India - Cash Constrained And Need To Litigate? Third Party Funding May Be The Solution.

23 June 2020

Covid-19 has seen the legal landscape leapfrog into digital courts, electronic filings and asynchronous video hearings. The change has been fundamental and deep deliberations are currently underway for the systemic adoption of a new normal. Such a material shift often facilitates rapid adoption of other innovations that were hitherto stuck at the threshold of a conservative mindset. We believe that Third Party Funding of litigation is one such legal innovation that will now come of age in India.

The disruption in the global economy caused by the outbreak of Covid-19 has been profound to say the least. It is assumed that the adverse impact of the current pandemic will be greater than the combined crises of 9/11 and the 2008 global financial crisis. It is foreseeable that consequent to such massive disruption and continuing uncertainty, many parties may terminate or consciously choose to not perform contracts with/without legal justification. Some, if not all such parties, may soon find themselves amidst material litigation that directly stems out of the pandemic. For instance, the evolving force majeure jurisprudence or change in law clauses will be key points of contention.

Litigation/arbitration/legal fees require substantial amounts of money. Recovery of such legal costs (if at all) will only occur at the end of the proceedings, provided a favorable judgment is obtained. It may be noted that contingency fees are prohibited for lawyers in India. Coming out of the pandemic, as parties are bound to find themselves in cash constrained circumstances, it is unlikely that the laws of limitation will allow such party to stabilise its cash position before initiating legal proceedings. There is thus a massive opportunity for leverage capital to be made available for funding litigation claims.

Third Party Funding/Litigation Financing will play a vital role in enabling companies to enforce their legal rights without diverting valuable resources.

Third Party Funding is a non-recourse funding of litigation/arbitration/mediation costs of a litigating party, by a third party in exchange for a share in the monetary award of the litigation (if successful) or settlement amount. Third Party Funding may extend to all dispute resolution mechanisms; and include legal counsel’s fee, court/tribunal’s fee, cost of expert witnesses, pre-deposit, adverse costs order, and other dispute-related expenses. Third Party Funding is a thriving industry in the US, Australia and the UK. The industry has expanded extensively at a global level. The total value of the industry is estimated at around USD50 billion-USD100 billion[1] with the share of the US and the UK standing at approximately USD9.5 billion[2] and USD1.9 billion[3], respectively. The global market in litigation claims has attracted private equity, hedge funds, specialist firms, crowdfunding amongst others who have been looking for high-reward investments. The litigation funding of Hulk Hogan’s lawsuit against Gawker, Stormy Daniel’s lawsuit and the #MeToo cases are examples of a few high-profile cases which have been a pivot of news headlines in the recent past. [4]

A key sector where we may witness a significant surge in disputes relating to breach of contract is EPC. The nation-wide lockdown has adversely affected construction and engineering contractors to fulfil their obligations per their contracts. This is likely to result in major legal disputes between the parties. While the government has provided relaxations in order to resume construction activities, there are certain other factors which will impede in fulfilling the obligations of the contractor such as supply chain disruption, shortage of subcontractors/ labour and materials which in turn may result in termination of the contracts. In this background, Third Party Funding may help the construction and engineering contractors to leverage their litigation for liquidity by monetising their claims vis-à-vis breach of contract that directly stems out of the pandemic. The concept of Third-Party Funding is not unexplored in India or specifically the EPC sector. Hindustan Construction Company Limited was the first EPC company in India to consider monetisation of litigation claims with a consortium of investors led by BlackRock Inc.[5] Similarly, Patel Engineering has also been successful in monetising its claims through third party investors. [6]

We also anticipate that there will be an influx of litigation in relation to insurance coverage flowing from Covid-19 as many corporates are adversely affected by cancelled events, damaged goods, closure of manufacturing facilities on account of lockdown. Given the unprecedented circumstances, recovery of insurance cover has significant elements of uncertainty for both insurers and insured. The survival of companies may depend solely on recovery from insurance, though the litigation that may precede such payout could either be unaffordable or add great financial strain on the policy holder. Third Party Funding can play a pivotal role in such a case as the insured can receive litigation funding collateralized by the insurance pay out if successful. The non-recourse nature of litigation funding is the most distinguishing part of this product. Third Party Funding is the panacea for a claimant, where it maximizes the chances of obtaining compensation for legal wrongs and enables the creation of a financial level playing field between disputing parties.

The delayed establishment of Litigation Finance in India is often attributed to the unpredictability of the judicial process. Primarily the risk is seen to lie in the inability to quantify the time that may be taken for a case to progress through the courts until decree, and thereafter enforcement. In part, this inability is driven by the lack of adequate machine-readable data, which has inhibited the development of statistical inputs at a granular level. With the advent of the digital courts initiative that is currently being contemplated, we may see material changes to the universal access to data. This will then spur the development of risk assessment tools that are data driven and continuously updated.

Contrary to popular perception a few years ago, there has been a significant change in the public perception of the legality of third-party funding in India. Observations by the Supreme Court of India and the amendment of the Code of Civil Procedure, 1908 by states in recognition of third-party funding have clarified the permissibility. However, a wide cross section of clients that we have spoken to have articulated their hesitation to engage with third party funding solely on the basis of contract and without the protection of some regulation of third-party funders. In response, litigation funders are keen to explore the adoption of a self-regulating model such as the Code of Conduct for Litigation Funders that is prevalent in England which not only contains provisions relating to maintaining capital adequacy by the funders but also creates security for the claimants. With the market demand-supply dynamics for third party funding falling in line in the current environment, we expect to see developments in this space in the medium term. In summary, the Covid-19 disruption is all set to be the catalyst not just for lawtech, but also litigation finance.