Jan 24,2023 | 12 min read

FEASIBILITY AND LEGALITY OF THIRD-PARTY FUNDING IN INDIA

INTRODUCTION

Third-party funding is a practice where an organisation pays for one party's legal fees in exchange for a cut of the settlement money if the case is successful. Although it is a common practice in many jurisdictions, India has not yet ventured into this realm of international arbitration. Due to its historically exorbitant nature and broad popular concern and reluctance to engage in such practice, arbitration has become an inaccessible method of conflict resolution for most people due to the lack of a regulating system.

 

WHAT IS THIRD-PARTY FUNDING?

Non-recourse funding of a party's litigation expenses by a funder in exchange for a percentage of the monetary award of a successful lawsuit is known as third-party funding ("TPF") or litigation finance. Any legal process, including litigation in a court of law, arbitration, and/or mediation, may be paid for by TPF. Using litigation financing to leverage resources during the pendency of a dispute is commonly seen as a fair way to level the playing field between litigating parties.

There is no statutory definition of the term ‘third part funding’, but it can be defined as an arrangement whereby an unrelated third party, who has no prior interest in the dispute, provides financial support to one of the parties engaged in a dispute resolution, in return for a share of the eventual monetary proceeds that come out of the award, if any[1].

 

DEVELOPMENT OF THE CONCEPT OF THIRD-PARTY FUNDING

Under the English legal theories of maintenance and champerty, third parties were historically barred from providing financial support for an unrelated party's litigation.

To provide maintenance is to involve persons who are neither direct beneficiaries nor who otherwise have any locus in a dispute. An agreement in which the proceeds of litigation are split between the litigant and an unconnected third party who helps pursue the claim constitutes champerty, which is an extreme type of maintenance. It has been stated that receiving money from a third party is akin to maintenance or champerty. To avoid corrupt individuals associating themselves with frivolous and vexatious claims in exchange for a cut of the profits, the common law regime forbade third-party agreements.

Though the disadvantages of third-party funding may outweigh its benefits, still English courts have paved a way for the acceptance of this scheme. 

 

CHANGES IN THE INDIAN LAW CONCERNING THIRD PARTY FUNDING

There is no law involving TPF in arbitration in the Indian context. Furthermore, TPF is not recognised by the Arbitration and Conciliation Act of 1996. Therefore, TPF's legitimacy in arbitration would have to be derived from its philosophy concerning the litigation. In the seminal decision of Ram Coomar Coondoo v. Chunder Canto Mookerjee[2], the Privy Council ruled that the strict English principles of maintenance and champerty do not apply to the Indian jurisdiction, allowing TPF on the grounds of facilitating access to justice.

This view has been restated by the Privy Council in subsequent judgments[3], and it has also been upheld by the Indian Supreme Court after independence[4]. While champertous agreements are prima facie legal under Indian law, the Rajasthan High Court noted in Suganchand v. Balchand[5] that they would become unenforceable if the following circumstances were met- 

  1. if they are unfair because they are exorbitant and unconscionable;
  2. if they are not made with the honest intention of helping a claim that is thought to be just and getting a fair settlement for it, but instead for improper purposes such as:
  • to place a wager on the outcome of a legal case; or
  • assisting and supporting unjust lawsuits, which cause harm or oppress others.

Later, state revisions by Gujarat, Madhya Pradesh, Uttar Pradesh, and Maharashtra codified the notion of TPF in the context of civil litigation under Order XXV Rule 1 of the Civil Code of Procedure, 1908[6]. Courts in the Indian state of Maharashtra have the authority to require financiers to join suits as parties and deposit the necessary funds with the court to cover legal fees[7]. In addition, in the case of A.K. Balaji v. Bar Council of India[8], the Supreme Court recognised the constitutionality of TPF but ruled that attorney financing was not allowed since it could lead to violations of the Bar Council of India's Standards of Professional Conduct and Etiquette[9]. Thus, it appears that TPF is not illegal in India.

 

 NEED FOR THIRD-PARTY FUNDING DURING COVID-19 ERA

TPF is more important now than ever before. The world economy has been hugely impacted by the COVID-19 pandemic. Furthermore, the costs associated with litigation or arbitration can be quite high, with reimbursement only possible if the case is resolved favorably. Furthermore, the arbitration and any potential appeals demand a substantial financial and time commitment. However, TPF can aid Indian businesses in either maintaining their claims or assigning them for swift liquidation. Hindustan Construction Company ('HCC') is a noteworthy example of a company that has recently used a special purpose entity to sell a group of arbitration claims and awards to an outside investor group led by BlackRock Incorporated. The deal's ₹1,750-crore price tag and the fact that it was the first of its kind in India's infrastructure industry made it front-page news. A few recent cases of litigation finance for major corporations that have stoked interest in TPF include Patel Engineering and Era Engineering. As a result, the pandemic may accelerate the development of TPF in India, but this could lead to previously unanticipated challenges due to the absence of regulations governing TPF.

 

STEPS TO INITIATE THIRD-PARTY FUNDING FOR ARBITRATION IN INDIA

 

  Analysis of the Economy

If the parties can agree on or at least establish a limit to the total cost of the arbitration, that would be great. Funders may decide against investing if a budget undergoes frequent revisions. The budget ought to be practical, thorough, futuristic, and detailed. Much will be determined by the specifics of the case at hand. But things in the actual world are by no means ideal. There is no surefire way to know how a legal issue will end in advance.

Because there will inevitably be differences, a party can make a general estimate of the costs of litigation. In such a case, the funders must be flexible and willing to assist with adjusting the original budget. Before any agreement is made between the parties, the plaintiff is solely concerned with the cost of the funding agreement, so it is imperative that they keep a close eye on the costs associated with packaging and negotiating the agreement.

2.     Confidence in the Neutrality of the Arbitral Tribunal

The arbitrator's impartiality is crucial to the successful conduct of arbitration procedures. Following the recommendation of the 246th Report of the Law Commission of India, the Arbitration and Conciliation Act, 1996 was amended in 2015 to include a new provision in subsection 5 of Section 12 requiring the Arbitrator to disclose any prior, current, direct, or indirect relationship with any of the parties to the arbitration.

The entire arbitration process may be derailed if a previously undisclosed or unapproved third-party relationship were to emerge. Due to the inference of influence of the linked party over the arbitrator and the procedures, the award obtained can be contested and set aside. Therefore, keep in mind that the funding party must either have no connection to the Arbitration Tribunal or get a declaration from the Arbitration Tribunal and the approval of the other parties.

3.     Requirements for Disclosure

Neither the funding scheme nor the knowledge that the claim or defence is being supported by anyone is required to be disclosed under any applicable legislation. Due to their "direct pecuniary interest in the award," sponsors are considered equal to the parties in the eyes of the International Bar Association's (IBA) Guidelines on Conflicts of Interest in International Arbitration. While compliance with these recommendations is not required, it may benefit the entity receiving funding if done so. For starters, future challenges to the award will not be based on the arbitrators' perceived lack of objectivity. Second, the claimant has demonstrated both the financial wherewithal and the merits of its case (since the funder conducts extensive due diligence before investing) to proceed with its claim.

Along these same lines, the ICC added a new Article 11 that requires the parties to reveal the existence and name of any non-party that has engaged in an arrangement for funding of claims and defences. Legal professionals in Singapore are required by Rules 49A and 49B of the Singapore Legal Profession to inform Arbitrators of any such agreements.

4.     Arbitration Venue

It is of the utmost importance to verify where the arbitration will take place. One cannot move on with litigation financing if it is expressly prohibited by local law. Singapore's law of champerty has been recently repealed, but only in arbitration cases. It is still not possible to use third-party funding in court cases. Many countries with a common law system have done away with it already, notably India.

There is no specific prohibition on using third-party funding because of the absence of such rules. TPF shall function in such jurisdictions. In addition, it is important to consider the location of enforcement while deciding on a TPF, as enforcement may be denied on the grounds of the country's Public Policy. There is currently very little ambiguity in India because various challenges have been filed with Indian courts against arbitration verdicts on the grounds that they are against Indian public policy. While it is impossible to predict the future, the pro-arbitration stance of Indian courts provides some hope.

 

5.     Safety of Paperwork

The onus is on the investor to do a thorough investigation into the claim's validity. There is a mountain of paperwork that needs to be reviewed before making a call. The claimant will disclose private information throughout this phase of the investigation. Thus, it is essential that the parties sign an NDA right away. An exclusivity agreement is something the investor may wish to consider. However, exclusivity should be granted only after all necessary checks and balances have been made. In the event that investors are reluctant to commit, it is important to find replacements as soon as feasible.

 

6.     Autonomy

Investors' ability to have a say in the proceedings and the resolution should be spelled out in the funding arrangement. In most cases, financiers take a "light-touch approach," meaning they stay out of the way, but settling any potential disagreements over the arrangement can be avoided by clearly outlining the parameters of the funding recipient's independence. When the parties are unable to settle their differences amicably, the process must contain a mechanism for reaching a consensus.

 

7.     Date of Damage Assessment

The claimants' remedy must be monetary damages for the funders to be interested. The amount of compensation they receive is determined beforehand as compensation for the risk they took. Here, determining from when period onwards damages should be calculated becomes crucial. Awarding damages retroactive to the date of the disputed breach of agreement, the purpose of which is to reinstate the claimant to the financial position they would have occupied had the breach not occurred, is usual practise.

When figuring out how much you should pay for damages, you should start with the date of the breach. The actual problem is that the parties haven't come to a meaningful agreement on this date. Due to the complexity of the transactions and the industry, a professional analysis may be necessary. There could be disagreements about how much of a return the investor is entitled to if the funder and the financed party cannot reach an agreement.

 

HURDLES TO THIRD PARTY FUNDING IN INDIA

The number of lawsuits filed in India is rising alongside the country's thriving economy. While it's clear that well-organized and expert TPF is needed to make it easier to pursue valid claims, a few thorny issues remain:

  1. Attorney Funding- Attorneys cannot front the money for a case and expect to get paid back if their client wins. This rule applies especially when the attorney is representing the losing party. Section 23 of the Indian Contract Act states that contracts that violate public policy are null and void.
  2. No definition of Public Policy- There is no clear definition of public policy as a reason to declare an agreement null and void. The court's ability to justify public policy is typically determined by their discretion, which is exercised in light of the specific facts and circumstances of each case. Non-law companies are unable to get into funding arrangements due to the lack of clarity surrounding public legislation. 
  3. Lack of Legislation- The lack of adequate legislation pertaining to the engagement of foreign investors in funding litigation in India, as well as the absence of legal precedents and necessary laws to recognise the legality of third-party agreements, are also problematic.
  4. Class Actions suit not found in India- The use of representative or class actions, which can result in large monetary awards known as "exemplary damages," which are attractive to investors, has not caught on in India. 
  5. Lack of data- The awards of exemplary or "blockbuster" damages in commercial disputes have a very limited historical precedent in India. Before taking on a case, investors will often do a risk assessment analysis using previous data. In India, gathering and organising this type of data is still a work in progress that will take at least a few years to complete.
  6. Unpredictability- The system's intrinsic unpredictability makes it difficult to gauge risk, as evidenced by factors such as roster changes that occur as the case progresses. Many funders prefer to have attorneys representing the funded party work on a contingency fee basis so that both parties can share in the risk of the investment. By doing so, the interests of both the lawyers and the funders are aligned. In India, this is strictly forbidden.

Thus, the pathway forward for third-party funding in India is a rocky road. 

 

GLOBAL-VIEW ON THIRD-PARTY FUNDING

As the law has evolved, the global trend now appears to be away from viewing TPF of conflicts as crimes concerning champerty and maintenance. Australia was one of the first countries to abolish crimes and torts arising from champerty or maintenance.

 

UNITED KINGDOM

The Criminal Law (Amendment) Act, 1967, in England and Wales, for instance, removed the crimes of champerty and maintenance from the criminal code. The Association of Litigation Funders is responsible for managing industry self-regulation per the Code of Conduct for Litigation Funders published in November 2011 by the Civil Justice Council, an agency of the UK's Ministry of Justice. The English Commercial Court's precedent-setting decision in Essar Oilfields Services Ltd. v. Norscot Rig Management (2016)[10], in which it upheld the arbitrator's decision to allow the successful claimant to recover its third-party litigation costs from the losing party as "other costs" under section 59(1)(c) of the Arbitration Act 1996, is also worth mentioning (AA 1996). Third-party litigation funding is a common occurrence in today's court system, as described by the Competition Appeal Tribunal in its decision on preliminary issues in UK Trucks Claim Limited v. Fiat Chrysler Automobiles NV and Road Haulage Association Limited v. Man SE[11]. This helps those who might not otherwise be able to afford legal representation get their day in court.

2.     PARIS

The Paris Bar Council endorsed external funding in a 2017 resolution. The ruling affirms that the use of third-party funding is beneficial for both clients and attorneys, especially in the context of international arbitration. In addition, French law does not prohibit this practice.[12]

3.     SINGAPORE

The use of TPF in litigation is not against public policy or illegal in Singapore, provided that it is used by eligible parties and in the categories so reserved for its use. This was confirmed by the promulgation of the Civil Law (Amendment) Act, 2017, and the Civil Law (Third Party Funding) Regulations, 2017 in March 2017[13].

4.     HONG KONG

To ensure that common law notions of champerty and maintenance do not impede the exercise of TPF Agreements in litigation, Hong Kong also passed the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance, 2017[14].

5.     MINNESOTA

Recent case law from the Supreme Court of Minnesota in Maslowski v. Prospect Funding Partners LLC[15] overturns the old common law prohibitions against champerty on the grounds that the evolution of common law should be guided by the needs and wants of the social society which it rules. 

 

CONCLUSION

India has to implement a proper legal framework to recognise third-party litigation, taking into account the current economic growth and worldwide development of various jurisdictions in improving the environment related to arbitration proceedings. Given the high costs associated with international arbitration, there is an equally pressing need for a workable answer to the problem of reducing those expenses without sacrificing the quality of the arbitration itself. These suggestions can help move the situation forward in regard to the legitimacy of third-party funding in arbitration in India. To ensure the enforceability of arbitration decisions made in other countries and to give legal weight to third-party agreements in arbitrations conducted in India, India may consider creating a legislative framework similar to that of Singapore or Hong Kong.

Authorities make sure that things like openness, party autonomy, confidentiality privilege, avoiding undue benefit, and public policy are all taken into account when crafting laws pertaining to third-party funding and the resolution of disputes through arbitration. Foreign capital investment in relation to third-party funding in India can benefit from a regulatory framework provided by legislative authorities. Laws should do more than simply recognise TPF; they should also include safeguards against abuse, such as prohibitions and redress mechanisms. Moreover, in India, courts will uphold third-party contracts if they are in line with the law. In addition, the Supreme Court can issue guidelines or directions to implement third-party funding arrangements until legislative authorities enact pertinent laws.



[1] INTERNATIONAL COUNCIL FOR COMMERCIAL ARBITRATION, Report of the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration, ICCA Reports No. 4, 18, (April 2018) available at https://www.arbitration-icca.org/media/10/40280243154551/icca_reports_4_tpf_final_for_print_5_april.pdf

[2] (1876-77) 4 IA 23

[3] Kunwar Ram Lal v. Nil Kanth, (1893) 20 I.A. 112; Lala Ram Swarup v. Court of Wards, (1940) 42 BOMLR 307.

[4] In Re: Mr. 'G', A Senior Advocate Of the Supreme Court. v. Unknown, 1954 (2) BLJR 477, ¶11

[5] 1956 SCC OnLine Raj 127.

[6] The Civil Procedure Code (Amendment [State]) Act, 1908, Order XXV Rule 1. 84 The Bombay High Court in 1983 substituted Order XXV of the CPC which pre-supposes that third-party funding is permissible for Indian litigation.

[7] See, Bombay High Court Notification P 0102/77, dated September 5, 1983.

[8] AIR 2018 SC 1382

[9] Bar Council of India’s Standards of Professional Conduct and Etiquette Rules, 1975, Part VI, Chapter II, read with the Advocate’s Act 1961, §49(1)(c) and the proviso thereto.

 

[10] ([2016] EWHC 2361 (Comm)) 

[11] UK Trucks Claim Limited v. Fiat Chrysler Automobiles, [2019] CAT 29 (Competition Appeal Tribunal, United Kingdom); Road Haulage Association Limited v. Man SE, [2019] CAT 26 (Competition Appeal Tribunal, United Kingdom.

[12] https://www.twobirds.com/-/media/pdfs/france/en-paris-bar-council-resolution-dated-21-feb.pdf?la=en

[13] Civil Law (1999) (amended 2017) (Sing.); Civil Law (Third-Party Funding) Regulations (2017) (Sing.)

[14] Hong Kong, The Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance, (2017), https://www.gld.gov.hk/egazette/pdf/20172125/es1201721256.pdf;

[15] A18-1906


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