On 28 May 2020, the Society for Construction Law– Young Leaders Group (India) (“SCL-YLG”) hosted a webinar on ‘Funding Infrastructure Disputes: Using Litigation Finance as a Strategic Tool’. The webinar saw a staggering level of attendance, with over 775 registrations and over 400 attendees from Australia, Bangladesh, Belarus, Botswana, Brazil, Brunei, Canada, China, Congo, Finland, France, Germany, Ghana, Guam, Hong Kong, India, Indonesia, Iraq, Israel, Italy, Japan, Kenya, Korea, Kuwait, Libya, Malaysia, Nepal, Netherlands, Pakistan, Philippines, Qatar, Saudi Arabia, Serbia, Singapore, Sri Lanka, UAE, UK, US and Vietnam. The 2-hour session explored in depth third-party litigation finance from its legal, economic and commercial perspectives.

Background

The Society of Construction Law, India (“SCL India”) was formed with a perceived need for a body to promote research and education in the field of construction law and a means by which people from all sectors of the construction industry including lawyers, arbitrators, experts, contractors, architects etc. throughout the country and overseas could come together to discuss issues relating to construction law.

The SCL-YLG is a group formed under the umbrella of SCL India and is a nation-wide construction law and dispute resolution knowledge network for future leaders and young law practitioners, neutrals, various professionals (like in-house lawyers, engineers, quantity surveyors, financial experts, delay experts and project/ contract managers) and students.

In keeping with SCL-YLG’s diverse membership, the panel consisted of leading individuals representing all stakeholders involved in the construction industry:

 

 

(a)   Tom Glasgow: Chief Investment Officer (Asia), Omni Bridgeway

(b)  Sindhu Sivakumar: Senior Investment Manager, Innsworth Advisors

(c)   Badrinath Durvasula: Former VP Legal and General Counsel, Hindustan Construction Co.

(d)  Alastair Henderson: Managing Partner (South-East Asia), Herbert Smith Freehills

(e)   Montek Mayal: India Practice Leader of Economic Consulting and International Arbitration, FTI Consulting [Moderator, SCL-YLG Steering Committee Member]

(f)   Prateek Bagaria: Partner, Singularity Legal LLP [Moderator, SCL-YLG Steering Committee Member]

Discussion

The webinar discussed the length and breadth of litigation finance, spread over 6 themes:

1.    Brief overview of litigation financing.

Ms. Sivakumar and Mr. Glasgow began the webinar by explaining the basics of litigation finance. They explained that in simple terms, a litigation financing arrangement is any arrangement whereby a third-party funds the costs of a claimant’s litigation in exchange for a portion of the winnings. In this sense, it is different from other financing arrangements such as loans, outright assignments of the right to sue, or contingency fee arrangements offered by lawyers. It was highlighted that these arrangements benefit claimants by improving access to justice, preserving cash flow for the claimant to invest in its core business rather than litigation, and mitigating the risk of the sunk cost of litigation if the claimant does not succeed. In addition, they also send a strategic message to its investors, counter-parties, tribunals and courts that a sophisticated third-party who has done an extensive due diligence on the claim believes it to be worth investing.

Mr. Durvasula concurred with their observations that, from the perspective of a claimant, litigation finance allows companies to unlock funds to use for their core business.

2.    Legal and economic considerations involved in litigation financing.

Mr. Bagaria began the discussion on the legality of litigation financing arrangements in India. He offered an analysis of Indian law since the 18th century to conclude that litigation finance was in fact valid in India, provided four criteria were achieved:

(a)    the funder should not be the lawyer;

(b)    the funder should not have influence on the adjudicator;

(c)    the funder should not have decision-making over shutting down the case;

(d)    fairness of the agreement.

Mr. Henderson added to this discussion by describing how litigation financing can clash with laws on maintenance and champerty in common law jurisdictions. Countries such as Hong Kong and Singapore have addressed this by enacting legislations that abolish these common law doctrines, or excluding litigation finance from its scope.

On the other hand, Mr. Mayal and Mr. Glasgow explored the economic considerations involved. Mr. Mayal explained that the assessment of the commercial value of the claim prior to adjudication for the purpose of funding, depends on an array of factors including economic, legal and factors such as the timelines of successful recoveries. He provided an overview of the framework within which an expert carries out its assessment and stressed on the importance of the date of the calculation.

Meanwhile, Mr. Glasgow explored how litigation finance can work in parallel with other arrangements such as contingency fees for lawyers and other ways in which funders’ economic interest can be aligned with that of the client.

3.    Structural issues in finalising litigation financing arrangements.

The panellists then discussed the various structures a litigation finance arrangement can have. They explained that the funders throughout the world have followed innovative structures wherein the simplest form would be where a funder funds all costs of only a single case in exchange for a portion of the winnings and could take more complex forms, where the funder funds a portfolio of claims, partly funding certain claims, funds a non-monetary claim in exchange for a portion of a future income-stream, etc.

The panelists cautioned that in India, such structures may have to comply with various FEMA, SEBI and RBI regulations and that the different structures may also be subject to differing tax obligations and currency-conversion risks. Specifically, if the funder is offshore, FEMA regulations would only allow simple structures such as funding a specific claim or a portfolio of claims. However, an onshore fund can have much more freedom with structuring its investment, such as securitisation under the IAF regime, or offering investment through the NBFC model.

Ms. Sivakumar also explored the nuances of funding a claimant undergoing insolvency, which will require compliance with insolvency laws, consent from creditors or insolvency courts and detailed negotiations over priority of rights if the claimant goes into liquidation.

4.    Case considerations in closing litigation financing arrangements.

The panellists then discussed what parameters are used to evaluate whether a claim is worth being funded. Typically, a funder will conduct detailed due diligence over the merits of the claim (probability of success), recoverability of the claim (counter-party’s solvency and assets) as well as the economics of the claim (likely legal fees compared with likely winnings). Lawyers play a key role in this by presenting the merits of the claim realistically, and predicting their budgets accurately. Experts (such as quantum or delay experts) are often crucial for conducting a wholistic due diligence of claims in the infrastructure sector.

Mr. Durvasula offered perspective from the other end; he pointed out that 4 stakeholders approached litigation financing with suspicion:

(a)   the client: clients with little understanding of litigation financing often see it as suspect, and are apprehensive of getting into such arrangements.

(b)  courts: Mr. Durvasula opined that Indian judges often look down upon litigation financing arrangements, which can affect their evaluation of the case.

(c)   financial Institutions: lenders of the client often object to litigation financing, as they feel the funder is likely to carve out a larger cut of the winnings for itself.

(d)  Board of Directors: directors often object to litigation financing, because they feel that if the case is good enough to be won, the winnings needn’t be shared with the funder.

5.  Cost considerations in funded claims.

The panellists next discussed that apart from covering the claimants’ costs of litigation, funders also face other costs such as Security for Costs (“SFC”) and adverse costs orders.

The funders usually undertake to bear the cost of the SFC application and in some cases, the presence of funders can assure the adjudicator of the claimant’s ability to pay, and thus avoid the need for security for costs.

Whereas the liability for adverse costs may rest with the funder, depending on their arrangement and the laws of each jurisdiction. An alternative to the funder incurring adverse costs is a demand for an After-the-Event (ATE) insurance from the client, however the panellists cautioned that in practical terms, it is an extremely expensive and complicated process to secure this insurance.

Another impact of litigation financing is that a tribunal / court which is aware of a claimant being backed by a third-party funder may subconsciously or consciously increase the amount of costs it will award against a losing claimant. From his experience as an arbitrator, Mr. Henderson pointed out that while in theory the presence of a funder should not influence a tribunal, but in practice it is seen that certain arbitrators were influenced by the presence of funder while determining costs to be awarded.

6.    Key issues for infrastructure sector.

Finally, the panel brought this nuanced understanding of litigation financing discussed so far to the infrastructure sector. Mr. Henderson began by giving an overview of disputes in this sector. He explained that the infrastructure sector is diverse, including sub-sectors from classic building of roads and railways to energy infrastructure, offshore oil and gas, telecommunication etc. The only commonality is that these disputes involve are sizable, with millions of dollars at stake, and very complex, involving factual evidence over several years as well as technical nuances of each project. The typical areas of disputes are delay or time-related claims, cost overrun or payment-related claims, and defect-related claims.

Mr. Durvasula offered his experience as an industry representative to point out that this sector is an ideal candidate for litigation financing because freeing up cash flow allows infrastructure firms to carry on other projects while one is under dispute. Further, he opined that this sector is bound to see a plethora of disputes after passing of the Covid-19 crisis. Mr. Mayal added to this point by explaining that Covid-19 has impacted businesses in two ways: a definite short-term impact on both demand and supply, as well as an uncertain medium to long term effect on demand.

Mr. Glasgow and Ms. Sivakumar added from their experience that infrastructure disputes were in fact a large part of funders’ existing portfolio of investments.

Finally, Mr. Bagaria brought pointed out that there was already significant amount of litigation financing in the Indian infrastructure sector, with 7 to 8 deals involving everything from offshore litigation, to India-seated arbitrations, as well as portfolio claims. He opined that this deal flow was just the tip of the iceberg, and the Indian market was likely to see USD 30-40 billion in third-party litigation financing provided the right conditions were developed. Already, he pointed out, various stakeholders have begun work to set up an association to promote and self-regulate litigation financing in India.

Conclusion

All in all, the webinar offered a nuanced and comprehensive overview of litigation financing, with special focus on the Indian infrastructure sector. The infrastructure sector will be in focus in the coming months, as investment therein has the potential to give a much-needed booster to the Indian economy and reverse the impact of the Covid-19 crisis. In this light, the webinar served as a useful primer for all industry stakeholders, and clarified misconceptions surrounding litigation financing. This information will enable the industry to use litigation financing to its maximum potential.