Why Litigation Funding makes sense financially?

Introduction

Of the numerous expenses that a business faces, legal expenses such as lawyer fees, court fees, etc. seem to be increasing each day. According to the U.S. Bureau of Labor Statistics, legal services prices have increased by more than 10% in recent years, despite the economic turmoil caused by COVID-19, which highlights the sharp increase in legal expenses faced by businesses. Sometimes even continuing the lawsuit appears like a poor financial choice for the corporation as the expenses keep on rising over time which makes access to justice inaccessible for many businesses.

What are the causes of increasing legal costs in India?

The following factors are the primary drivers of rising lawsuit expenses -

·       Redundant Formalities and Inefficient system - According to the Chief Justice of India, there are over 40 million cases outstanding in subordinate courts in India, which illustrates the slow pace of case processing. Even with the creation of fast-track courts, cases still have to wait years for the hearing to begin and subsequent litigation might last several years, which drives up the cost by an astronomical amount. This protracted and ineffective procedure discourages companies from bringing legal action against the other party, demonstrating the public's lack of confidence in the legal system.

·       Improper Framing of charges - Another practical problem that is responsible for the unnecessary elongation in the duration of the litigation process is the improper framing of charges on the part of the authorities who are responsible for the initial stages of the investigation and legal proceedings. Many times, businesses are unsure of the fees they should be paying for a particular case. As a result of this confusion and the wide range of fees charged by different law firms, businesses are forced to pay much higher fees, even in open-and-shut cases, or they choose not to pursue the case at all, which results in a significant loss on their financial statements.

·       Absence of settlement culture - This habit, which is predominantly followed in the West, is just now starting to spread in India as a method to resolve disputes amicably without resorting to litigation and the customary process that leaves both parties worse off financially than they were before. This is primarily seen in B2B cases but still, in India, the culture of settlement is not prevalent which makes businesses incur huge expenses on legal fees.  

·        No fixed professional fees - The costs involved in the litigation process are varied. They differ from the court fees to the expense of filing and the cost of the counsel employed by the person seeking justice. Nevertheless, it is extremely difficult for businesses to calculate and anticipate the legal costs they will incur in pursuing a case, making it a very risky venture.

Solution

Change won't come immediately, of course, but what should the best course of action be today for a firm looking to fight litigation?    

That’s where litigation funding comes in.  

A litigation financing arrangement is a non-recourse form of funding where the claimant gets paid back only if the claim succeeds. A claimant does not pay anything back to funders or funding companies if the claim is unsuccessful. Due to the non-recourse nature of the funding, most businesses see it as an alternative to high-cost litigation.   

The bulk of the issues that businesses face as a result of excessive legal expenses are resolved by litigation funding because of its structure and the involvement of third-party litigation funders, such as -

·        Faster dates and trials - When an experienced 3rd party litigation funder is funding a case, it will be able to passively advise about the best practices due to which a business can proceed with the litigation much faster which will lead to overall cost reduction.

·        Appropriate charges - As a result of their expertise as a litigation funder in this sector, the litigation funder can monitor and eliminate improper charges, and can guide about the appropriate charges depending upon the case which lowers the total litigation costs.

·        Increased chances of settlement - As a result of the presence of third-party litigation funders, companies have historically preferred to settle cases outside of court as the defendant understand that there is a merit to the case as litigation funding is used in arbitration proceedings where merit is high on the side of plaintiff.

In conclusion, legal funding makes sense from both a logical as well as a financial standpoint, and when companies learn more about this kind of funding, it would be a win-win situation for every stakeholder.

Reference -

Legal services price inflation, 2018→2022 (in2013dollars.com)

3-The-dynamics-of-increasing-litigation-costs-an-Indian-perspective.pdf (dehradunlawreview.com)

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