“Litigation Finance - The doorway to recovery”

“Litigation Finance - The doorway to recovery”

It is common knowledge that litigation is no easy mode of recovery - it is bound to burn a hole in your pocket. In essence, litigation financing refers to when a third party funds a lawsuit in return for a percentage of the profits. The financier covers all legal fees and receives no compensation or return unless the lawsuit is successful and the claimant recovers their damages or compensation. If there is a settlement, the financier gets a portion of the earnings. If the lawsuit is lost, the financier loses their money, and the claimant owes nothing.

This is generally split into two aspects; commercial litigation finance and consumer litigation finance. In commercial litigation funding, commercial funders invest in cases that involve conflicts between businesses. These lawsuits are frequently complicated and entail substantial monetary damages. Commercial litigation funding is ideal for matters such as a breach of contractual obligation, violation of fiduciary responsibility, infringement of intellectual property, trade secret theft, international and domestic arbitration proceedings, etc. Basically, such cases involve high returns through compensation due to the dispute taking place from business-business. Through these returns, the litigation funders make a profit by collecting a certain percentage of the compensation from the business. More often than not, the payoff is higher in commercial litigation finance cases as opposed to consumer litigation finance cases.

Consumer litigation funding differs in the sense that it is often used by individuals that have no prior legal experience, have suffered a personal injury, and have no knowledge or means of financing their case. Such cases include discrimination, malpractice, fraud, etc.

The concept of litigation funding was established in Australia and quickly became widespread across the West. Given the convenience of the scheme, today, litigation finance is slowly crawling its way into India, and other developing economies as an increasing number of law firms in UAE and businesses choose this type of funding to pay their legal obligations. However, there is no formal regulation or government entity that regulates litigation financing in India. As a result, the conditions of a third-party legal financing contract are currently governed by the Indian Contract Act of 1872. In the case of BCI v AK Balaji, The Supreme Court of India highlighted the legality of third-party funding in litigation and stated that legal financing arrangements are not forbidden in India. Furthermore, certain states, including Maharashtra, Gujarat, Karnataka, and Madhya Pradesh, have accepted the notion of litigation funding by amendments to Order XXV rules 1 and 3 of the Civil Procedure Code, 1908. Despite this, Indian law still remains silent with regard to several aspects of litigation funding. The lack of regulation coupled with the lack of awareness makes it difficult for litigation funding in India to be inculcated as a norm into the legal system like in other foreign countries.

Nonetheless, it is undeniable that litigation funding has enormous potential to enhance the accessibility of justice in India by allowing ordinary individuals and small companies, that normally afford the high costs of civil and commercial litigation, to assert their legal rights in approaching the bench. Unfortunately, it has yet to be developed into a specific recognized legal sector, owing to the aforesaid structural obstacles, in addition to the uncertainty of the legal system due to an absence of regulation, and an overall lack of legal understanding among the general public.

The same predicament prevails in the MENA region, given the concept is an up-and-coming development in the legal world. The prejudice against litigation funding stems from the lack of uncertainty and unforeseeability of courts in the Middle East hence withholding the risk capacity of third-party funding companies. Moreover, Arbitration Law in MENA regions remains silent on the concept of legal funding, which again holds legal funders back from investing in cases owing to the lack of rules and regulations, which could increase the repercussions they face. However, such apprehensions are generally unsubstantiated because funders conduct significant due research before committing to financing litigation, so the return on risk invested is usually higher as opposed to what people are under the impression. While the adoption of this approach is still limited in the area, several jurisdictions are beginning to accept third-party finance. Both the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Markets (ADGM) have acknowledged the rise and advantages of third-party finance and have explicitly stated that such funding is permissible in their respective jurisdictions.

In light of the above, in accordance with the demand for third-party funding in the UAE, the ADGM 2019 adopted the first set of procedural guidelines for TPF in MENA, known as the Litigation Funding Rules, 2019. The implementation of the Rules is a substantial and positive milestone for the UAE. The Rules are intended to provide a higher degree of assurance to funders and plaintiffs in the UAE about the legality of financial arrangements in litigation and encompass the requirements for such arrangements. However, these rules merely formalize and standardize the procedure for funding in litigation proceedings. There remains an abundance of lacunas that fail to address a multitude of legalities, such as the recoverability of TPF Funds, whether DIFC will follow suit and more. Nevertheless, this is still a massive step in the right direction which shows the growing interest to normalize TPF in the MENA region.

As of today, construction is a significant source of third-party funding demand in the MENA area. Although contracts are being allocated and granted, the market is constantly growing, which means that competition is increasing, monetary compensation is decreasing, and the costs of projects and sticking to deadlines are rising. This is causing liquidity problems, escalating corporate disputes, and essentially leading the way for possibly extensive and expensive judicial processes. On account of this, companies turn towards third-party funding to assist in addressing these issues.

Given the situation, the scenario is still progressively evolving, and with increased legal knowledge and formal address of the regulatory issues,  Litigation Funding is anticipated to flourish as a significant element of the finance industry, gradually making the justice system more efficient and accessible.