Delving on the agony of the notion in how the grass is the one getting crushed when two elephants fight over it, one wonders on the poor destiny of grass. It becomes a passive sufferer in an ordeal it has no control over. One may imagine if there was a way the grass could gain some monetary returns over this fight if it chooses to train either of the elephants before their fight. This now a viable scheme of investment in many countries across the globe, including India and is called third-party litigation funding.

The concept of third-party litigation funding (TPF) is that a neutral person, who is not a party to the dispute, funds either of the parties to the suit in order to enable them to fight the issue of the dispute for return of a portion of the winning claim. Thus, it enables funding of litigation and/or alternate dispute resolution mechanisms including arbitration.

Several jurisdictions around the world have allowed TPF, especially in commercial matters including in arbitration, like Singapore, Hong Kong, United Kingdom and United States. TPF has also offered a renewed sense of power to class action suits in United states and Australia especially against big corporate giants.

A few cases in India have been the guiding light behind the development of TPF in India, the landmark being Bar Council of India v A.K Balaji (2018) 5 SCC 379. The judgement has allowed entities to get involved in third party litigation funding barring advocates from funding litigation for their clients based on the combined reading of Bar Council of India rules.

Unlocking the value of TPF

TPF has several advantages for the system of dispute resolution in India for various stakeholders. For the litigant, it helps cover the costs of taking the matter to court. It can include, but is not limited to, the fees of the advocate, the court fees, charges for independent investigators and experts to name a few. If the litigant is a corporate entity, through TPF, they can save their capital to be invested into building their businesses further than getting their capital locked up as security in court cases that may take years to get resolved, thereby foregoing not only working capital but also the interest that would have accrued if the capital was invested in the market. It also helps keep their accounts clean as the cost to fight the claim can be attributed to TPF than to present it as a recurring entry.

TPF can be considered a better model for the litigant that litigation insurance due to the fact that an insurance premium is paid by the litigant to cover the costs if the case is lost but in third party litigation funding, no such costs are to be borne by the litigant to the funder and the funder gets their pre-determined amount only if the litigant wins their case. Litigation insurance, thus, works ‘after the fact’ whereas litigation funding covers costs ‘upfront’ to maximise the chance of winning (to create a win-win situation for both parties to the litigation funding).

To the litigation funder, it not only includes pecuniary benefits in terms of a lumpsum cash payment or a previously determined percentage value of the asset at stake. It can also extend to having rights over the asset. The funder can theoretically accumulate interests over multiple stressed assets without getting involved in the regulatory process to get their ownership or through corporate restructuring. Several experts have claimed that TPF has one of the highest returns of Investments in the current modes of investments.

Overall TPF provides the parties to explore various courses of action as their stress about the money is hedged because of the funding party. TPF can also help maintain the integrity of the justice delivery systems intact as a funder would only be interested in TPF that go before an arbitrator/ adjudicator who is known for their sound professional ethics and speedy disposal of disputed claims in front of them.

To be able to participate in TPF in India is still a path being carved, a person (either natural or juristic) can secure TPF through companies that specialise in TPF or through crowdfunding.

There exist companies like Liticap, fightright, Legal Fund etc. that provide TPF in India on a case-to- case basis after intensive due diligence of the claimant’s dispute. They look for cases where the rights of the claimants are strong and based on sturdy contracts that may encounter a favourable outcome for both parties to the TPF. The other way a person can raise TPF is through crowdfunding or making individual contracts with their acquaintances to assist them in their legal dispute. However, this pathway is longer and riskier for the claimant seeking TPF as they may have to spend considerable time to find a funder and enter into a contract that is favourable to both parties. This problem may get compounded due to lack of knowledge on behalf of both parties, lower appetite to take risk or the threat exploitative practices in smaller value matters in smaller cities of India.

Points to remember while creating a TPF agreement

In creating a contract for TPF, the parties should clearly agree on the amount to be paid by the funder and at what stages of the dispute. They should agree on the amount to be paid to the funder in case the claimant wins the case, the mode and timeline of the payments over the winning asset. The parties should discuss the extent of rights the funder may have on the winning asset, if any. The parties should also ensure to discuss the legal strategy about the dispute regarding who makes the decision and the extent of the funders involvement in the legal strategy being adopt to fight the dispute. The parties should also plan an exit clause and a dispute resolution strategy in the event any of the party fails to fulfill their part of the contractual obligation.

Grey areas while exploring TPF

TPF sounds a practical solution to the agony of a litigant who may not be able to engage in litigation due to lack of means thereof. It may be due to lack of resources at individual or corporate level. Yet there are several reasons to tread with caution when engaging in TPF. The Delhi High Court held that the funder is merely a third party and has protection against liability in the suit Tomorrow Sales Agency (P) Ltd. v. SBS Holdings Inc 2023 DHC 3830). As there is no law regulating TPF, there are no guidelines on the need of disclosure, ethical standards, conflict of interest declaration to be made when a suit with TPF is filed. This makes the field uneven for all stakeholders as there is no transparency about the matters which may be funded, by whom, where and to what extent jeopardizing the interest of the claimant who may already be under-resourced.

Thus, exploring TPF for litigation requires a litigant to be able to have a deep understanding of the consequences of their involvement. At the same time, it requires the funder to be aware of the merits of the case that they intend to invest in. Both these are areas where an advocate’s expertise makes them an indispensable advisor to any person thinking of TPF in India.