by lawyers.

This evolving legal framework suggests that while litigation financing is not explicitly regulated in India, it is permissible under certain conditions, provided that the agreement does not contravene public policy, morality, or good conscience, and the third-party funder is not a lawyer.

Statutory Recognition

Litigation financing does not have a specific statutory recognition in India. Even the Arbitration and Conciliation Act, 1996 does not mention it. The only possible legal framework for such agreements is through valid contracts under the Indian Contract Act, 1872. However, the concept has been favorably referenced in the report by Justice B.N. Srikrishna’s High-Level Committee to review the Institutionalization of the Arbitration Mechanism in India. In certain states, such as Maharashtra, Madhya Pradesh, Gujarat, Uttar Pradesh, Andhra Pradesh, Orissa, and Tamil Nadu, amendments to Order XXV of the Civil Procedure Code now allow third-party financing. These amendments give civil courts the authority to ask the financing party to cover the costs in a litigation case. Under Order XXXIII of the Civil Procedure Code, 1908, there are provisions for indigent persons to file lawsuits, but these are not available to financially well-off parties. Litigation financing provides a viable option for all parties, regardless of their financial standing.

Benefits of litigation financing

For Litigants:

  1. Relieves Financial Pressure: When a claimant faces financial strain or expensive legal battles, litigation financing helps them continue their case without worrying about money or the risk of losing.
  2. Boosts Company Assets: Ongoing lawsuits can harm a company’s finances. Litigation financing can help preserve and grow the company’s assets by covering legal costs.
  3. Improves Legal Support: Litigation financing ensures claimants get the best legal advice, even when they face a strong opponent, by evaluating the case’s potential and providing funds for quality counsel.
  4. Encourages Legal Action: Many claimants settle out of court due to lack of funds. Litigation financing gives claimants the confidence to pursue their case and not give in to pressure from well-funded opponents.
  5. Reduces Litigation Risk: Legal battles come with risks, and even small mistakes can affect the outcome. TPLF helps manage these risks, protecting the claimant’s interests.
  6. Quick Access to Funds: Unlike banks, which require collateral and have high interest rates, litigation financing offers fast, non-recourse funding for claimants.

For Investors:

  1. Growth Potential: The litigation financing market is growing, offering investors a chance to earn high returns with strategic investments.
  2. High Returns: Litigation financing can provide returns of 25-30% or more, outperforming traditional investments like fixed deposits, mutual funds, or real estate.
  3. Low Risk Investment: Unlike other investments affected by market conditions, returns from litigation financing depend solely on the merits of the case, avoiding market fluctuations.
  4. New Investment Opportunity: Litigation financing is a new asset class that allows investors to diversify their portfolios and explore high-return opportunities.