Third Party Funding

in India
 What is Third Party Funding?

Third Party Funding (“TPF”) also known as Litigation financing, is the non-recourse funding of litigation costs
of a party by a funder in exchange for a share in the monetary award of the litigation, if successful. TPF may
cover the costs of any kind of dispute resolution mechanism, be it traditional litigation in courts, arbitration
and/or mediation. Litigation financing is a manner of leveraging capital while the dispute is ongoing and is
often considered to level the playing field between the parties in a dispute.

Operating PROCESS OF THIRD PARTY FUNDING

Cost of
Business

Funder Litigation
Capital Claimant
Costs and Fees

Litigation
Resolution

Per Agreed Share Monetary Award / Settlement

Amount

Who can be funded? approximately USD 3.2 Billion. In India, while

Generally, claimants (which could include counter the large global funders are yet to establish a local
claimants) are the recipients of TPF as they may presence, today there is at least one crowdfunding
receive a monetary award in the case of a successful platform for litigation financing.
outcome, since third party funding is premised on
a contingent share in such monetary award. There What costs would TPF typically cover?
is however an upcoming trend for insurance and TPF can cover legal counsel’s fee, court/ tribunal’s
other risk transfer arrangements for both claimants fee, cost of expert witnesses, pre-deposit, adverse
and defendants. costs order, and other dispute-related expenses. A
2015-16 survey found that litigants spend up to
Who are the funders? INR 30,000 crores on legal costs in lower courts
In addition to specialized third party funders, in- alone.
vestment banks, hedge funds, insurance companies
and pension funds also invest in legal claims as an What kind of disputes are funded?
asset class. Funders may have ready investible cap- Disputes that attract TPF generally include com-
ital or may raise funds for specific claims in an ad mercial contracts, international commercial arbitra-
hoc manner. Increasingly, litigation financiers are tion, class action suits, tortious claims like medical
leveraging technology to provide for crowdfunding malpractice and personal injury claims, anti-trust
platforms for TPF. The largest TPF funder in the proceedings, insolvency proceedings, and other like
world has an investment portfolio of approximate- claims that have a calculated chance of resulting in
ly USD 2.4 Billion with a market capitalisation of a substantial monetary award.

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The business case for Third Party Funding

Party’s Perspective

• Leverage capital to enforce rights

Business’ Business’
• Allows the funds released to be used for core
cash flow cash flow
business (rather than expenditure on legal costs) without funder with funder
• Enables pursuing claims that otherwise would not
be brought
• Non-recourse finance with zero cost of capital Year 1
results in increased operating profit and market
value without any impact on EBITDA
• Objective analysis of the dispute from the funder Year 3
can bolster assessment of “winnable” claims
• Balances bargaining power between parties and Year 5
encourages settlement driven by merits of the case

and not by imbalance in risk tolerance
• Discourages deep-pocketed parties from “gaming” Operational benefits of TPF
the system by burying the counterparty in paper
• Benefits from the experience and expertise of a
repeat-player in the litigation market, including
the funder’s ability to ensure greater discipline
from lawyers and other intermediaries
• Assists in managing risks of litigation

Stellar Returns Funder’s perspective

Litigation finance has outperformed on a multiple of invested capital basis
• Bloomberg reports high comparative
3 times
return on investment
• Distinct asset class allows for
2
diversification as investment returns
are not subject to the vagaries of the
1 financial market
• Support cause based funding
0 • Underexplored market that can
Litigation Funding Private equity Real estate Credit Hedge fund
effectively deploy capital
Note: Average of last reported data, Goldman forward multiple of
invested capital estimates for leading listed sector players.
Source: Goldman Sachs, Bloomberg Bloomberg

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 Third Party Funding

System’s perspective

• Enhances access to justice

• Allows better enforcement of rights, holding accountable those responsible for wrongful acts
• Parties settle based on the merits of the claim and not based on cost or risk-tolerance factors
• Litigation is a chessboard to infinity that results in an unfair advantage to the financially stronger party.
TPF enables creation of a financial level playing field between parties, alleviating this structural concern

Raising Third Party Funding – a brief overview of the process

Case Conclusion:
Expression of Interest by the funder the award is
in funding the case, and proposal of Funding Agreement
distributed between
Enquiry from terms of funding including, including is entered into between the party
the funder and the
the party re TPF eclusivity and confidentiality and the funder.
funded party

2 4 6

1 3 5 7

Case Assessment Further Due Diligence and Monthly reporting and invoicing
by the Funder to Final approval of the case of legal costs and the progress of
ascertain whether with the help of algorithms and local the case
the case meets the counsel, keeping in mind the
funder’s investment consideration of legal privilege
criteria & confidentiality

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Standard terms of the funding agreement

1.  Duties of the Party: To carry out all necessary acts with reasonable care and skill; to continue diligently
with the advice of the lawyers; to cooperate with the funder; to request consent of the funder where its
required to incur costs, dispose of claims, discontinue the proceedings, enforce the judgment; to report all
material events to the funder, etc
2.  Duties of the Funder: To review the case; to cover the agreed costs; etc. In some jurisdictions, funders may
also have the duty to liaise with the lawyers
3.  Distribution of proceeds following successful claim: Includes the waterfall of distribution of a successful
claim, the definition of proceeds, set-off rights etc. While the stake of the funder is a matter of commercial
negotiation, several funds indicate the range of their stake upfront, subject to the risk assessed for each case
4.  Representations by the Party: Fundamental conditions including the rights of assignment, presence of
counterclaims, validity of documents provided, etc
5.  Representations by the Funder: Funder’s capital adequacy, lack of any relationship with the counter-party,
independence regarding the merits, no interest in the merits of the dispute, etc
6.  Assignment of Claims to Funder as security: The details of assignment of rights to claim costs and all
subsidiary rights to the funder. In some agreements, funders may seek the right to on-sell
7.  Termination: The events and circumstances upon which the Agreement can be terminated and its
consequences
8.  Settlement proposals by court or opponent: Stipulations as to the plan of action in the case of a settlement
proposal, its acceptance, termination, continuance of proceedings etc
9.  Confidentiality and Disclosure: Explains the confidential nature of the agreement, for example: the
existence of the funding and the identity of the funder, the background of the claim; the procedural status
of the claim; the planned strategies and the tactics, the expected recovery, billing arrangements, litigation
risk, etc. Agreed process for disclosures where required under law or by regulator
10. Data transfer by Funder to third parties: The circumstances when transfer of data by the funder to any
other third party (example, witness, expert, insurance companies, etc.) would be permissible

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 Third Party Funding
Ecosystem supporting TPF

Experts such as claim assessors, technical

experts, forensic investigators and local law
Risk firms help the funder determine the chances
Analysts
of success in a dispute, understand the risk
that needs to be priced, and ascertain the costs
which would be incurred in the resolution of
Increasingly, funders make data
the dispute.
driven decisions that are screened
by confidential algorithms to
determine the viability of a Third
dispute as investment. Party
Funding
Class
Technology Action
Claims

Class action suits and similar disputes that result in

blockbuster payouts (by volume of claims), make
for attractive investments. Funders often add value
as a coordinating platform for such cases.

Factors underlying a TPF investment decision

Enforcement

Risks Jurisdictions
Competent Counsel
Creditworthy Defendant
Time To Resolution
Type of Case Costs
Evidential Strength

Settlement Prospects

Merits of the
Quantum of Claim
Case Contingency Fee

Economic Viability

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Third Party Funding: a global snapshot of marquee investments

2017: Australia - Vannin funded an AUD 100 million class action against online
retailer Surfstitch for being in breach of its continuous disclosure obligations and
engaging in misleading conduct. The case is ongoing.

2018: USA - IMF Bentham, Johnson Winter and Slattery Lawyers have col-
lectively funded a class action arising from the Facebook privacy breach where
data of about 50 million users was harvested by ‘This is My Digital Life’ and made
available to Cambridge Analytica without users’ consent. IMF Bentham allows
users to understand whether they have been affected and should join as plaintiffs in the
class action suit through a savvy online tool. The case is ongoing.

2018: USA - Burford Capital has earmarked a USD 50 million pool of capital
for financing commercial litigation matters led by women under its Equity Project.In its
words “We want to use our assets—our decade of experience, sizable capital and skilled
team—to help balance the scale and promote women in law.”

2016: Australia - Harbour Litigation Funding funded an AUD 200 million class
action against PTTEP Australasia (Ashmore Cartier) Pty Ltd, on behalf of
Indonesian seaweed farmers to hold PTTEP responsible for uncontrollably spewing
oil and gas into the Timor Sea for more than 70 days in 2009. The case is ongoing.

2010: USA - Citigroup backed finance company made USD 11 million profit
on a USD 35 million investment in class action lawsuit brought by workers who
developed illnesses working at Ground Zero, following the September 11, 2001
terrorist attacks.

2016: Legalist uses algorithms to identify cases suitable for funding, and
focuses on smaller-sized cases ranging “from local ice cream manufacturers, bakeries,
family-owned vineyards, small toymakers who simply don’t have the resources to see
cases through. The cases are often against deep-pocketed clients and vendors who
have damaged their business and believe they’ll get away with it.”

2018: Canada - Augusta funded class actions against mining company BHP and the
labour contractors it used to employ workers. The claims demand compensation and
penalties on behalf of workers, alleging that the workers were deliberately hired as
‘casuals’ when they were regular workers.

2016: India - Advok8, a start-up in India aims to create a market for third
party funding by assisting litigants in raising funds for their lawsuits through
technology-enabled crowdfunding. From publicly available information, funding
has been completed for eight cases.

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 Third Party Funding

Legal Landscape In India

TPF is not alien to the Indian legal market. Many a situations when such financier may be made a party
mukadma (case) have been bought and sold in the to the proceedings. TPF has also received favourable
unorganised market by opportunistic investors and reference in the report of the High Level Committee
desperate litigants, often resulting in the transfer of the to review the Institutionalisation of Arbitration
very asset that is the subject matter of the litigation. Mechanism in India (2017).
Formal arrangements built on risk-reward share on
an arms-length basis, as discussed in this paper, are Limitations under existing legislative
however yet to come of age in India. framework
It is well established that lawyers in India are expressly
Legislative and Judicial Recognition of barred from funding litigation when representing
TPF the disputing party or accepting a success based fee.
In 2015, the Supreme Court in Bar Council of India v. This could bear an inherent structural limitation for
AK Balaji, clarified the legal permissibility of TPF in funders that typically seek contingency fees of legal
litigation and observed that “There appears to be no counsel as a core factor to an investment decision to
restriction on third parties (non-lawyers) funding the ensure alignment of interests.
litigation and getting repaid after the outcome of the
litigation.”. Additionally, whether a TPF arrangement falls foul
of public policy would depend on the terms of the
As on date, there is no legislative instrument that arrangement including the funder’s stake in the award,
regulates such funding. However, the (Indian) Code if determined to be extortionate.
of Civil Procedure, 1908 as amended by a few Indian
states including Maharashtra, Karnataka, Gujarat and Another limitation that is yet to evolve is the
MP, expressly acknowledges the role of the financier permissibility of foreign investment in third party
of litigation costs of a plaintiff and sets out the funding of disputes in India.

Notable gaps in the Indian market

Indian litigation is an ever expanding market a case. Such relevant data is a work in
with increased commercial activity. While there progress in India and will take a few years
is a demonstrable demand for structured and to consolidate.
professional TPF to facilitate the pursuit of viable › 
Factors like roster changes during the
claims, a few sticky areas of concern are: progress of the case lead to an inherent
› Class actions suits or representative claims unpredictability in the system that is not
which provide high likelihood of exemplary conducive to risk assessment.
damages that attract funders have not gained › Funders often prefer sharing the risk of
traction in India. Further, there is hardly any their investment with lawyers appearing
precedent in India for grant of exemplary for the funded party, by requiring the
or ‘blockbuster’ damages for commercial lawyers to work on a contingency fee basis.
disputes. This aligns the incentives of the lawyers
› Funders often use historical data to carry out and funders. This practice is impermissible
a risk-assessment analysis before taking up in India.

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Upcoming global trends in Third Party Funding

Innovative Risk Transfer Arrangements

Funding arrangements for defendants involve cases where the defendant does not want to bear the
upfront costs of litigation, but will pay out-of-pocket, a share of the perceived value of a successful
defence, upon dismissal of the claim. Increasingly, defendants not only want the litigation-related
expenses funded, but also the risk of an adverse decision transferred. For this, the market is evolving instruments
that provide insurance and other arrangements (like “After the Event (ATE) Insurance”) that transfer the risk of
a dispute for an upfront price paid by the party.

Increasing legislative sanction for Third Party Funding

Beginning with Australia, many countries are moving away from the outdated common law con-
cepts of champerty, barratry and maintenance, and have legalized third party funding. Most re-
cently, Singapore introduced the amended Civil Law Act and the Civil Law (Third-Party Funding)
Regulations, 2017 making third party funding in international arbitration and related proceedings
legal. On the same lines, Hong Kong enacted and amended its legislative framework to enable
third party funding in arbitration and mediation.

Artificial Intelligence Driving INDIA 2025: CRYSTAL BALL GAZING

Investment Decisions
Artificial Intelligence enabled algorithms 1. Legislative acknowledgement of TPF
are increasingly being used to determine 2. Increased reliance on TPF in commercial
the outcome of disputes, and to analyse disputes including on account of
and price the risk in funding a case. For instance, Le- shareholders urging a risk transfer model
galist, a tech third party funding company, uses an for litigation.
Algorithm that determines the chances of winning the 3. Adoption of a self-regulation model
case using its database of 10 million court cases before like the United Kingdom.Factors for
investing. consideration are:
a. Regulation of interference of a funder in
Portfolio Funding and other the litigation strategy
evolving structures b. Provision for disclosure of funding for
In Portfolio Funding, a number of claims all kinds of dis pute res o lu t i o n
brought by a single claimant against the mechanisms
same or different defendants are funded. c.  Framing of rules concerning
This helps the claimant get more favorable terms since confidentiality of the communication
the funder’s investment and return is spread across the between the funder and the litigating
claims, minimizing exposure to a single claim. party
d.  Specific disclosure requirements and
Funders are also being approached for transactions like protection of disclosed documents by
early payment to creditors of an insolvent company litigation privilege
who would otherwise have to wait for the conclusion e.  Validity and legal recognition of
of a claim before being paid, accelerating the proceeds contingency fee as a valid legal fee model
of a settlement, and even funding the costs of business, 4. Foreign capital permitted for domestic TPF
which might be dependent on a successful claim. by regulatory amendment.

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 Third Party Funding

Managing Partner’s note on ethical considerations in

Third Party Funding
Given the increasing global presence of TPF, we can lawyers are bound by rules of professional conduct
reasonably expect the Indian landscape to evolve that seek to align their interests with the client, funders
quickly and favourably to support this innovation in are not so obligated. Second, a funder’s fiduciary and
dispute resolution. While it espouses several benefits contractual relationship with its investors deepens this
that have been discussed in this paper including conflict. Third, funders are repeat players, funding a
levelling the field and increasing access to justice, I do portfolio of cases, whereas the litigating parties are
want to take a moment to consider, and give primacy usually one-time players interested in the outcome of
to, the ethical considerations that should underlie the only their case.
Indian regime for Third Party Funding.
These conflicts become particularly acute at the time
A 1876 Privy Council decision in Ram Coomar Coondoo of the negotiation of the funding agreement, and the
v. Chunder Canto Mookerjee, provides guidance in timing and value of a settlement. For instance, when
this regard, where the Court permitted TPF on the the settlement amount is lower than the return upon
grounds of promoting access to justice, but held that the continuation of the case in courts, the funder
“agreements of this kind ought to be carefully watched, might not want to settle the case, even though a party
and when found to be extortionate and unconscionable, might want otherwise.
so as to be inequitable against the party; or to be made,
not with the bona fide object of assisting a claim believed In addition to the above, TPF might potentially lead
to be just, and of obtaining a reasonable recompense to issues concerning confidentiality and litigation
therefore, but for improper objects, as for the purpose of privilege. The litigating party might risk waiving the
gambling in litigation, or of injuring or oppressing others attorney-client privilege by sharing confidential case-
by abetting and encouraging unrighteous suits, so as to related information with a third party funder. That
be contrary to public policy, effect ought not to be given said, these concerns similarly resonate in arbitration.
to them.” The contract terms will have to be drafted keeping in
mind protection of such privilege.
Delineating clear objects of the participants in the
financing arrangements, adopting transparency of While these concerns have for long restricted the
funding process and avoiding conflict of interest is development of litigation financing, it is heartening
essential to the ethical discussions. I emphasise this to note that the focus has now shifted to regulating
because, first, the interests of the litigating party, its TPF, such that the drawbacks arising out of these
lawyer and the funder may diverge from one another. ethical considerations are balanced against the
The balance further wavers when the funder seeks to benefits of TPF. I am confident that India will also
put itself in the driver’s seat, controlling the litigation embrace an appropriately balanced version of this
strategy and funding the lawyer’s fee. While the tool soon.

Cyril Shroff,
Managing Partner,
Cyril Amarchand Mangaldas

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 `

Contributed by:
Amita Katragadda, Partner
Bipin Aspatwar, Principal Associate
Shruti Khanijow, Senior Associate
Ayushi Singhal, Associate

DISCLAIMER:

This article is not intended to serve as legal advice and the position of law expressed in the article is only valid
as on 20th February 2019.

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