This article was first published in The Economic Times of India.
Imagine you’re a company with a strong legal claim – maybe a competitor stole your intellectual property, a customer breached its contract, or a former joint venture partner stole your patented technology.
Our legal system exists to provide a right for this wrong. But our legal system is also extraordinarily expensive. Bringing a lawsuit like this, particularly against a well-heeled defendant and factoring in appeals and associated delays, will easily cost lakhs, if not crores of Rupees.
This is nothing new. The cost and time associated with litigation in India is high. With lawyers in High Courts charging more than INR 2-3 lakhs per appearance, to lawyers in the Supreme Court charging INR 10-20 lakhs per appearance, the cost of litigation in India is a major deterrent for litigants with strong and favorable commercial claims.
Historically, many individuals and companies with strong legal claims have been effectively denied access to the courts, because they simply cannot afford the high cost of accessing our justice system.
What is Litigation Funding
Over the past two decades, a new industry has emerged, one with promises to help litigants with strong legal claims get better access to the courts. That industry is litigation funding.
Litigation funders help litigants pay their lawyers and win their cases. Litigation funders pay some or all of the legal fees and case expenses required to bring a case, in exchange for a share of case proceeds if the matter succeeds. They help bring the capital markets to lawyers and clients who need cash to advance their case.
Litigation funding investments are normally “non-recourse,” meaning if the case loses, the funder receives nothing. For this reason, litigation funding is typically more attractive to companies than the alternative of raising full recourse equity or debt financing (assuming their company is large enough to raise that kind of funding in the first place).
Litigation Funding and India
The litigation finance industry has seen significant interest over the past several years in India, as lawyers and clients understand how it can help them advance their legal disputes. The Delhi High Court recently held that third-party funders are not liable for adverse cost awards:
“73… Third-party funding is essential to ensure access to justice. In absence of third-party funding, a person having a valid claim would be unable to pursue the same for recovery of amounts that may be legitimately due…” (emphasis supplied)
“74. It is essential for the third-party funders to be fully aware of their exposure. They cannot be mulcted with liability, which they have neither undertaken nor are aware of. Any uncertainty in this regard, would dissuade third-party funders to fund litigation…” (emphasis supplied)
The Supreme Court of India, in the matter of Bar Council Of India vs A.K. Balaji (2018) 5 SCC 379, held that:
“35….There appears to be no restriction on third parties (non-lawyers) funding the litigation and getting repaid after the outcome of the litigation. In the U.S.A., lawyers are permitted to fund the entire litigation and take their fee as a percentage of the proceeds if they win the case. Third-Party Litigation Funding/Legal Financing agreements are not prohibited…” (emphasis supplied)
Third-party financing has found an initial strong-hold in the arbitration sector. The Delhi High Court organized an event earlier this year, The Delhi Arbitration Weekend 2023, where third-party financing was a key point of discussion.
But litigation funding is not without its detractors. Some have opposed litigation funding, arguing that it is likely to lead to frivolous litigation, increase the cost of litigation, and extend the duration of civil litigation cases.
Recent research however rebuts these arguments, demonstrating that litigation funding is much more likely to improve the efficient administration of justice in India.
Does litigation funding lead to increased frivolous litigation?
Let’s begin with the claim that litigation funding will lead to more frivolous litigation. It is hard to see how this will be true because litigation funders that invest in frivolous cases will quickly go out of business.
Most litigation funders invest in a very small percentage of cases they review – less than 5% of cases, for many funders. Litigation funders are thus only investing in the strongest cases that they see. Moreover, litigation funders function as an unbiased screen against bad cases. And in our experience, clients who unsuccessfully seek third-party funding for their cases are not likely to self-finance the cases. Thus litigation funding may actually result in fewer cases being filed, and fewer frivolous cases too.
This finding is consistent with a recent paper written by Samuel Antill, a professor at Harvard Business School, and Steven Grenadier, a professor at Stanford Business School. Their paper, published in the prestigious Journal of Financial Economics, presented a dynamic real-option model of litigation and explicitly rejected the argument that funding is likely to lead to frivolous litigation. To the contrary, they concluded that cases funded by litigation funders “are not necessarily more frivolous than lawsuits that are viable without financing.”
Does litigation funding increase the cost of legal services?
What about the argument that litigation funding is likely to increase the cost of legal services and lead to protracted litigation?
These arguments too are increasingly being shown to lack merit.
As an initial matter, litigation funders introduce more competition into the market for legal services. This is likely to drive down rather than up the cost of legal services. With access to legal and financial experts, litigation funders are often better positioned to understand budgets and spending estimates.
Nor should litigation funding necessarily increase the cost of any particular litigation. Here too Antill and Grenadier had something to say: they found that litigation funding should actually decrease defense-side litigation spend because it “deters wasteful defense spending.” More specifically, they found that “litigation financing may be socially beneficial because it deters wasteful bullying: a strategy in which a defendant incurs large litigation costs simply to secure negotiating advantages over an under-financed plaintiff.”For this same reason, litigation funding may decrease the total duration of legal disputes too. Because defendants are more likely to settle rather than engage in wasteful defense spending when a case is funded, Antill and Grenadier concluded that “litigation financing expedites the resolution of lawsuits.” In the Indian context, commercial litigation often becomes a war of attrition – with the side that has more financial resources attempting to delay as much as possible. With litigation funding, the playing field is leveled and access to capital does not decide who wins – the merits of the case do.
These conclusions are similar to arguments one of us (William) has made in a paper published in the Vanderbilt Law Review. That paper, co-authored with Suneal Bedi of Indiana University, argued that litigation funding is likely to increase welfare, including by discouraging frivolous suits and deterring defendants from breaching their contracts, thus leading to fewer legal disputes in the first place.
Litigation funding has the promise to significantly increase access to the courts, reduce litigation duration, and improve the quality of litigation. Policymakers should consider these benefits of litigation funding as they consider any regulations of the industry.
¹ Samuel Antill, Steven R. Grenadier, Financing the litigation arms race, Journal of Financial Economics, Volume 149, Issue 2, 2023, Pages 218-234, ISSN 0304-405X, https://doi.org/10.1016/j.jfineco.2023.05.004