Legaltech

Litigation Funding in India: Is a Hybrid Governance Model the Key to Balancing Justice and Innovation?

• ByStartupStory     |    October 28, 2024

Is justice truly blind when access to it comes with a hefty price tag?

This question lies at the heart of the growing debate surrounding litigation funding, a practice that has gained significant traction globally but remains in its nascent stages in India. As the world’s largest democracy grapples with an overburdened judicial system and millions of pending cases, could litigation funding be the key to unlocking access to justice for all?

More importantly, how can this emerging industry be regulated to ensure ethical practices and protect the interests of all stakeholders involved?

The Rise of Litigation Funding

Litigation funding, also known as legal financing or third-party funding, involves a third party providing financial support to a plaintiff on a non-recourse basis. This practice has emerged as a powerful tool to level the playing field in legal disputes, allowing individuals and businesses with limited resources to pursue legitimate claims against well-funded opponents.

In recent years, the global litigation funding market has experienced exponential growth. According to Allied Market Research, the industry is projected to reach $22.3 billion by 2027, growing at a CAGR of 8.3% from 2020 to 2027. This surge can be attributed to factors such as increasing litigation costs, risk mitigation, growing awareness of funding options, and a supportive response from the legal industry at operational levels.

Governance Models

As the litigation funding industry continues to grow, the need for effective regulation becomes increasingly important. Different countries have adopted various regulatory approaches to govern this sector. Some, like the United Kingdom and Australia, have implemented statutory regulation, enacting specific legislation such as the UK’s “Code of Conduct for Litigation Funders,” which outlines guidelines including capital adequacy requirements and limits on funders’ control over litigation.

In contrast, jurisdictions like the United States rely on court-driven regulation, where courts shape the rules through case law and local court rules. Other countries have opted for self-regulation, allowing industry bodies like the UK’s Association of Litigation Funders to establish voluntary codes of conduct for their members. Additionally, some jurisdictions use hybrid models that blend statutory oversight with self-regulation to create a balance between formal legal frameworks and industry-driven standards.

The Indian Landscape

In India, litigation funding is still in its early stages and operates within a legal grey area. While not explicitly prohibited, the absence of clear regulations has created uncertainty and hesitation among potential funders and litigants. Despite this, the potential benefits of litigation funding in India are substantial. It could enhance access to justice, especially with over 30 million pending cases in Indian courts, by providing financial support to those who cannot afford legal representation. For businesses, litigation funding could promote economic growth by enabling them to pursue valid claims without depleting their financial resources. Additionally, it could improve judicial efficiency, as well-funded cases are often better prepared, potentially leading to quicker resolutions and a reduction in the court backlog.

Can Self-Governance Work in India?

As India explores regulatory approaches for litigation funding, the question arises: could a self-regulatory model work in the Indian context?

Proponents of self-regulation highlight several advantages. It offers flexibility, enabling the framework to adapt quickly to market changes and innovations, and draws on industry expertise, allowing insiders with in-depth knowledge to craft practical guidelines. Self-regulation can also be more cost-effective, reducing the burden on government resources, which is crucial in a country with many competing priorities.

Additionally, global alignment could ease the adoption of similar practices, as many international litigation funders already follow self-regulatory codes elsewhere. However, challenges exist. Enforcement may be difficult without statutory backing, and a trust deficit stemming from past financial scams could create public skepticism about industry self-policing. The diverse stakeholders and complex legal landscape of India might complicate consensus on standards, and with limited precedent in litigation funding, India lacks the established best practices needed to build a robust self-regulatory framework.

A Hybrid Approach: The Way Forward?

Given the unique challenges and opportunities within the Indian legal system, a hybrid model of governance for litigation funding could be the most effective solution. This approach would combine statutory regulation, judicial oversight, and industry self-regulation. A statutory framework could establish legal recognition and guidelines for litigation funding, providing legitimacy and clarity. At the same time, judicial oversight could empower courts to review funding agreements, ensuring they do not compromise the integrity of the legal process or the interests of the funded party.

Additionally, a self-regulatory body could be formed to develop and enforce a code of conduct, promote best practices, and foster dialogue among stakeholders. Finally, regulatory supervision by an existing financial regulator, such as SEBI, could ensure oversight of the self-regulatory body and intervene when necessary to protect public interest. This multi-layered approach would provide the necessary safeguards while maintaining the flexibility required in a rapidly evolving industry.

As India stands on the cusp of a potential revolution in legal financing, the question of governance looms large. While self-regulation offers certain advantages, the unique challenges of the Indian legal and business environment suggest that a hybrid model might be more suitable.

By combining statutory recognition, judicial oversight, and industry-led standards, India can create a regulatory framework that fosters innovation in litigation funding while protecting the interests of all stakeholders. This balanced approach could unlock the potential of litigation funding to enhance access to justice, promote economic growth, and contribute to a more efficient legal system.

As the global litigation funding industry continues to evolve, India has the opportunity to learn from international experiences and craft a governance model that addresses its specific needs. By doing so, it can ensure that the scales of justice are truly balanced, regardless of a litigant’s financial means.

About the Author:

Tanya Prasad is the Chief Investment Officer & Head of Legal at LegalPay, bringing a wealth of expertise in investment strategy and legal frameworks within the financial industry. With an extensive background in guiding legal funding and finance solutions, Tanya offers valuable insights into the evolving landscape of litigation funding and access to justice.

 

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