Litigation financing has been rapidly picking up pace in India. Internationally, litigation financing exists as an established industry and is a go-to option for individuals and businesses alike, to secure financing of their respective disputes. The following is an overview of the litigation financing model.
What is Litigation Financing?
Litigation Financing involves a third-party financer providing a claimant with the financial resources required to contest the claimant’s disputes, before the judicial forum or an arbitration tribunal. The financer receives a fixed portion out of the monetary relief that the claimant derives out of the judicial or settlement process, and this constitutes the return on investment for the financer.
A litigation financing arrangement occurs on a non-recourse basis; therefore, the claimant is obligated to pay the financer the fixed sum only when there is an actual monetary relief that accrues to them by pursuing the dispute. In case, there is no monetary recovery in favour of the claimant, then the financer receives no amount in lieu of their investments. Therefore, a litigation financing arrangement cannot be termed as a “loan”.
How does Litigation Financing work?
Let us imagine a small company having bought expensive machinery for their business operation from a bigger company. A dispute arises with respect to the purchase agreement and the bigger corporation repudiates the agreement and refuses to give back the money already paid by the smaller company. Instead, a low-ball settlement offer is made by the bigger company. If the smaller company did not have the financial resources to contest long-stretched litigation, they will be forced to accept the sub-par settlement offer.
However, if the smaller company had access to litigation financing arrangements, the other party would have the knowledge that the dispute can very well be contested in courts. Therefore, the terms of settlement in this case would be fairer and more equitable, in favour of the smaller company.
In a typical litigation financing arrangement, the financer conducts an elaborate due diligence process before deciding to finance a particular case.
The diligence process comprises legal, financial and operational due diligence of both parties to the dispute, in order to assess the viability of the claims, and the financial position of the other party to pay the due amount. The confidentiality of all the information shared with the financer is ensured by virtue of a non-disclosure agreement, signed between the claimant and the financer at the outset.
What are the advantages of Litigation Financing?
The primary advantage of litigation financing is that it levels the playing fields for all parties to a dispute, and enables the disputes to be decided on merits, rather than the respective financial capacities of the parties to disputes.
Businesses have applied litigation financing as a financial engineering tool to boost their respective valuations.
Legal expenses are a charge on the P&L of an organisation, and no substantial increase in the valuation occurs even if a corporation succeeds in a suit contested with its own money. Therefore, businesses find it lucrative to offload the costs involved in pursuing litigations to the third-party financers and channelise the freed-up capital into operating activities that boost their respective valuations.
Litigation financing arrangements are beneficial to the lawyers and law firms as well, who need not follow up or worry about the payment of their bills, in financed disputes. Such arrangements also allow them to convert prospective clients, who might have a genuine claim but lack the financial means to contest the claims.
What is the current status of Litigation Financing in India?
The legislature, executive and the judiciary in India have recognised and have been promoting litigation financing arrangements. Currently, there are a few international litigation financers active in the Indian market. However, they have been largely interested in big-ticket claim buyouts. A home-grown Indian company, however, has recently become active in the Indian market, with its primary focus on the domestic mid-market segment, especially the MSMEs. The litigation finance market is set to exponentially grow in India in the years to come, as India takes positive steps towards becoming a global arbitration hub.
How can retail investors invest in litigation financing?
Litigation funding is a very common practice in western countries where investors make juicy returns by investing in lawsuits. An investor funds the costs associated with such lawsuits and gets a cut from the end proceeds/recovery from such disputes. The asset class is so matured globally that some international litigation funders are generating more than 100 percent IRRs.
LegalPay has started this in India with the intention of democratizing the access to investors to invest in this asset class. They have gone live with an online technology platform in which any upper-retail investor can invest in this asset class. The best part is that the minimum investment required to invest in this asset class starts at Rs 25,000. LegalPay diversifies investment across multiple cases so that the investors can cherish higher returns at minimized risk. LegalPay provides such hand-picked litigation financing investment options to its investors regularly.
The author, Kundan Shahi is Founder at Legal Pay. The views expressed are personal
First Published: IST