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Litigation Funding: Here's all you need to know

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Compared to India, litigation funding is quite popular in the UK. Even though the concept has been in place since 1967, the past few years have witnessed a rapid acceleration in the overall acceptance and usage of litigation funding.

The process of to seek justice is an expensive and time-consuming affair. Both the parties in a case (the plaintiff and defendant) need to hire the best law firms they can afford to put their points before the courts most effectively and impressively possible. As of December 2021, around 44 million cases are pending in all the courts in India, including 73000 cases before the Supreme Court.

A learned lawyer’s time and expertise are invaluable for getting justice in a court of law. Spending a lot of money on litigation is not an uncommon practice. This brings to a common requirement of legal financing or litigation funding, a common practice in the UK and other western countries.

Litigation Funding in the UK

Compared to India, litigation funding is quite popular in the UK. Even though the concept has been in place since 1967, the past few years have witnessed a rapid acceleration in the overall acceptance and usage of litigation funding. The courts have accepted litigation funding as a legitimate method of financing litigation costs in the country. The UK also has a Code of Conduct for Litigation Funders, which provides best practices and behaviour for the fund managers and the participants looking forward to raising money through this source to cover litigation expenses. Due to these regulations, there is a full-fledged market for litigation funding. There are large, mid and small-sized funds with the presence of a few opportunity-based players. There is also a regulatory body for these funds known as the Association of Litigation Funders (ALF), which has representatives from different popular funds, including Therium Capital Management, Burford Capital, Calunius, Woodsford and Harbour Litigation Funding.

One of the critical features of litigation funding in the UK is that it is available non-recourse. Hence, if the claimant loses a case after being funded, they are not entitled to refund such money to the fund. The presence of insurance cover (at cost) also helps the fund if the case is lost. However, the objective of litigation funding is to cover the legal costs only, and no penalties as imposed by an authority or court could be paid through such funding.

It may be worth mentioning that the lawyers in UK are permitted to convert part of their fee related to success of the case and the returns could be more than the normal fee. So even the lawyers participate as an alternate medium of funding which is legally allowed.

The proper process of Due Diligence and vetting of the funding contract

After a party applies for funding, a comprehensive due diligence process is followed by the respective fund managers. The amount agreed is disbursed at different time points, which is agreed in advance. Even though the inflow of fund in a case can help improve the overall standard of the legal procedure followed, such fund cannot be a part of the case and has no representation in the court. In the context of a tort, legal funding is commonly sought in personal injury cases. However, there are trends when sought in various other matters such as commercial disputes, civil rights cases, and workers’ compensation cases.

The due diligence costs are subject matter of negotiation between the parties because such a process is expensive and may include an opinion from a senior counsel (about the possible outcome of the case). Hence, before allowing any funding, the probability of success or failure is evaluated by a fund. It is also crucial to take account of the creditworthiness of investors along with the solvency of the individual/party receiving the funding.

The settlement of the funding contract is crucial as it defines the rights and obligations of the parties giving funds and the one receiving funds. Though the UK markets have matured on this subject still each contract is different and requires to be vetted by trained eyes on both sides.

Summing up

Litigation funding is quite common in the UK with its own regulatory body and code of conduct. There are different opinions about how it supports plaintiffs and law firms; its popularity in the country demonstrates that people have accepted it as a source to finance litigation costs. For a country such as India, where a large number of cases are not tried at the correct time due to the absence of proper funding, this could be an excellent alternative.

With an overall increase in the country’s economic development, there ought to have more disputes between businesses and consumers. Hence, litigation funding shall be crucial to ensure that small enterprises and businesses have enough funds and are not overwhelmed by the financial power of large enterprises. Even though third-party funding arrangements are not barred in India, they are not specifically popular. There is a lack of funders and integrated platforms and an absence of regulations and laws. However, given the points underlined in the article, the potential is huge.

(By Rajesh Narain Gupta, Managing Partner, SNG & Partners)

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