Third-party litigation funding is now an established global commodity, with an expected revenue of $17 billion in 2023, according to research analyst Future Market Insights. Across the Asian region, uptake has been slow, however, although India is a market that is showing keen interest.
It wasn’t always the case, though. “In the initial years when we introduced this concept, it was met with scepticism and even ridicule. Over 99 percent of legal professionals deemed it unlawful,” says Kundan Shahi, the founder and CEO of one of India’s most prominent funders, LegalPay, which was set up in 2019. The past few years have witnessed a significant shift, with the industry gaining traction on the back of aggressive marketing, awareness campaigns and use of technology, including AI-powered legal tools.
Another key driver has been the fact that legal costs and resolution times in India are much higher than global standards. The cost of litigation in India is approximately 31 percent of the claim value, 10 percent higher than in OECD countries, according to the World Bank’s latest Ease of Doing Business report. The same report also found that commercial contract disputes in India take 1445 days for resolution, compared to the 590 days it takes in the OECD countries.
The demand for funding “stems from businesses aiming to transfer litigation risk and find a reliable partner. Startups and MSMEs, in particular, leverage risk-free capital for their legal pursuits,” Shahi says.
JUDICIAL SUPPORT
There may not be a regulatory framework yet to support litigation funding, but courts have already weighed in, and the direction is positive.
In March 2018, the Supreme Court of India ruled that there “appears to be no restriction on third parties funding the litigation and getting repaid after the outcome of the litigation.”
More recently, the Delhi High Court in June recognised the enforceability of a third-party litigation funding agreement and went as far as to say third-party funders play a vital role in ensuring access to justice. “In the absence of third-party funding, a person having a valid claim would be unable to pursue the same for recovery of amounts that may be legitimately due,” the court ruled.
Naresh Thacker, the head of disputes at law firm Economic Laws Practice, says many state legislatures have also given their tacit acceptance to litigation funding. Maharashtra, Gujarat, Uttar Pradesh and Madhya Pradesh have amended the Civil Procedure Code in their state to include references to third-party-funded litigation.
For Shahi, these milestones “mark a palpable shift in perception and signal a resounding acceptance of this trans-formative product.”
“As issues emanating from third-party litigation funding arise before Indian courts, it may garner attention from legislative bodies to consider introducing a regulatory framework. Having said that, safeguards ought to be introduced to ensure that this does not open a pandora’s box of frivolous litigation.”
Naresh Thacker, Economic Laws Practice
Vikram Singh, co-founder of another leading litigation funder, LegalFund, established in 2021, says that while this judicial support is welcome, any way forward must address concerns about potential abuse and ethical implications of third-party funding by introducing a legislative framework.
Thacker believes this may be in the offing. “As issues emanating from third-party litigation funding arise before Indian courts, it may garner attention from legislative bodies to consider introducing a regulatory framework. Having said that, safeguards ought to be introduced to ensure that this does not open a pandora’s box of frivolous litigation,” he says.
THE BUSINESS OF FUNDING
Litigation funding has also grown hand-in-glove with India’s economic growth, with businesses looking to quantify and mitigate increasing legal risk as they expand. It also provides global and domestic investors with an opportunity to diversify their portfolios with a new asset class, Singh adds.
With domestic and global capital eyeing the Indian market for high investment returns and as demand for litigation funding continues to rise, the country has seen litigation funders mushroom. Funders like LegalPay and LegalFund, as well as the likes of FIGHTRIGHT and Liti-Cap, are now organised financially and commercially to transform the industry into a mainstream, high-profitable and risk-averse avenue for growth.
And clients are beginning to take notice. In 2019, Hindustan Construction Company completed the first litigation funding deal in India’s construction sector, worth $240 million, monetising a pool of arbitration awards and claims to secure an upfront cash payment from a consortium of investors led by Black-Rock. In a similar deal, Patel Engineering transferred its interest in litigation claims to investor Eight Capital Group for $260 million.
The financing for litigation funding companies is done by bringing in investors through a process involving outreach, education and marketing, Singh says. Investors look at the fund’s track record and investment strategy, and any investment is placed in dedicated investment funds from where it is released towards selected cases, he adds.
“Litigation finance operates on a non-recourse model, where our payment hinges on client success. Cost structures differ per case intricacies,” Shahi says. This means, as Singh explains, that if a funded case is lost, the claimant is not obligated to pay back the funder, who must absorb the losses.
So how does a funder determine whether taking on a dispute is likely to result in a good payout?
The determinative factor for the funder is the financial feasibility of a claim,” Thacker says. “In the Indian scenario, this translates into not just achieving monetary success but also decisions of funders are likely to pivot on predictability and probability of successful outcomes.”
At LegalPay, “AI and machine learning underpin our evaluation of meritorious claims,” Shahi says. “Businesses and law firms initiate contact with us seeking funding and providing comprehensive case details. Our in-house team employs proprietary technology to scrutinise each case holistically – evaluating its merit, financial feasibility, the opposing party’s financial standing, legal representation, and its alignment with our overarching strategy.”
THE WAY FORWARD
Experts agree that commercial contract-based disputes, particularly in the construction sector, with their complex techno-legal issues and long resolution periods, are most sought to be funded or monetised by prospective clients. Apart from construction, Thacker says disputes in the healthcare, pharmaceuticals and private equity sectors are attractive to funders.
Third-party funding is also extensively secured in international arbitration as cross-border disputes can often be complex and expensive, Singh says. The sector has also harnessed the rise of financial technology to offer innovative solutions to ease market access to potential investors and claimants, a trend that is only likely to grow as litigation funding continues to penetrate the Indian market.
Shahi’s LegalPay focuses on disputes in the B2B commercial space, ensuring it picks up cases that will bring strong returns to the company.
“We are in the business of investing capital and ensuring our investors make good risk-adjusted returns. We prioritise investor returns and exercise caution, with room to explore other sectors with a robust hypothesis,” Shahi says. “Growth is inevitable. However, if we have a better timeline record for the disposal of commercial litigations/arbitration, the market will attract more investors.”