In today's Finshots, we talk about funding lawsuits :)


The Story

We love litigation. We love to go to court. We want to fight for what belongs to us and sometimes, for things that don’t belong to us as well. But litigation can be expensive. You have to incur major expenses during the process of legal dispute resolution — the lawyer’s fee, lots of paperwork, research, diversion of integral resources towards compliance and other procedures. It can get heavy on your pockets. And during times of financial duress, you’ll probably be forced to set aside a large chunk of your resources to fund litigation.

So the obvious choice is to stop litigation, right?

Well, no. You don’t do that. Instead, you locate financiers who will fund your expense. Think of it this way — Somebody walks in and decides to fund your litigation expense. If you are successful in court then the third party financier will recover the costs and some extra income on top. If you lose, they walk away with nothing. There is risk. There is reward. And while the investment does sound like a bit of a gamble, they aren’t entirely leaving it to guesswork. They employ an elaborate process that involves party assessment, estimating the likelihood of victory, possible timeframes and the money they could make in the event the litigation is successful. In most cases, they also hire firms and employ qualified and experienced lawyers so they can better assess how winnable a claim is.

And the best part?

Economic cycles and stock market fluctuations don’t impact these investments as much. And since there is a fair amount of risk involved, third party financiers can earn as much as 4–5 times their initial investment (or even more in some cases). Granted, nobody is assuming this will suddenly change the face of investing, but it’s still a very thought-provoking idea.

But for most of our history third-party funding (TPF) has been a bit of a sensitive subject. Consider England — where “Maintenance” and the “Doctrine of Champerty” put the brakes on litigation financing a long while back. Maintenance here means assisting individuals defending civil proceedings financially without having any legitimate interest in the matter. The doctrine of Champerty is a more aggravated form of maintenance where you are funding litigation for profit.

They were put in place because feudal lords in medieval England just couldn’t keep to themselves. They’d trouble their enemies by financing frivolous lawsuits and overburden courts. It was meant to discourage such behaviour. But times have changed. Feudal lords don’t rule England and lawmakers in the country have shunned their narrow approach towards TPF.

India, on the other hand, has a much more liberal take on the whole matter. Strictly speaking, there is no law in place that bar maintenance or champerty to begin with. You won’t find the words ‘maintenance’ or ‘champerty’ expressly mentioned anywhere. In fact, when this principle was first discussed in the Indian context, this is what the courts had to say — “a fair agreement to supply funds to carry on a suit in consideration of having a share in the property, if recovered, is not opposed to public policy and not illegal. However, such agreement ought to be carefully watched, when extortionate, unconscionable or made for improper objects, they ought to be held invalid.”

Perhaps the biggest drawback here is that most people simply aren’t aware of third party funding. They are not sure if it's legal. They are not sure if it's illegal. In general, they don’t know a lot about it. And while there is always a fair amount of uncertainty for people funding litigation in India, it still serves a purpose. Nobody ought to be denied justice because they can’t fund court expenses. And if TPF can help solve this problem — why shouldn’t they be allowed to do so?

Until next time…

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