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Legal finance in India: Lawyers weigh in (Part I)

  • Monetization
June 22, 2020
Quentin Pak

Given growing interest in legal finance in India, Quentin Pak asked a group of international lawyers from leading Indian law firms to address the legal framework regulating funding, recent monetization activity and predictions for the future of legal finance in the region. Their perspectives are collected below, with some edits for brevity.

Lawyers are under obvious pressures to innovate and better manage costs. What do you perceive to be the main business challenges faced by lawyers in India, and how can legal finance help?

Cyril Shroff: The aftermath of COVID-19 will see big changes in the practice of the law—in India and globally. Lawyers will have to innovate on the front foot, change fundamental practices and meet business needs in order to survive.

Specifically, the issue around managing costs has been top of mind for clients for some time, but it will now become immediate. Until recently, clients did not question the conventional billing models on which the legal industry has been operating for decades.

Indian lawyers have increasingly found themselves competing in the global marketplace, with lawyers from other jurisdictions who have embraced more innovative models of legal finance (particularly in international arbitration matters). Our clients have become more proactive and sophisticated, pushing their lawyers to consider what innovative financing models can be adopted within the existing legal regime in India.

One of the biggest challenges remains innovating on fee structures to compete in the global legal market, despite domestic statutory limitations on offering clients the most flexible financial terms of service. Unlike other jurisdictions, lawyers in India are prohibited from charging contingency or success fees—this can create a situation where a client is forced to forego or easily settle a case, simply because it is unable to front the legal costs.

This situation is a perfect entry for litigation finance and Indian clients are ready—perhaps even keen—to embrace it. Legal finance can be an invaluable tool in a client’s arsenal to ensure that it is able to receive quality legal representation to pursue cost-intensive but meritorious cases, and in situations where the client may prefer to deploy its funds for other uses. For lawyers, it enables them to take on cases that may be complex and document-intensive, and utilize their best resources to service clients without having to invest in them in terms of fees—whether as a fee discount or on a contingency basis (which is restricted under Indian professional regulations).

The first set of what I would call “India-centric” cases have been funded off-shore, where there is no uncertainty on the permissibility of funding, and also some certainty on a swifter recovery of the decretal amount. I see the trend continuing in the near future. The Indian market is ready for this disruption, and changes triggered by COVID-19 may only accelerate it.

Another recent development in India which will be a hotbed for legal innovation is the notification of class action lawsuits under the Companies Act of 2013. The class action regime in India is very nascent, and it may be that, like Australia, the Indian infrastructure around legal finance develops alongside the class action regime—an area that we are watching closely.

Pallavi Shroff: Judicial delay is unfortunately common in India, as it takes several years for a dispute to be conclusively resolved. Clients are therefore averse to incurring legal expenses, as there is a delayed return on any investments. Additionally, actual costs are rarely awarded by Indian courts. In these circumstances, clients are concerned as to how they can reduce their risk and expenses relating to disputes.

To cut costs, clients often end up compromising on legal representation. Some clients with limited resources may even consider not pursuing a claim at all because of the expenses involved.

In such circumstances, legal finance is a helpful solution. This is particularly relevant at the moment. The downturn in the economy (owing to the effects of COVID-19) means that many parties will fail to pursue claims because of the related expenses.

Sanjeev Kapoor: Legal advisors across jurisdictions are under pressure to provide the best legal advice at the most competitive prices. The era of globalization and the establishment of good legal institutions that produce commendable talent has resulted in the increasing popularity of law as a career in India. Legal practitioners have the benefit of access to greater knowledge and exposure across jurisdictions and are constantly under pressure to innovate and better manage costs.

Arguably, therefore, one of the major business challenges faced by lawyers in India is pricing their services competitively. Increasingly, clients are moving away from hourly mandates to fixed fee estimates that they can provide for in their balance sheets. This is particularly tricky for dispute resolution mandates where courts or tribunals are unpredictable in terms of the time and cost involved in rendering a decision.

Vyapak Desai: The practice of law in India faces a number of challenges where litigation finance could provide a solution.

Sophisticated clients understand the legal market and recognize expertise, but for clients that lack this sophistication it is difficult to charge fees commensurate to case complexity. It is almost always expected that law firms give a discount on their invoices and fee rates. Litigation funders usually have a good understanding of the legal market and, given that they also have a legal background, are often better suited to recognize the value of legal work. Involving them reduces bill negotiations and eliminates the discount mindset.

Recovery of fees from clients continues to be a major challenge, and usually requires law firms to be extremely efficient in cash flow management. Legal finance helps ease this cash flow risk, as invoices are paid by the funders in a very timely and prescribed manner.

The doctrines of champerty and maintenance historically have been seen as the primary legal hurdles to financing litigation in India. Do you foresee the formalization of guidelines for the use of legal finance? If so, how would it impact the legal finance market in India?

Pallavi Shroff: Under Indian law, there is no restriction, by way of champerty or otherwise, on third-party funding of arbitrations or litigation—no such rules apply under Indian law. This has been confirmed by various judgments of the Privy Council (which served as the highest court of appeal in India prior to India’s independence in 1947) and the Supreme Court of India (the highest court of appeal in India post-independence).

In one of the earliest decisions on third-party funding in India, Ram Coomar Coondoo v. Chunder Canto Mookerjee, the Privy Council noted that although the doctrines of champerty and maintenance were applicable in England, they were not applicable in India. However, it was clarified that a transaction that is inequitable, extortionate and unconscionable and not made with the bona fide objects of assisting a claim would be invalid.

This position has been upheld in subsequent decisions and further confirmed by the Code of Civil Procedure, 1908 (CPC). The Bombay High Court in 1983 made an amendment to Order XXV, Rule 3, of the CPC which pre-supposes that third-party funding is permissible for Indian litigation and permits the courts to issue an order requiring the funder to give “security for the payment of all costs incurred and likely to be incurred by any defendant”. While this amendment only applies to proceedings before Bombay High Court, the fact that the amendment was made leaves little doubt about the validity of third-party funding in India.

Vyapak Desai: Unlike England, the doctrines of champerty and maintenance never strictly applied in India and there are several court judgments which have permitted the financing of litigations in India—the recent Balaji case shows just what is possible in India. However, a formalization of the guidelines would go a long way in creating greater awareness amongst litigants and lawyers. It would also eliminate the legal uncertainties which would arise if the legal finance market grew without such a framework.

Cyril Shroff: In the A K Balaji judgment, the Supreme Court observed that there was no restriction on third parties funding litigation and getting paid after the outcome. Indeed, it noted that there was no bar to a lawyer funding a litigation—as long as the lawyer was not representing a client in such litigation. This is one among many signs that litigation funding is an acceptable practice.

The Report of the High Level Committee to Review the Institutionalization of Arbitration Mechanism in India noted the legislations passed in various jurisdictions, including Singapore and Hong Kong, with regard to third-party funding, and also that this contributed significantly towards the growth of these jurisdictions as arbitration hubs. The Committee then recommended enacting legislation in this regard, as something that could give a boost to arbitration in India.

The last few years have seen a slew of amendments and new legislations by the government with a view to promote its “Make in India” campaign and its avowed intent to make India a worthwhile regional hub for arbitration. While there may be some distance to go before India enacts a comprehensive supporting framework for funding, one hopes that the Indian government is receptive to the idea. Guidelines would be required to address the kinds of cases allowed for funding (for instance, Singapore allows funding of only international arbitrations—a good place to start), ethical issues surrounding conflict of interest, disclosure of funding and regulating control of legal proceedings by a funder.

Amendments to our legal professional regulations would also be welcome, for instance permitting lawyers to work on a conditional fee arrangement, thus also being able to provide further value to their clients. This could also open the door for portfolio funding provided by funders to law firms for a basket of cases, where both the law firm and the funder are invested, along with the client, in a successful outcome.

Sanjeev Kapoor: The Supreme Court in Balaji observed that Indian law does not prohibit third-party non-lawyers from funding litigation and getting repaid after the outcome of litigation. However, the same can’t be construed as a conclusive ruling on the issue, as this is a passing observation made in a list before the Supreme Court that did not concern the question of litigation financing. The absence of formal laws, rules or guidelines create uncertainty here.

With increased financial stress on companies in India, especially in the infrastructure, construction and energy sectors, there have been some recent instances where arbitration awards have been monetized. Given the increasingly risk-averse and cost-conscious approach of Indian companies, I expect this to be a more commonly used tool, especially with the threat of insolvency looming large upon companies with stressed financial assets post the commencement of the Insolvency and Bankruptcy Code 2016. In such a scenario, monetizing awards can prove to be a boon and potentially prevent a company from entering an insolvency process by increasing liquidity.


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