Litigation funding, also known as third-party funding or legal financing, is a way for individuals or businesses to pay for legal expenses by seeking financial support from outside investors. In India, litigation funding has become increasingly popular, as more people turn to this option to afford the high cost of legal proceedings. However, despite its growing popularity, there are several misconceptions about litigation funding that persist in the country.
Misconceptions regarding investments in legal cases
Litigation funding is only for wealthy individuals or businesses - This is perhaps the most a common misconception about litigation funding. Many people believe that only the financially well-off can afford to invest in various cases as litigation costs are rising and are not easily affordable. However, this is not true. Litigation funding as an investment opportunity is available to individuals and businesses of all financial backgrounds. If an individual/business is willing to objectively invest in strong cases and create their portfolio in this investment class these cases can be funded. Herein, returns are assured if the case has strong merits. As an investor, there is an opportunity to enter into this market by investing a minimal amount of INR 10,000 (Ten Thousand).
Litigation funding is risky - Some investors believe that litigation funding is too risky because they are not sure if the litigant will win the case which makes the investors sceptical of the returns on their investments. However, reputable litigation funding companies such as LegalPay carefully evaluate the merits of each case before agreeing to deploy the funds of their investors. This means that they only invest in cases that have a strong chance of success, reducing the risk for both the plaintiff and the investor. At LegalPay, our team of professionals evaluates each case with detailed due diligence and gives a green flag only if it strictly stands up to the benchmarks in due diligence. Misconceptions of litigants regarding litigation funding:
Litigation funding is only for personal injury cases. - Another common misconception about litigation funding is that it is only available for personal injury cases on an international forum. While it is true that personal injury cases are one of the most common types of cases that receive litigation funding, this type of financing is also available for other types of legal proceedings, such as commercial disputes, and cheque bounce cases (section 138 of Negotiable Instruments Act), MSME cases and intellectual property cases. Litigation Funders can be approached for funding of this kind of case as well.
Litigation funding is a loan. - Some people believe that litigation funding is a loan that must be repaid along with interest, regardless of the outcome of the case. However, this is not true. Litigation funding is not a loan, but rather a non-recourse investment. Investors provide financial support to cover the costs of legal proceedings in exchange for a percentage of any settlement or judgment awarded to the plaintiff. It’s a non-recourse funding which means if the plaintiff loses their case, they are not required to repay the investor. Thus litigants approaching this funding can rest assured knowing that the funding is on a shared risk basis with the investor and does not qualify as a loan from them.
Litigation funding is not allowed in India- Some people believe that litigation funding is not allowed in India. However, this is not true. Litigation funding is legal in India and can be traced from various judicial precedents such as Bar Council of India v. A.K. Balaji [2018] that indicate its permissibility. There are also several reputable litigation funding companies such as LegalPay operating in the country that follow all the best practices, applicable laws and regulations. It is imperative to remove these misconceptions and assist litigants in completing their litigation without bearing the financial burden and fear of leaving their litigations due to a lack of funds. Simultaneously, the elimination of these misconceptions would assist Investors in creating a new asset class in their portfolios.