Imagine being embroiled in a strong legal case but lacking the financial muscle to see it through. This is where Third-Party Funding (TPF) steps in, transforming the dispute resolution landscape in India and globally. Third-party funding (TPF) has emerged as a game-changer in international dispute resolution, and India is gradually embracing this trend. TPF allows a financially constrained party in arbitration or litigation to access funding from an external source, typically in exchange for a share of the potential award or settlement.
Global Boom, Indian Potential: A Market in Numbers
The global TPF market is a multi-billion dollar industry. Established players like Burford Capital, Bentham IMF, and Vannin Capital dominate the scene, funding high-stakes international disputes. India, with its burgeoning arbitration and litigation market, is a hotbed for potential TPF growth.
International Acceptance, Evolving Scenario in India
Common law countries like the UK, US, and Australia have embraced TPF with established regulations. India, however, is still evolving. Landmark judgments like Bar Council of India v. A.K. Balaji [2018] and a recent breakthrough – the May 2023 Delhi High Court judgment in Tomorrow Sales Agency Private Limited vs. SBS Holdings, Inc. & Ors – are crucial.
Landmark Judgments: Shaping India’s TPF Landscape
- Bar Council of India v. A.K. Balaji (2018): The Supreme Court clarified that TPF isn’t inherently illegal, as long as lawyers maintain professional independence. This opened doors for TPF in India, even without specific legislation.
- Tomorrow Sales Agency Private Limited vs. SBS Holdings, Inc. & Ors (2023): In this pivotal judgment, the Delhi High Court recognized the critical role TPF plays in ensuring access to justice. The Court observed that without TPF, legitimate claimants might be unable to recover funds rightfully owed to them.
The Two Sides of the Coin: Pros and Cons for Funders
TPF companies see immense potential in India, but challenges exist.
Pros:
- Lucrative Market: India’s vast legal market offers opportunities for TPF investments.
- Leveling the Playing Field: TPF empowers parties with strong cases but limited resources.
Cons:
- Regulatory Uncertainty: The lack of TPF-specific regulations creates uncertainties about enforceability and risk allocation.
- Lengthy Proceedings: India’s court system can be slow, impacting return on investment timelines for funders.
Order 25: A Glimpse into the Future?
Order 25 of the Civil Procedure Code, amended in some Indian states, allows parties to arrange for funding for legal proceedings. This provision, although broader than just TPF, indicates a potential legislative openness to the concept.
How TPF can help the balance sheet
- Off-Balance Sheet Treatment: Depending on the jurisdiction and accounting standards, TPF can sometimes be treated as an off-balance sheet item. This means the liability associated with the funding won’t appear on the company’s balance sheet, potentially improving financial ratios.
- No Direct Cost Outlay: TPF doesn’t require an immediate cash outlay by the company seeking funding. Legal costs are covered by the funder, easing short-term financial burdens.
- Contingent Success Fee: TPF arrangements are typically success-based. The funder receives a portion of the award or settlement only if the case is won. This means no upfront losses for the company, reducing overall financial risk.
How TPF may improve EBITDA
- Accessing Top-Tier Legal Representation: TPF allows companies to hire high-quality legal teams they might not otherwise afford, increasing their odds of success in litigation or arbitration. A successful outcome can directly translate to increased earnings, boosting EBITDA.
- Reduced Legal Expenses: While there might be a share in the winnings for the funder, successful TPF arrangements can sometimes result in lower overall legal expenses than if the company had funded the case entirely on its own. This can contribute to improved EBITDA.
Things to Consider
- Not always off-balance sheet: Accounting treatment of TPF can be complex. It might not always qualify for off-balance sheet classification.
- EBITDA Impact Depends on Success: Any potential improvement in EBITDA rests entirely on winning the case. If the case is lost, there would be no positive impact on EBITDA.
- Complexity and Disclosure: Some jurisdictions might require disclosure of TPF arrangements, potentially influencing investor and stakeholder perception.
Note: TPF can potentially improve company financials and EBITDA, but it’s a case-by-case assessment influenced by the specifics of the funding agreement, accounting regulations, and ultimately, the success of the underlying dispute.
The Need for Regulatory Clarity on Third-Party Funding (TPF)
- While Indian courts are beginning to recognize the value of TPF in promoting access to justice for those with limited financial means, the lack of specific regulations creates uncertainty for all parties involved (claimants, funders, tribunals, and courts).
- This uncertainty makes it difficult to predict outcomes and consequences in TPF-backed disputes.
- Landmark judgments like Tomorrow Sales Agency Private Limited v. SBS Holdings, Inc. and Ors are crucial because they clarify key issues and highlight the need for the government to create a formal regulatory framework for TPF.
- Until legislation is in place, all stakeholders need to be transparent in the TPF process:
- Full disclosure to tribunals, courts, and potentially even the opposing party.
- Meticulous drafting of TPF agreements to cover all eventualities and avoid future liabilities.
The Road Ahead for TPF in India
TPF holds significant promise for India’s dispute resolution system. The recent Delhi High Court judgment underscores the increasing recognition of TPF’s importance. A robust regulatory framework, informed by international best practices, is crucial to unlock its full potential. This will benefit claimants, promote access to justice, and establish India as a more attractive venue for international arbitration.