Balancing Access To Justice And Ethical Integrity: Third-Party Funding In Commercial Litigation

In the world of commercial litigation, financial barriers often prevent parties, particularly small businesses and individuals, from pursuing claims due to the prohibitive costs associated with legal battles. In response, third-party funding (TPF) has emerged as a significant tool, providing financial support to litigants in exchange for a share of any eventual recovery or damages. 

TPF, also known as litigation financing, involves a financially capable entity—such as a bank, hedge fund, or insurance company—providing monetary support to a litigant. This support covers litigation expenses, including lawyer’s fees, court costs, and expert witness charges. In return, the funder receives a pre-agreed share of the monetary award if the case succeeds. If the case fails, the funder typically absorbs the loss, mitigating financial risk for the litigant. TPF improves access to justice but brings ethical considerations, particularly when the funder seeks significant influence over litigation strategy.

An Overview of Third-Party Funding in India

In India, TPF operates in the absence of a unified statutory framework, deriving its legitimacy and guidance primarily from judicial precedents and certain state-specific regulations. The origins of TPF in India can be traced to the Privy Council’s landmark judgment in Ram Coomar Coondoo v. Chunder Canto Mookerjee¹. In the said decision, the Privy Council upheld the validity of agreements involving champerty and maintenance, provided such arrangements were not extortionate, unconscionable, or contrary to public policy. The Court further affirmed the permissibility of third-party funding agreements under which the funder receives a share of the litigation proceeds, provided these arrangements do not offend public policy or shock the conscience.

The Supreme Court of India, in Bar Council of India v. A.K. Balaji², further clarified the legal position on TPF. The Court held that while third-party funding by non-lawyers is permissible, advocates are prohibited from engaging in such practices as it would contravene professional ethics. 

In the recent case of Tomorrow Sales Agency Pvt. Ltd. v. SBS Holdings Inc. & Ors³., the Division Bench of the Delhi High Court set aside an order of a Single Judge that had directed interim measures against Tomorrow Sales Agency (TSA), a third-party funder. The application, filed by SBS under Section 9 of the Arbitration and Conciliation Act, 1996, sought to compel TSA to disclose its assets, furnish security for the amounts awarded in an arbitral award, and refrain from alienating or encumbering its assets.

The Division Bench overturned the Single Judge’s order, holding that such an application would not be maintainable as TSA was neither a party to the arbitration proceedings nor to the arbitral award. The Court emphasized that, since TSA had no obligation to pay any amount under the arbitral award, it could not be treated as a judgment-debtor for enforcement purposes. Significantly, the Court, in the said case, drew a distinction between the recovery of costs awarded against third parties in litigation and the enforcement of arbitral awards against nonparties. It observed, “Thus, the powers of the courts to award costs in a trial would have no relevance for determining whether the awarded amount can be recovered from a person who is not a party to the arbitral proceedings or the arbitral award.”⁴

While recognizing the necessity of transparency and non-exploitative practices in TPF, the Court also highlighted its pivotal role in ensuring access to justice. The Court noted, “In absence of third-party funding, a person having a valid claim would be unable to pursue the same for recovery of amounts that may be legitimately due,” and further observed that “Thirdparty funders play a vital role in ensuring access to justice.” 

The indispensability of TPF in modern commercial litigation cannot be overstated. It serves as a critical tool for parties who lack the financial resources to sustain prolonged litigation or arbitration proceedings. In the absence of TPF, individuals and businesses with meritorious claims may be precluded from pursuing legal remedies due to financial constraints. TPF bridges this gap by providing financial support for litigation and arbitration-related costs, thereby enabling claimants to access justice. This is especially significant in a country like India, where economic disparities often impede access to legal recourse. The imbalance is further exacerbated when claimants face opponents with superior financial resources.

Certain Indian states, including Gujarat, Madhya Pradesh, and Uttar Pradesh, have formally recognized TPF by amending Order 25 Rule 1 of the Code of Civil Procedure, 1908. These amendments empower courts to mandate security for costs from third-party funders in specific cases. On the corporate front, entities such as Hindustan Construction Company have embraced TPF arrangements to monetize arbitral awards, reflecting its growing acceptance in commercial contexts. Furthermore, emerging platforms like LegalPay have introduced innovative litigation financing models, with a focus on arbitration and insolvency matters, thereby attracting both litigants and investors.

Global Approaches to Third-Party Funding: Balancing Access to Justice with Ethical and Legal Considerations

Globally, jurisdictions have adopted diverse approaches to third-party funding (TPF), seeking to balance the imperative of enhancing access to justice with the ethical and legal challenges associated with such arrangements.

In the United Kingdom, TPF has gained significant acceptance, particularly in the realms of commercial litigation and arbitration. While TPF is not subject to statutory regulation, the Association of Litigation Funders (ALF) has promulgated a Code of Conduct, which requires funders to maintain transparency, refrain from exerting undue influence over litigation strategy, and adhere to ethical standards. Additionally, disclosure of funding agreements is mandated in certain cases to prevent conflicts of interest and to ensure judicial integrity.⁵

In the United States,⁶ the landscape of TPF is more fragmented, with practices varying widely across states. Some jurisdictions mandate the disclosure of funding agreements, while others impose no such requirement, affording litigants and funders considerable discretion. U.S. courts have acknowledged the role of TPF in enabling access to justice, but concerns persist regarding its potential to interfere with attorney-client relationships and the independence of legal counsel.

Australia⁷, by contrast, has established a more structured regulatory regime for TPF, particularly in the context of class actions. Funders are required to hold an Australian Financial Services License (AFSL), thereby ensuring compliance with financial regulations and ethical standards. The High Court of Australia, in Campbells Cash and Carry Pty Ltd. v. Fostif Pty Ltd.⁸, affirmed the legality of TPF and underscored its importance in promoting access to justice. This regulatory model aims to balance the interests of claimants, funders, and the broader judicial system.

In Asia, Singapore and Hong Kong have emerged as leaders in the formal recognition of TPF, particularly in the field of international arbitration. Both jurisdictions have introduced comprehensive regulatory frameworks that emphasize transparency, confidentiality, and fairness in TPF agreements, setting a benchmark for the region. Singapore’s Civil Law (Amendment) Act, 2017 and Hong Kong’s Arbitration Ordinance, 2019 have been pivotal in facilitating the growth of TPF while ensuring compliance with ethical and legal standards.

Third-Party Funding: A Catalyst for Fairer, More Efficient Litigation

TPF offers numerous advantages, making it an indispensable tool in modern legal systems, especially in jurisdictions like India. Foremost among these is its ability to enhance access to justice by covering litigation costs, allowing individuals and small businesses to pursue meritorious claims that would otherwise remain unaddressed due to financial constraints. This is particularly crucial in India, where prolonged litigation often deters parties with limited resources from seeking redress. TPF also plays a significant role in risk mitigation, as it allows litigants to transfer financial risks, such as adverse judgments and escalating costs, to the funders. This arrangement is particularly beneficial in high-stakes commercial disputes where financial exposure can be substantial. Moreover, TPF encourages the use of Alternative Dispute Resolution (ADR) mechanisms, such as arbitration and mediation, by providing funders with cases that have predictable timelines and enforceable outcomes, reducing the uncertainties typically associated with litigation. In India, the provisions of the Arbitration and Conciliation Act, 1996, including fast-track arbitration, align well with the objectives of TPF, making arbitration an attractive option for both funders and litigants.

Additionally, TPF fosters an objective assessment of claims, as funders conduct rigorous due diligence before committing to a case, ensuring that only high-merit claims receive financial backing. This scrutiny improves the quality of litigation and reduces frivolous claims, enhancing the efficiency of the justice system. TPF also represents a lucrative investment opportunity for funders, offering high returns relative to other financial instruments. This has spurred the growth of platforms like LegalPay in India, which provide innovative financing solutions tailored to the needs of both litigants and funders. Beyond these financial benefits, TPF allows litigants to pursue more robust legal strategies by alleviating the financial burden of litigation. With the funding secured, parties can afford to engage in thorough investigations, hire top-tier legal counsel, and undertake comprehensive legal research, ensuring betterprepared cases and more effective legal strategies.

Moreover, TPF strengthens the bargaining power of litigants. With funding in place, litigants are better positioned to negotiate favorable settlements, as the financial backing signals to the opposing party that the claimant has the resources to see the case through, potentially leading to more favorable settlement discussions. TPF also facilitates faster resolution of disputes by providing financial backing for quick legal processes. Funders typically seek expedited outcomes, and with the financial resources in place, litigants can avoid delays due to financial constraints, enabling a quicker progression of cases. For businesses, TPF allows them to preserve capital for other operational needs instead of tying up funds in costly and protracted legal battles. This ensures that companies can continue their regular operations without financial strain. Furthermore, TPF plays a critical role in promoting equality of arms in legal disputes, especially when one party may be significantly more resourceful than the other. It provides financial support to litigants who would otherwise be at a disadvantage, ensuring a fairer and more balanced legal process.

TPF also facilitates cross-border litigation, particularly in international arbitration, enabling parties from emerging markets or smaller jurisdictions to engage in high-stakes disputes that would otherwise be financially out of reach. This has contributed to the global acceptance of TPF, allowing litigants to pursue claims with greater confidence. TPF represents a financial solution that offers litigants flexibility by enabling them to pursue legal claims without the need to sell assets or take on debt, ensuring that they can seek justice without compromising their financial stability. The expansion of TPF has also driven the development of innovative financial models, such as portfolio funding and litigation finance for insolvency proceedings. These innovations broaden the scope of TPF, providing more tailored financing solutions for different types of cases, and driving the evolution of the legal finance sector. Additionally, as TPF becomes increasingly regulated, jurisdictions like the UK, Australia, and Singapore have established frameworks to ensure transparency and fairness in funding arrangements, preventing conflicts of interest and exploitative practices.

Therefore, it is fair to say that TPF has become a vital component of modern legal systems, particularly in jurisdictions where financial constraints often hinder access to justice. By facilitating access to legal resources, mitigating risks, enhancing legal strategies, and fostering innovation, TPF plays a pivotal role in ensuring that individuals and businesses with meritorious claims can seek justice, regardless of their financial means. Its importance continues to grow, especially in countries like India, where TPF helps bridge the gap for parties without the necessary resources to engage in lengthy and expensive legal battles.

Ethical and Legal Concerns in Third-Party Funding  

Despite the many advantages, TPF presents several ethical and legal challenges that require careful scrutiny. One of the foremost concerns is the potential for funders to exert undue influence over litigation strategy. Given their financial interest in the outcome, funders may prioritize their own objectives over the litigant's best interests, potentially undermining the independence of legal counsel and the integrity of the judicial process. To mitigate this risk, regulatory frameworks must ensure that litigants retain control over key decisions, such as whether to settle or proceed to trial.

Confidentiality and disclosure also remain contentious issues in TPF arrangements. While confidentiality clauses protect sensitive information, non-disclosure of funding agreements can create imbalances, especially in adversarial proceedings. Some jurisdictions, like the UK, have addressed this concern by mandating the disclosure of funding agreements in certain contexts to prevent potential abuses. In India, however, the lack of clear guidelines on disclosure leaves room for ambiguity and potential misuse, raising concerns about fairness and transparency in the process.

Another significant ethical issue is the risk of conflicts of interest. Funders may hold financial stakes in multiple parties involved in a dispute, potentially compromising their neutrality. Therefore, clear and enforceable rules regarding funder independence are necessary to ensure that such conflicts do not undermine the credibility of the TPF model.

Critics also highlight the risk of TPF’s profit-driven nature commodifying justice. By focusing primarily on high-value claims with substantial returns, funders may neglect smaller, yet equally valid, cases. This could exacerbate existing inequalities in the justice system, particularly in jurisdictions like India, where access to legal resources is already uneven and many claimants face financial barriers to litigation.

Additionally, the taxation and financial regulation of TPF in India presents further challenges. Uncertainty remains regarding the tax treatment of proceeds from TPF arrangements, as well as the classification of funders’ earnings. The lack of clear regulations on these matters creates an atmosphere of ambiguity for both litigants and investors. To address these concerns, there is an urgent need for a comprehensive legislative framework to provide clarity and ensure that TPF operates transparently and fairly.

The Path Forward: Regulatory Recommendations

India’s TPF landscape operates largely on self-regulated practices, with limited statutory recognition. To ensure the ethical and effective use of TPF, several regulatory measures should be considered. First, a central statute defining TPF and its permissible scope can provide muchneeded clarity. This legislation should outline the rights and obligations of funders, litigants, and legal counsel, ensuring transparency and accountability. Such a statute could further include provisions for the regular monitoring of TPF arrangements by an independent regulatory body to oversee compliance with ethical standards.

Mandatory disclosure of funding agreements to courts and tribunals is another crucial step. Such disclosures can prevent conflicts of interest and ensure that all parties have a clear understanding of the financial dynamics underpinning a case. Furthermore, disclosure should extend to the specific terms of the funding agreement, including the percentage of recovery the funder stands to gain, to prevent any perception of bias or influence over legal strategies. Ethical guidelines must also be established to safeguard litigants’ autonomy and prevent funders from unduly influencing litigation strategy or settlement negotiations. These guidelines should be aligned with international best practices, such as the ALF’s Code of Conduct in the UK and the licensing requirements for funders in Australia. These measures would encourage fairer funding practices and mitigate the potential for exploitation.

Tax policies specific to TPF arrangements are equally important. Clear rules on the taxation of proceeds and the classification of funders’ earnings can reduce ambiguity and encourage investment in litigation financing. The government could also consider offering tax incentives for funders who engage in socially beneficial cases, such as public interest litigation, thereby creating a more diverse pool of funding options. Additionally, India can draw lessons from jurisdictions like Singapore and Hong Kong, where robust regulatory frameworks have facilitated the growth of TPF while addressing ethical concerns. These frameworks could serve as models for developing a structured and balanced approach in India that promotes both legal growth and fairness.

A formal framework for dispute resolution between funders and litigants in case of disagreements would also be a welcome addition to Indian TPF regulations. This would ensure that any issues arising during the litigation process are resolved without delay, promoting a more efficient and harmonious relationship between the parties involved.

Lastly, a code of ethics for funders should be established, with specific sanctions for noncompliance, to deter unethical practices. This code could focus on transparency, fairness, and respect for legal independence, which would help instill confidence in TPF arrangements within the legal community and the public.

Conclusion

Third-party funding represents a transformative development in commercial litigation, offering a vital lifeline to litigants who may lack the resources to pursue their claims. Its growing adoption in India and other jurisdictions highlights its potential to democratize access to justice and stimulate economic growth. However, the ethical and legal challenges associated with TPF cannot be ignored. By implementing a comprehensive regulatory framework that balances transparency, fairness, and litigant autonomy, India can effectively harness the benefits of TPF while safeguarding the integrity of its legal system. As TPF continues to evolve, it holds the promise of reshaping the landscape of dispute resolution, making justice more accessible and equitable for all.

Footnotes

^{1. Ram Coomar Coondoo v. Chunder Canto Mookerjee , 1876 SCC Online PC 19.}

^{2. Bar Council of India v. A.K. Balaji & Ors., (2018) 5 SCC 379.}

^{3. Tomorrow Sales Agency Pvt. Ltd. v. SBS Holdings Inc. & Ors. [2023 SCC OnLine Del 3191]}

^{4. Id}

^{5. Mulheron, Rachael, England’s Unique Approach to the Self-Regulation of Third-Party Funding: A Critical Analysis of Recent Developments, The Cambridge Law Journal, Vol. 73, No. 3 (2014), 580, (http://www.jstor.org/stable/24693910).}

^{6. Daughety, Andrew F., and Jennifer F. Reinganum, The Effect of Third-Party Funding of Plaintiffs on Settlement, The American Economic Review, Vol. 104, No. 8 (2014), pp. 2553-2554, (http://www.jstor.org/stable/42920899).}

^{7. Pinheiro, Kaira and Chitalia, Dishay, Third-Party Funding in International Arbitration: Devising a Legal Framework for India, Vol. 14 NUJS L. Rev. 2 (2021), (http://nujslawreview.org/2021/10/12/third-party-fundingin-international-arbitration-devising-a-legal-framework-for-india/).}

^{8. Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd [2006] HCA 41; 229 CLR 386; 80 ALJR 1441; 229 ALR 58.}

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.