Litigation Funding (LF), as we all know, is the funding of litigation. It is a budding concept in India but a huge business globally. LF involves the funders paying for the claimant’s expenses on a non-recourse basis. A third-party paying for your expenses. Does it sound like a loan to you? Well, you’re not alone in this. A lot of people, including those serving in the legal industry, tend to confuse LF with loans. Even though it may sound like a loan, LF and loan are two widely different concepts.

How is LF different from loans?

As similar as they sound, LF Agreement is not the same as a normal Loan Agreement. Both bind two parties to a contract but both have different purposes, regulations, processes, needs, demands, terms, conditions, etc. As mentioned, in the process of LF, claims are funded on a non-recourse basis which means the claimant will be paying only when he receives his share from the defending party. Unlike loans, there is no need for the principal amount to be paid at fixed intervals or any question of interest payments. Just the fixed percentage from the claims won.

Apart from the monetary aspects, there is a likely chance that providers of loan might not provide expert advice, unlike LF where relevant know-how come hand-in-hand with funds. Along with that, the funders are more likely to fund only those claims that have a high probability of winning which is a strong validation for a claim.

Another major difference is the laws governing both concepts. Where loans are covered under The Usurious Loans Act, 1918, with the policies formulated and monitored by the RBI, there is no particular branch of law that regulates, defines, or disallows LF as of today.

Hence, it can be said that there is a clear difference between loans and LF and the terms cannot be used synonymously.