Third-Party funding in Litigation

Editor’s note: In this post, Namratha Murugeshan, explains Third-Party Funding (TPF) in litigation. The post looks at the pros and cons of allowing TPF given the current set of regulations we have. 


What is Third-Party funding (TPF)?

TPF or litigation financing refers to a model where when a party’s litigation costs are covered by a funder in exchange for a share in the monetary award of a successful suit. Third-party funding can take place in any form of dispute resolution mechanism, with arbitration being the most common forum for such intervention. Off late, TPF in litigation and mediation is gaining traction. TPF is comparable to investments made by hedge funds, investment in shares or any other capital market venture that involves speculation. Third-Party Funders invest in a litigating party’s pursuit of justice after assessing the claim. Generally, commercial matters are deemed to be the appropriate venture for such funding. While there exists restrictions on the involvement of third parties in litigation in terms of the funder’s locus to intervene and control the parties, many major common law jurisdictions are moving towards removing these restrictions on third-party funding for litigation.

This move can be attributed to the benefits that TPF provides with respect to creating a level playing field for litigating parties and the immense scope of such funding in increasing access to justice. Litigation claims, as we know, tend to be prohibitively expensive and allowing for external funding would definitely help litigating parties to pursue their claim by helping them overcome monetary barriers.

Who is a third-party funder?

Third-party funding, apart from working as a specialization, is a part of the portfolio of investment banks, insurance companies and private individuals with resources. The traditional rules of being a player in the capital market apply to third-party funders too. Similar to a capital market venture having ready investible capital is a prerequisite to be a third party funder. Funding can also take place through crowdsourcing. The case of Bar Council of India v.  A K Balaji (2015) iterated the legality of TPF in India. The case held that there was no bar on non-lawyer third parties funding litigation and getting repaid after success in the same. Lawyers are not allowed to fund, as a foreseeable conflict of interest would occur when a lawyer motivated by a sense of profit colludes with the investor; thereby making monetary gains the principal goal instead of the pursuit of justice.  Order XXV, Rule 3 of the Civil Procedure Code, 1908, as amended by a few states makes way for TPF. This, however, is easily preventable with the enactment of a statute that would govern TPF in India. The hope is that such a statute would clearly set out the terms of contracting under TPF, the duties, the obligations of claimants (including counterclaimants), lawyers and funders to avoid a clash of interests and perhaps a model contract for TPF too.

Costs and Coverage

TPF generally covers costs of either the entire cost of litigation or certain aspects of it such as court fees, lawyers’ fees, etc. Given that litigation at most times turns out to be prohibitively expensive, TPF adds dual value to the claims of the parties. One, the investment of a funder in litigation is a deliberated process. Just like how an investment bank would thoroughly work on due diligence before making an investment in the market, its investment towards a litigating party too would be a thorough exercise. Therefore, when TPF is secured, the claim’s legitimacy increases after receiving backing from a neutral party. Second, which is a benefit arising from the same legitimacy is that weaker claims may be weeded in this process of selection. Increased third-party intervention may help in objectively segregating strong and weak claims. Once filtered, a rational choice not to go ahead with weak claims may result in the reduction of the Court’s burden with respect to the number of cases arriving at its doorstep.

 The process of TPF

Once TPF gains traction, there will be an increase in the institutionalization of the same within the country. Before this happens, there is ample opportunity to ensure that this system is transparent. When a litigating party approaches a funder, the funder would look at the substance and merits of the case to determine if it is worthy of their investment. While this needs to be done on a case-to-case basis as per the funders’ wishes, a set of legally qualified rules in place to express set out the criteria for funding and requiring disclosure of conflict of interest would be a step towards transparency. Once due diligence is done and the funder arrives at a proposal for the litigating party, a contract for the same is required to ensure both parties meet their obligations with respect to each other. At this juncture, the intervention of the Law is particularly useful as it could provide a mechanism to prevent coercive or unfair contracts to be enforced by the more powerful party, who is usually the funder. The contractual agreement must clearly specify the level of involvement of the third-party funder, the costs to be covered in the process, the manner in which costs are to be recovered and any case-specific additional requirements. An apprehension commonly expressed while arguing against TPF is the excessive and unregulated involvement of external parties in private suits. The regulation of this would ensure that TPF grows in a more controlled environment while preventing adverse consequences.

Where is TPF going?

While the merits of TPF have been pointed out, the workability of it in India is an open question due to some structural differences in litigation processes across the world. The lack of precedent of exceptionally high monetary awards in commercial cases, extreme delays in court procedure, frequent changes in the bench composition, lack of clarity on the role of foreign investors and lack of data on patterns of judgments are factors that are barriers in TPF’s path of growth. While there is immense scope for funding to ensure that fair claims to justice actually find an avenue, there remains an equal pessimism of it changing the landscape of litigation. The opening of the litigation process to third parties, brings with it the fear of interference, conflict of interest and the prioritizing of monetary gain over justice in the courtroom process. While all these fears a legitimate cause for concern, addressing and regulating this growing asset class right in its infancy would ensure that positive outcomes outlive apprehensions.

Namratha Murugeshan is a final year student at NALSAR and also a Writing Fellow at the Nyaya Forum.

About the Author:

Namratha Murugeshan is an IV year B.A., LLB. (Hons.) candidate at NALSAR, Hyderabad. She is the current Editor-in-Chief of the NALSAR Legal Practice Hub.

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