Litigation Financing or third-party financing is a procedure including lawyers and their clients to assess and manage risk and costs involved in the duration of their courtroom case. It is an important financing tool for both lawyers and clients. For clients, hiring an outside financer makes it financially easier and convenient than financing their claims on their own. On the other hand, financial claims require a lot of calculations and assessments and the lawyers use an outside financer to spread their risk.
It is only recently in India that litigation financing has received its due attention considering its innumerous benefits for the three parties involved- clients, lawyers, and financers. Globally, the concept of litigation financing is quite popular, but India is still an infant in this form of financial tool. Considering the potential market in India, many international funders and legal firms have developed an institution that will self-regulate this third-party funding concept, known as the Indian Association for Litigation Finance. This will ensure a smooth and ethical mode of conducting this new method of financing with a more structured institutionalization. (Benwal, 2020)
Parties Involved in Litigation Financing
The parties involved in the process of third-party funding can be precisely categorized into the following:
- Plaintiffs or Clients: These are individuals or companies that need fund assistance for their case. They use external funders to monetize their legal expenses that are incurred in the duration of their claims. This helps them to have a more flexible way as money is no longer their constraint,
- Investors: The investors are the third-party funders that invest in these legal claims in return for the future proceeds that the client may earn on winning the case. They can also invest in the litigation process of a defendant, in which they would receive the proceeds that their client might be able to defend.
- Lawyers or Law firms: They are basically the facilitators of the different stakeholders involved in the litigation process. They keep an account of the funds and claims during the conduct of the litigation process. This helps them attain recoveries and achieve their outcome in a more sustainable manner.
Growing Relevance of Litigation Financing Globally
Litigation financing has developed and received maximum attention in the last few years worldwide. Although its existence dates to the 1980s, it is only in the last decade that people have actually started understanding the concept and its importance in the legal spectrum.
It has brought in the realization that when looked from the investment point of view, it is an investment that remains unaffected from the other business cycles. Globally, the emergence of litigation financing has only caught the pace in the 1990s and 2000s. this involves Australia, UK, USA predominantly. In Australia, this concept developed in the 1990s after the legalization of class action lawsuits in 1992. This rose the need for a more structured and legal system of investments for group claims since this required a large chunk of money during the legal procedures.
In the UK, this concept developed around the same time as Australia, although it only got popular after the Access to Justice Act 1999 which provided other methods of funding than the already existing traditional methods. With the legalization of the third-party funding, the UK market saw a significant rise in such investment companies, opening door to a new kind of investment and a new addition to the economy.
The USA although had the concept of litigation financing prior to these countries, it was only however limited to the personal injury cases. However, after 2006, the concept has now been broadened and many companies are now using litigation financing to claim their dues. The state is trying to promote this method and it has been significantly growing thereafter.
In India, there is however no legal restrictions on this mode of legal financing through the third party but the concept still hasn’t picked up the pace as it should according to its potential. Even though it looks simple, the third-party funding has some complications and that is why it will also require proper structure and regulation for it to flourish in the Indian markets. (Whillans, 2017)
Role of Regulations in View of the Complexities
There are a number of complexities involved when we talk about third-party funding. Since it is still a new concept, it is very important to have proper knowledge, structure, rules and regulations for the smooth conduct of this procedure. There are possibilities if fraudulent practices when it comes to third party funding. There are also issues related to the lack of transparency by the funded party or conflict of interest among the stakeholders.
When we talk about third party funding in the Indian context, the main issue is that investors obviously look for quick return policies, but the Indian legal system is designed in such a way that any case takes a lot of years to get solved finally. This is one of the reasons why investors are not extremely comfortable investing their large chunks of money and waiting for such a long period of time. The next issue faced is that the lawyers are not motivated enough to take up the cases very actively since they do not feel the ownership since the money is invested by a third party. Such issues call for regulations for the smooth conduct of this growing system.
As of now, there is no legal organization that facilitates or regulated the third party funding in India. However, with the coming of this new year, a self-regulatory body is being launched on the 7th January that will be responsible for the conduct of this system. India has previously faced a number of legal scams and in the view of this, the regulatory body is hoped to bring a positive impact and build customer trust and verified services. The self-regulatory body is named Indian Association for Litigation Finance and is looked forward to bring in a more inclusive and transparent system. (Benwal, 2020)
Litigation Financing and Covid-19 – A Way Forward
2020 has been an unpredictable year for most businesses across the world. In India too we have seen the disruptions that this pandemic has brought with itself. The aftereffects of the months-long lockdown are still being felt across the nation and even globally. But such times call for innovations and economies are finding ways to hit back. Covid-19 has accelerated the demand for immediate working capital and this helps to boost the investment sector. This has, in turn, opened doors for the concept of third-party funding. On the other hand, the pandemic will also lead to a number of concerns as the primary motive of the funder is to at least cover their investment amount but with this pandemic and the current situation of the economy, it a major cause of concern as the quantum assessment has only gotten tougher.
To overcome the concerns, India would require a properly regulated system to move forward. However, the bottom line is that the pandemic has definitely opened wider doors for third party funding to flourish in the Indian markets given that we develop a proper system and develop a long term structural change that helps all the stakeholders involved in third party funding.
Funders are currently very sceptical to invest in any litigation financing. Surveys suggest that only 1 in 10 applications are accepted by the funders as the uncertainties of returns is very high. This is currently the most important reason why the Indian market is not running on its full potential when we talk about litigation financing. (Indge,2020)
If litigation financing is promoted positively, it can help all the stakeholders in a significant manner. The comparatively poor clients can have a chance of getting their claims and on the other hand, funders can be encouraged to invest with proper legal structure. For any new system to work smoothly, the government has to come up with regulations and at the beginning of this year, we have one such organization that can help this new concept grow widely in India. It is a very innovative method of financing and can change the way our legal system is currently working.
A very important regulatory body – Indian Association for Litigation Finance is being launched and it is hoped that this can bring a significant development in litigation financing.