Understanding the Uncharted: Litigation Financing Agreement in India

Litigation can be a long and expensive ordeal. For many parties, particularly those with merit worthy claims but limited resources, the financial burden of pursuing justice can be a significant hurdle. This is where litigation funding agreements (LFAs) come in.

LFAs are arrangements where a third-party funder agrees to finance a lawsuit in exchange for a share of the potential proceeds if the case is successful. It’s essentially a non-recourse funding option, meaning the funder bears the risk if the case is lost, and the claimant is not liable for repaying the funds.

Third-Party Litigation Funding Agreements in India

Third-party litigation funding, also known as external dispute financing, involves a third party (with no prior connection to the litigation) financing part or all of the legal costs of a lawsuit. In return, the funder receives a portion of any proceeds recovered by the litigant through settlement or damages awards.

Key Points:

• Who Can Seek Funding:

Any litigant can seek third-party funding.

• When to Apply for Funding:

Litigants can apply for funding at any stage of the litigation process.

• Use with Other Funding Arrangements:

Third-party funding can be used alongside other funding methods.

• Legal and Ethical Constraints:

While there is no specific law regulating third-party funding in India, it is not explicitly prohibited.
An old Privy Council decision from 1876 allowed third-party funding, emphasising access to justice.

• Issues to Consider:

1. Disclosure, confidentiality, and attorney-client privilege.
2. Factors when choosing a funding company.
3. Terms of funding agreements.
4. Legal costs and expenses typically covered by funders.

The Indian Landscape

India presents a unique situation regarding LFAs. Unlike many common law jurisdictions, there’s no specific legislation governing them. However, the Supreme Court’s 2018 verdict in Bar Council of India v AK Balaji clarified that third-party funding isn’t inherently prohibited.

This lack of regulation presents both opportunities and challenges. On the positive side, it allows for flexibility in structuring LFAs. However, the absence of clear guidelines also means there’s a degree of uncertainty. Courts might scrutinise LFA terms to ensure they aren’t extortionate, unconscionable, or against public policy.

Key Considerations

If you’re considering an LFA in India, here are some crucial aspects to keep in mind:

• Validity: While judicial pronouncements have been encouraging, the legal framework surrounding LFAs remains unsettled. Partnering with a law firm well-versed in this area is essential.
• Contractual Terms: The LFA should clearly define the scope of funding, the funder’s share in case of success, and exit strategies in case of settlement or failure.
• Public Policy: The agreement should be drafted to avoid any activities that could be construed as fomenting litigation or maintenance of champerty (financing litigation for a share in the proceeds).

The Road Ahead

The Indian legal system is gradually embracing the concept of LFAs. As its use becomes more widespread, the need for clearer regulations is likely to grow. This will provide greater certainty and encourage further development of the litigation funding market.

Are Litigation Funding Agreements Valid in India?

Third-party litigation funding (TPF) agreements are generally considered valid in India, but with some important points to note:

• No Specific Law: There’s no specific legislation directly addressing TPF agreements in India.
• Judicial Precedent: Court cases have established its permissibility. The leading case is Bar Council of India v AK Balaji (2018) where the Supreme Court clarified that TPF is not inherently barred.
• Contract Law Principles Apply: The Indian Contract Act, 1872 governs these agreements. Under Section 23, any agreement against public policy is void. So, the courts can scrutinize TPF agreements to ensure they’re not unfair or promote frivolous lawsuits.
• Lawyer Funding Not Allowed: Advocates (lawyers) cannot directly fund their clients’ cases.

In Conclusion

Litigation funding agreements can be a powerful tool for claimants with strong cases but limited resources. However, navigating the legal landscape in India requires careful consideration and legal expertise. By understanding the current scenario and potential challenges, individuals and businesses can make informed decisions about using LFAs to pursue their legal rights.

Your Legal Partner for Litigation Funding – LawCrust

LawCrust Legal Consulting Services is a prominent player in India’s emerging litigation funding market. They offer financial backing for lawsuits in exchange for a share of any successful outcome. This allows individuals and businesses to pursue claims without the upfront financial burden. LawCrust positions itself as a champion for “extended access to justice,” empowering those who might otherwise struggle to afford litigation.

To schedule a phone consultation, reach out to us at +91 8097842911 or email us at bo@lawcrust.com.