Abstract
One of the reasons behind people not approaching the court of law to seek justice in case of any unlawful event is the common belief that “proceedings of a court are too expensive” and as a lower middle-class citizen of the country, it is difficult to have funds to cover these costs. Court fees, lawyer fees, traveling expenses, and other related costs are some of the expenses involved in the process. Many economically backward people in India work on daily wages, they hardly have the money to make ends meet. Even smaller companies who have just started business do not possess much money. In case of being wronged by any well-established organization or client who has access to the best lawyers available and the company, not having enough money to hire a good lawyer might gain an undue disadvantage in the suit. In such cases where financial obstacles prevent access to justice, Litigation finance provides funding to bridge the gap. Litigation finance or funding means monetary assistance provided to the needful to pursue the legal case. This paper explores the intricate impact of Litigation Finance on Corporate Litigation trends by observing its impact on the outcomes of the legal proceedings involving corporate entities.
Keywords: Litigants, Litigation finance, Litigation funding, Maintenance and Champerty, Lawsuit, Corporate entities, Courts.
Introduction
Money is an important factor in an individual’s life. It’ll get you whatever you desire and fulfill your needs. On the other hand, the lack of money makes an individual struggle to even fulfill his basic needs. If any injustice has to happen to an individual who is struggling to satisfy his basic needs, he will not be able to approach the court of law which is the highest authority of justice due to lack of funds. Hence, there arises a need for an instrument that provides funding to low-income groups to initiate legal proceedings. Litigation Funding or Financing has been growing in India for the last few years. It also exists in foreign lands however, there it is a well-established organisation available to be approached by any individual wanting to pursue legal tussle. The court proceedings in India are known to be expensive and time-consuming. In India, the High Court Advocates charge fees ranging between 3 lakh to 6 lakh per hearing whereas, the Supreme Court Senior Advocates charge fees ranging between 5 lakh to 25 lakh per hearing. In such a case Litigation funding is a blessing for low-income groups as well as small companies or start-ups who do not have the funds to raise voices against injustice. Suppose A is a newly incorporated corporate entity that does not have much recognition in the market. One day a large business firm B stole A’s Intellectual Property Right. Now this business firm B is quite well-known in the market. Entity A being new, with no reputation in the market, and not enough money in hand to file a lawsuit is left with very limited options. It can either take a loan from any bank which would be full of risk as the corporate entity is in its initial stage and not making enough profits to repay the loan or the owners of the unit can pay for the lawsuit from their liability. However, litigation funding introduces another option to the table i.e. expenses of the lawsuit being paid off by a third party in return for a share of the court proceeds if the plaintiff achieves success. Another benefit of litigation financing is that it is a non-recourse investment which means if the plaintiff loses the case, he does not owe money to the funder or investor. In simple words, if the case succeeds the funder will be given a share of the proceeds which are without doubt more than that of what he invested, and if the plaintiff loses he would not need to worry about repaying money to the funder. In Bar Council of India v. A.K. Balaji (2018) 5 SCC 379, the Supreme Court held that, In India, funding of litigation by advocates is not explicitly prohibited. However, Rule 18, Rule 20, Rule 21, and Rule 22 shall be referred to. Rule 18 talks about fomenting litigation, Rule 20 talks about contingency fees, Rule 21 talks about share or interest in an actionable claim, and Rule 22 talks about participating in bids in execution. As a result, lawyers funding their client’s litigation is prohibited. But there is no restriction on third-party funding i.e. non-lawyers funding the litigation and later taking a share of court proceeds if the outcome of litigation is favourable. In the U.S.A., third-party funding is allowed, even a lawyer can provide litigation finance to its clients and later get repaid out of court proceeds.
Research Methodology
The research methodology used in this paper is qualitative in nature, precisely using descriptive method and explanatory method. The study paints a picture of the challenges faced by litigants. It shows the difficulty experienced by low income groups and small corporate entities with limited financial assistance while accessing justice. It explains the costs of court proceedings, fees of High Court Advocates, fees of Supreme Court Advocates, etc. The study also explains the meaning of the term “Litigation Finance” and the ways in which it can help those with limited finance during court proceedings.
Review of Literature
A small technology company that specializes in location based technology in mobiles known as Skyhook Wireless filed a suit against Google which is one of the largest technology companies in the world accusing it of unfair competition. Google was already well-known in the market for various applications such as Gmail, YouTube, Google Maps, and Google Search. Skyhook Wireless alleged Google for misusing its position in the market and making mobile manufacturing companies use Google’s Location based services. The plaintiff being a smaller entity sought financial assistance from third-party litigation funding. The dispute was ultimately settled out of court by way of a confidential agreement between both parties whose terms were not disclosed publicly. This case study clearly shows how Litigation Funding helped a smaller entity to undergo legal proceedings against a tech giant. In this paper, the researcher has gone through various articles and blogs to examine the concept of Litigation Finance, its effect on court proceedings relating to corporate entities, and how it presents a chance for a smaller unit to defend its rights. Litigation finance provides financial assistance without envisioning the outcome of a suit, the party may win or lose but these funds allow them to present itself rightfully in a court of law.
History of Litigation Finance
The history of Litigation finance is not very old. Australia and the United Kingdom were the first nations to legalize the concept of third-party funding. Australia is also credited as the birthplace of modern litigation funding. The landmark judgement in Campbells Cash and Carry Pty Ltd v. Fostif Pty Ltd legalised the concept of Litigation Finance in Australia’s legal system. Campbells had agreed to third-party funding for the proceedings of the suit and also agreed to pay the funder a share of case proceeds. Now the question arose in front of the High Court of Australia whether the agreement of Campbells was valid and legal or not. However, the High Court held that:
- The agreement was indeed lawful.
- The agreement did not violate any principles of public policy
- Litigation funding is a significant means to provide financial support to plaintiffs, who may not possess enough funds to seek justice by themselves.
The legalisation of litigation funding happened around the same time in the UK as well. The courts of the United Kingdom decriminalised the doctrines of maintenance and champerty and also revoked the tort liability arising out of the doctrines of maintenance and champerty. In 1990, the parliament overruled the ban on Conditional Fee Agreements (CFA) allowing clients and solicitors to enter into a conditional fee agreement. A Conditional Fee Agreement is an arrangement between the claimant and solicitor to share the risks of litigation and the solicitor will be entitled to get repaid only if the claimant wins the case. It is a “no win, no fee” type of arrangement. Once the case succeeds in the favour of the claimant, the solicitor receives a percentage of court proceeds as previously agreed by both parties. These opened the way for Litigation financing in the United Kingdom. When India was a colony under British rule, an agreement to provide funds to a plaintiff with a condition to get repaid out of the court proceeds was not seen as void or invalid. Such agreement did not violate any rules of public policy which was confirmed by the Privy Council in 1876. In India, there does not exist a particular act governing third-party funding however, there is also no restriction unless the agreement of third-party funding is made for some unlawful purposes. The landmark judgment in Bar Council of India v. A.K. Balaji, 2018 was a notably important decision in the legalisation of litigation finance in India. Many countries and private bodies started to look at third-party funding from a business point of view.
Maintenance and Champerty
Maintenance and Champerty are legal doctrines that originated in ancient Greece and were further adapted into English medieval law. In the 17th century, Lord Chief Justice Coke explained the origin of maintenance as “taking up to on one’s hand, upholding quarrels by bearing up or taking sides, by disturbing or hindering the common rights.” The term champerty is derived from the Latin word ‘campus’ which means ‘field.’ The support of litigation by a third party who has no significant interest in the lawsuit is known as maintenance and the support of litigation by a third party with an intention to receive a share in the proceeds of the court is known as champerty. Historically, maintenance was seen as unnecessary meddling in the affairs of others and champerty was seen as outrageous as the champertor had a financial interest in the outcome of the lawsuit which could lead to the temptation to manipulate unjustified claims. This could compromise the fairness of the legal process. Maintenance was viewed as a civil wrong that could give rise to legal actions if the maintainer interfered in a lawsuit other than that of his interest. Whereas champerty was viewed as a criminal offence punishable by fine or imprisonment. However, after the Criminal Law Act of 1967, maintenance and champerty were not considered as tort and crime. The English law of maintenance and champerty was never applicable in India. The legal doctrines are valid in India to the extent that they are not used for any wrongful activities and are not inconsistent with public policy. Today, maintenance and champerty are relevant concepts in the legal field. They have evolved to assimilate changes and laid the foundation for the concept of litigation funding.
Steps to avail litigation finance
Availing litigation finance involves several steps so that there is transparency and no ambiguity between the plaintiff and the fund provider. The following steps should be taken to find a finance provider:-
- Analysing the legal case- The plaintiff should analyse the case and form a decision regarding whether or not litigation finance is a suitable option. He can talk to legal experts as well.
- Finding finance providers- To find a suitable funder, the plaintiff must consider the funder’s reputation, expertise, terms of financing, etc.
- Applying- The plaintiff after selecting a funder should apply for litigation finance to the funder. This application should include details of the lawsuit, the costs involved, and any other necessary documents.
- Due Diligence- The funder runs a background check on the plaintiff and the lawsuit, evaluates the risks involved, consults legal advisors, reviews legal documents, and takes an informed decision.
- Negotiation- The plaintiff and funder discuss the terms of funding, terms of repayment, distribution of shares of court proceeds, etc. They finalise the terms of the funding agreement. Once everything is discussed and finalised both parties i.e. the funder and the plaintiff sign the funding agreement. This agreement is the proof of their arrangement.
- Disbursement of funds- After the agreement is signed, the funder transfers the agreed amount to the plaintiff to cover the legal costs and expenses arising out of the lawsuit.
- Monitoring and reporting- The funder monitors the development of the case and provides additional support if required. It is the responsibility of the plaintiff to inform the funder about all lawsuit details. This can be done every month or as decided by both parties.
- Result of the case- If the outcome of the suit is in favor of the plaintiff, he should pay a share of court proceeds to the funder or some additional amount as agreed by both parties. If the outcome of the suit is against the plaintiff, he is generally not liable to repay the funder.
Litigation Finance as a Business Model
With the legalisation of third-party funding, some individuals started seeing this instrument as a business model. In this model, legal cases that have the potential to achieve success in court are analysed and funds are invested in these cases not from a single investor but multiple investors to reduce risk as third-party funding is a non-recourse instrument which means loss of money of investors and litigation financing company. The plaintiff agrees to pay a part of the court settlement to the investors. This amount is usually more than what was invested. In this way, the plaintiff in need receives monetary assistance to file a lawsuit, the investors who provided monetary assistance to the plaintiff get their share out of court proceeds and the Litigation Finance firm receives success fees. This model is known as litigation funding. There is also one different model known as interim financing under the Insolvency and Bankruptcy Code (IBC). In interim financing under IBC, a short-term loan is granted to a company dealing with insolvency. LegalPay is India’s largest legal financing player. It was founded in November 2019 with a mission to empower businesses to access justice by providing them with financial support. According to Kundan Shahi, founder and CEO of LegalPay, “We provide working capital to the company to tide through the governance process (Corporate Insolvency Resolution Process). Under this model, the company is given precedence over banks and other lenders during repayment. To be on the safer side, the company makes sure to grant loans to only such companies who have substantial assets for liquidation or those who are likely to get acquired or be restructured. Interim finance is safer than Litigation finance. However, the more the risk, the more the returns.
Future trends
With the rise in legal costs as well as the aspirations of both individuals and organisations to earn through litigation investments, the market of litigation finance is expanding. Diversified businesses want to make investments in the litigation finance industry. According to Ashish Chhawchharia, Partner and Head-Restructuring Services, Grant Thornton Bharat, “The rising number of disputes among organisations is expected to provide opportunities for the growth of the litigation funding investment market, with special interest from lenders and investor groups .” According to a report released by Custom Market Insights, “ In 2021, the global Litigation Funding Investment market was estimated at USD 12.2 billion and is projected to reach approximately USD 25.8 billion by 2030 with a compound annual growth rate (CAGR) of roughly 9% between 2022 and 2030.” This type of model is very common in the West but comparatively new in India, where it is receiving quick adoption and recognition. Hence, multiple factors are driving the growth of litigation financing, indicating a promising future for the industry.
Suggestions
One of the drawbacks revolving around litigation financing is the lack of a comprehensive regulatory framework. This may lead to a lack of transparency and unfair practices. There should be a set of rules and regulations consisting of ethical guidelines for the investor, it should monitor the transactions between the investor and the plaintiff and promote transparency and disclosure. A maximum investment amount should be decided and no investor should be allowed to provide funds exceeding this limit. Government agencies including local authorities can establish the requirement of a license to invest in the litigation market. They can also establish public awareness programs and educate common people on litigation funding, so they would be able to make informed decisions if required. Litigation financing includes various costs such as interest rates, contingency fees depending upon the result of the lawsuit, etc. These costs can reduce the compensation received by the rightful litigant, which would be unfair. Therefore, there shall be a limit on interest rates or fees, so the plaintiff is treated fairly. There should be transparency in the fee structure as well. An individual or company funding a legal proceeding can influence the legal proceeding for his financial benefit and may overlook the interests of the litigant. Ethical guidelines for funders should be established to avoid conflict of interest. The ethical guidelines and professional conduct standards should be followed by the funder and legal personnel respectively. The regulations should protect the plaintiff from severe outcomes of the case. Severe outcomes can include losing a case and having to pay the entire legal charges of the defendant or agreeing to a settlement that is not in his best interests, due to the pressure of the funder. Litigation financing can have positive as well as negative impacts on the legal system. Hence, there shall be a robust regulatory framework governing the cases of litigation finance.
Conclusion
Litigation Funding helps the plaintiff and investor by providing funds and incentives respectively. The emergence of litigation finance presented various opportunities as well as challenges. It provided an opportunity for economically backward individuals and small businesses to get justice by bridging the financial gap. However, the lack of a regulatory framework poses the threat of unfair practices. It is necessary to maintain a balance between providing access to justice and safeguarding the integrity of the legal system in the middle of evolving corporate litigation and rising litigation finance demand. The government should make sure the guidelines are being adhered to. Confidentiality is an important aspect of the concept of third party funding. A company should strike a balance between maintaining confidentiality and transparency. Litigation funding is a promising industry and can help our legal system evolve even more.
AUTHOR
Riya Puthran
Vidya Prasarak Mandal TMC Law College