Saturday, January 7, 2017

Third Party Funding of Litigation in India--Placing the Gun on Another Shoulder?

Third party legal financing, whether of arbitration or of litigation, has taken on increasingly large proportions in recent years. The practice of funding someone else’s litigation, perhaps in return for a share of the proceeds, has been increasing for some time now.

India has a strict policy against contingency fees, and has stayed away from such practices in the past. However, courts have also held that the strict rules of champerty (an agreement whereby a person with no interest in a lawsuit finances it hoping to take a share in the case of a successful settlement), and maintenance (agreement whereby a person with no interest in a litigation agrees to help with the funding of the litigation, without any hope of remuneration)[1] do not apply in India[2]. So, there is nothing to prohibit third party funding under the law in India as it currently stands.

Large funds (akin to private equity firms) are increasingly beginning to finance such actions for a share of the awards. Though there is success in only a percentage of the cases so bankrolled, it is more than enough to cover the costs of the others. Litigation funds are yet to be registered in India, and keeping in mind the restrictions on capital transactions, Indian regulators will have to approve cross border funding[3].

Litigation financing, which often takes the form of monthly payments, can help immensely with cash flow issues. Further, it typically covers the expenditure incurred in the litigation such as money given to court as security, institutional fees etc. It is not in the form of a loan. Agreements can then be structured to ensure that litigation funds get as much value out of the deal as possible: this could include rights in the patent in case of a patent dispute, part of the title of the land so determined in the event of litigation involving property disputes, or simply a share of the proceedings in the case of a money decree.

This can help with intellectual property matters as well: litigations are long and expensive, and often end because parties run out of steam. In cases involving patent disputes, for example, funders ensure that there is suitable margin between the costs and the expected return. However, in cases involving more open access to knowledge, it is doubtful whether third party funds will be willing to finance causes where there can be no hope of monetary returns.

As litigation funding becomes more sophisticated, trade in claims as derivatives is also increasing. This is an increasing trend in the patents arena. However, creation of derivatives from commercial claims is restricted in most jurisdictions[4].

Such funding could provide a serious boost to dispute resolution in India. One lawyer in India, quoted in a news article[5], said: “The number of instances where claims do not get pursued or get abandoned is very high. More often than not, advantage of lack of staying power is taken and, in fact, it is standard strategy to wear out the claimant. Having recourse to lines of finance will have a significant impact, including the quantum at which claims get settled.” Genuine claims and claimants, deserving their day in court, can thus access funds as and when they urgently need them.

Still, serious doubts remain. In an article published in the Wall Street Journal as far back as 2011[6], concerns were raised that such commercialisation of litigation would go against the very ethos of the legal system. Further, in the face of so much pressure and seemingly endless resources, defendants could feel pressured to settle for far more than they should. Conversely, plaintiffs could be pressured to settle for less, in order for the fund to safely recoup as much of the initial investment as possible, as soon as possible. 

Ultimately, the question of whether the funding savours of impropriety appears to hinge on a single factor: the level of control the funder will exercise over the litigation. In the event that the funder is proving to be a guiding hand in the litigation, the spirit of litigation, and the idea of fair play and natural justice, could be lost. Therefore, courts, as well as the legal and financial industries should take care to ensure that proper rules for such funding are put in place as soon as possible. This will ensure that funds, investors, and litigants are all adequately protected.

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