Will Litigation Funding Disrupt the Legal Profession?
Introduction
Imagine a world where access to justice is not limited by financial means. This is the promising reality that third-party litigation funding (TPLF) seeks to create. Litigation funding is a financial backing provided by external investors to plaintiffs or law firms to cover costly legal expenses in exchange for a share of any recovery, it is fast becoming a disruptive force reshaping the legal profession globally and in India. This article explores in depth how litigation funding is transforming legal practice, the challenges it poses, and what the future holds for lawyers and clients alike.
The Rise of Litigation Funding: Democratizing Access to Justice
The cost of pursuing litigation has soared worldwide, making justice inaccessible for many individuals and small businesses. For example, in India, litigation costs can reach approximately 31% of a claim’s value, causing many rightful claims to be abandoned due to financial barriers. Litigation funding bridges this gap by providing capital to litigants who either cannot afford or do not wish to bear the full financial burden of legal proceedings.
Funders rigorously assess cases based on their merits, risks, and likelihood of success, advancing expenses on a non-recourse basis, meaning repayment arises only if the case is won or settled favorably. This financing can support various types of claims, including complex commercial litigation, arbitration, insolvency disputes, and personal injury claims. It levels the playing field by enabling under-resourced parties to contest well-funded opponents.
Globally, the litigation funding market is projected to double in size from $10.9 billion in 2018 to $22.4 billion by 2027, with further expansion forecasted into the decades ahead. Litigation funders like Burford Capital, Omni Bridgeway, and LegalFund are pioneering this rapidly growing industry.
How Litigation Funding Alters the Legal Profession
Risk Transfer and Case Selection
Traditionally, law firms often finance litigation costs from their reserves or require clients to pay upfront or on contingency arrangements. Litigation funding transfers the financial risk from plaintiffs and law firms to external investors, incentivizing firms to take on more meritorious but high-cost or long-term cases they might otherwise avoid. This shift potentially increases litigation volume and creates demand for specialized legal expertise in funded matters.
Funders often pool multiple cases into portfolios to diversify risk, supporting a range of claims across jurisdictions and sectors. Portfolio funding encourages law firms to manage caseloads strategically to maximize investment returns while focusing on strong legal merits.
Opportunities for Smaller Firms and Clients
Litigation funding democratizes access to justice by enabling small businesses, startups, and individual plaintiffs to pursue claims against larger corporations. For law firms, it provides a cash flow boost, helping maintain operational stability and resource allocation without depending solely on client payments or firm capital. Emerging markets like India have seen recent growth in this financing, especially in commercial litigation, arbitration, and insolvency proceedings.
Ethical and Professional Challenges
The introduction of third-party funders into litigation raises critical ethical concerns. Chief among these are:
- Influence and Control: Funders’ interests may sometimes diverge from those of clients or attorneys, potentially influencing settlement decisions or litigation strategy. While most funders claim non-interference in legal decisions, the potential for conflicts of interest exists and remains a source of scrutiny.
- Transparency and Disclosure: Courts and regulators differ on whether funding arrangements must be disclosed during litigation. Disclosure requirements vary greatly by jurisdiction, affecting the relationship dynamics between funders, lawyers, and clients. Non-disclosure may raise questions on conflicts and impartiality, while disclosure could influence judicial perceptions.
- Champerty and Maintenance: Historically, common law doctrines prohibited third-party funding deemed as “champerty” (maintaining litigation for profit). Modern jurisprudence in many jurisdictions has relaxed these prohibitions, yet legal uncertainty remains, requiring careful navigation by practitioners.
These challenges call for the legal profession to adapt its ethical frameworks and professional responsibility standards to accommodate the realities of litigation funding.
Impact on Lawyer-Client Relationship
Litigation funding adds a third party to the traditionally bilateral lawyer-client relationship. This involvement can complicate confidentiality, decision-making authority, and the fiduciary obligations of lawyers. It may require lawyers to communicate clearly about funding terms and balance competing interests while maintaining client loyalty.
Litigation Funding in India: Emerging Trends and Legal Landscape
India’s foray into litigation funding is nascent but accelerating. While the Supreme Court of India affirmed that third-party funding is not prohibited, lawyers remain barred from contingency fees. Funding agreements are governed as contracts under the Indian Contract Act, 1872. Various states have amended procedural rules to explicitly permit litigation funding, and Indian funders like LegalFund are leading the growth locally.
Litigation funding’s impact on insolvency proceedings is especially noteworthy in India. The Insolvency and Bankruptcy Code, 2016, has opened new opportunities for funders to finance costly litigation related to disputed claims and avoidance transactions, enabling resolution professionals to focus on core insolvency functions while funders bear legal expenses. Landmark cases such as the Yashomati Hospitals resolution demonstrate successful exits and investment returns in this domain.
Despite this progress, India lacks comprehensive regulation akin to the UK’s code of conduct for funders, creating uncertainties. Clear regulatory frameworks, investor protections, and tax treatment guidance will be pivotal to sustaining growth and ethical practices.
The Future of the Legal Profession Amid of Litigation Funding Growth
Litigation funding is poised to cause structural shifts in the legal profession:
New Financing Models: Law firms may increasingly partner with funders to finance cases and operations, giving rise to more sophisticated legal finance models and collaboration strategies.
Rising Demand for Litigation Finance Expertise: Legal professionals, especially litigators and commercial lawyers, will need to develop skills in evaluating funding proposals, managing funder relationships, and advising clients on funding options.
Regulatory and Compliance Requirements: Lawyers must navigate disclosure obligations and ethical rules evolving to govern litigation funding, enhancing transparency while safeguarding client interests.
Innovation in Access to Justice: Litigation funding can enable novel legal service models, such as portfolio litigation and class actions, that may transform dispute resolution dynamics.
However, lawyers and firms must also remain vigilant to the risk of funder influence undermining professional independence or client priorities. As the industry matures, clearer guidelines, court rulings, and best practices will emerge to balance innovation with ethical safeguards.
Conclusion
Litigation funding represents a ground-breaking evolution in legal finance, one with the potential to disrupt traditional legal practice profoundly. By reducing financial barriers, shifting litigation risks, and spurring new case opportunities, it democratizes access to justice and drives professional innovation. Yet it also challenges the profession’s ethical foundation, lawyer-client dynamics, and regulatory frameworks.
For legal professionals, the rise of litigation funding is both a challenge to adapt and an opportunity to participate in a rapidly growing, transformative market. With appropriate regulation, transparency, and professional guidance, litigation funding can become a powerful tool to enhance legal practice and justice delivery worldwide.