India: Third Party Funding – Is India Ready?

1. INTRODUCTION

'Third-Party Funding' - this concept, which has a foreign ring to it, is widely believed to be invalid in India. However, India's apex court has recognised the concept of third-party funding, subject to certain terms which we will discuss further in this article. But one of the most important quandaries which emerges for consideration is whether the Indian legal system is in fact ready to accept third-party funding? In other words, in the present day, is a legal professional in a position to advise his clients to opt for third-party funding for a litigation/ arbitration proceeding in India?

Litigation/ arbitration proceedings can be heavy on the pocket involving a variety of expenses, such as professional fee of lawyers, court/ tribunal's costs, costs of expert witnesses, pre-deposits, adverse costs, etc. In the famous defamation case filed by Ms. Naomi Campbell against the publishers of the newspaper Daily Mirror, the solicitors of Naomi Campbell filed a bill of costs of UK £ 3,77,070.07 in the trial court, UK £ 1,14,755.40 in the Court of Appeal and UK £ 5,94,470 in the House of Lords totalling a baffling figure of UK £ 1,086,295.47. These costs were ultimately not paid by the Daily Mirror, which is a separate discussion, but the case gives us an insight as to how expensive legal proceedings can get.

As the name suggests, the concept of third-party funding essentially means that an unrelated/ non-beneficiary third party funds a litigation / arbitration proceeding in exchange for a profitable return out of the court decree or award. A funder can either be an individual or a company. This phenomenon is evolving rapidly across foreign jurisdictions for two main reasons: (1) it provides a level playing field for both parties and ensures that legitimate rights are not compromised due to paucity of financial resources; and (2) it provides for a good opportunity for funders to make investments. From a business point of view, it is natural for funders to prefer to fund claims of petitioners/ claimants where the possibility of earning a big profit is higher, as opposed to funding a defendant/ respondent where the funding will merely be used for defeating the claims made and there would be little to no profit making involved. However, funding companies may choose otherwise for a variety of factors. In an ICSID arbitration, a claim was financed by a foundation not with a view to earn profits but because the financing foundation was generally against the subject matter of the said arbitration, i.e. sale of tobacco products.¹

2. EVOLUTION OF THE CONCEPT

Historically, third parties were prohibited from funding an unconnected party's litigation under the doctrines of maintenance and champerty under the English law.

Maintenance essentially means the involvement of unrelated third parties to a dispute in which neither are they direct beneficiaries nor do they have any locus. Champerty, considered as an aggravated form of maintenance, means an agreement which divides litigation proceeds between the litigator and an unrelated third party who helps enforce the claim. It is argued by some that third-party funding is indeed a form of maintenance or champerty. Hence, the prohibition of third-party agreements under the common law regime was intended to prevent abuse of justice by corrupt individuals who associated themselves with frivolous and vexatious claims in return for a share of the profits.

In modern times, the rule against champerty and maintenance was based on the public policy ground of protecting the purity of justice. When we weigh the cons of third-party funding, factors such as the funders' say in the proceedings, compromise of confidentiality, reduced possibility of settlements appear to support the archaic English rules against champerty and maintenance.

However, it is important to remember that every coin has two sides. Over the years, English courts have also opined that public policy is dynamic and needs to evolve with the changing needs of the society, and consequently diluted the doctrines of maintenance and champerty, paving way for introduction of third-party funding arrangements. As Lord Denning rightly highlighted - "a financier may be tempted by his own personal gain, to inflame the damages, to suppress evidence, or even to suborn witnesses..." but he also stated that "...these fears may be exaggerated".²

3. LEGALITY OF THIRD-PARTY FUNDING AGREEMENTS IN INDIA

Despite the rules against champerty and maintenance in foreign nations, there was never any statute or express bar prohibiting third-party funding agreements in India³. In fact, third-party funding agreements are statutorily recognised for civil suits under some state amendments (being Maharashtra, Gujarat, Madhya Pradesh and Uttar Pradesh) of Order XXV Rules 1 and 3 of the Code of Civil Procedure, 1908.

Even though these agreements are not void ab initio in nature (unless funded by a lawyer⁴); their presence has shown to invite judicial scrutiny under the principles of Indian Contract Act, 1872. Consequently, such agreements have often been curtailed on grounds of "unconscionability", "unfairness" and other like public policy concerns, where they appear to be made, not for a bona fide purpose but for gambling in litigation, or of injuring or oppressing others by abetting and encouraging unrighteous claims.

Notwithstanding the above, the Hon'ble Supreme Court of India has also time and again made it categorically clear that the rigid English rules of champerty and maintenance do not apply in India. It has also been clarified that there is nothing morally wrong, nothing to shock the conscience, nothing against public policy or public morals in such a transaction per se, save when a legal practitioner is concerned.⁵ However, each agreement must be examined independently to ensure that it does not in fact intend to violate public policy and public morals.

One such case is where the Rajasthan High Court while evaluating the justness of such agreements, opined that agreements made with the intent of gambling in litigation and earning huge profits cannot be upheld. In this case, the High Court refused to uphold transfer of half the property to the funder in exchange for footing of certain litigation expenses. Such vastly disproportionate return to the funder was held to be opposed to public policy and consequently void⁶.

Based on the decisions of the Indian courts, it may not be incorrect to say that the quantum of the share which the funder is entitled to, under such agreements, plays a crucial role in determining the validity of a funding agreement. In addition to the quantum of share, other clauses of the agreement pertaining to the role, rights and responsibilities of the litigant and the funder in a funded proceeding, disclosure of confidential information to the funder, funders' say in evaluating settlement proposals by courts or opponents, termination of the agreement and the prescribed conditions, liability of the funders for accrued obligations, etc. may also be dissected by Indian courts. The idea is that while a party may fund litigation, the litigant ought not to suffer due to the interests of such third parties.

It is pertinent to understand there must always be full disclosure about existence of such agreements in a proceeding to the court or the tribunal to prevent any adverse orders at the stage of execution/ enforcement. For instance, involvement of a funder in an arbitration proceeding, makes independence of arbitrators⁷ qua the funders also relevant and absence of establishment of such independence can be raised as a strong ground while raising a challenge to an arbitral award.

4. FOREIGN TRENDS

Australia was one of the first few countries to abolish the crimes and torts arising from maintenance and champerty. Recently, Singapore became the first Asian jurisdiction to legalise third-party funding arrangements for arbitrations. It has enacted the Civil Law (Amendment) Act, 2017⁸ to abolish maintenance and champerty, and it recognizes third-party funding arrangements as valid for prescribed dispute resolution mechanism, provided they are not against public policy and prescribe rights of funders and exceptions to those rights. It also introduced Civil Law (Third Party Funding) Regulations, 2017⁹ to regulate third-party funding arrangements. Singapore Institute of Arbitrators has also recently issued guidelines for third-party funders, which shall prove to be a useful tool in streamlining the process for third party funding¹⁰.

Hong Kong has introduced Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Act, 2017¹¹ which applies to both domestic and international arbitration. This act was a welcome move which prohibited 'Maintenance and Champerty' with three exceptions: (1) the third party establishes legitimate interest in the outcome of litigation; (2) the party persuades the court that it should be permitted to obtain third-party funding on the basis of accessibility of justice; and (3) certain categories of proceedings such as insolvency. One unique and differentiating factor from India about such arrangements, is that lawyers are permitted to fund arbitrations, as long as they "do not have an interest recognized by law in the arbitration other than under the funding agreement".

The UK's arbitration legislation provides the arbitrator with the power to allocate legal and "other costs" under Section 59(1)(c) of the Arbitration Act, 1996 (UK). The Essar Oilfields case¹² before the England and Wales High Court discussed: (i) whether the arbitrator could have granted third-party costs under the heading of 'legal or other costs of parties' under Section 59(1)(c) of the Arbitration and Conciliation, 1996 (UK)?; (ii) whether Article 31(1) of ICC Rules includes costs for third party funding? The High Court decided both the issues in affirmative and held that the third-party funding cost under the category of 'other costs' was rightfully awarded by the arbitrator within his discretion upon being satisfied that funding was taken solely for the purpose of pursuing the proceeding and are reasonable in nature. It is relevant to highlight that the code of conduct for third party funding arrangements in UK is enforced by Association of Litigation Funders, which is a private organization, for its members. It also has a stringent complaint mechanism which can be triggered in cases of misconduct by members.

Third-party funding arrangements are generally lawful in civil code jurisdictions like France and Germany, but the precise terms of what is permissible vary quite sharply. Despite the international debate and views on the relevance and requirement of third-party funding arrangements, they are still unlawful in a number of jurisdictions like China, Ireland and Nigeria which consider such agreements invalid.

5. CONCLUSION

Looking at the topic coherently and from an Indian perspective, there are several shortcomings for third-party funding arrangements to be successful under the present regime in India. Lack of legislation/ regulations governing such funding, lack of factual data so as to enable the funders to carry risk assessment, inability of funders to share the risk with lawyers due to bar on lawyers from working on contingency fee basis, absence of market of domestic funders in India, absence of the concept of awarding exemplary damages to parties by courts/ tribunals are some of the factors which can discourage funders to fund litigation/ arbitration proceedings in India. Additionally, from a foreign exchange law perspective (i.e. in cases involving foreign funders), the asset class of litigation finance is unclear, owing to both the lack of regulatory regime as well as skepticism associated with businesses in identifying and engaging litigation finance firms.

To summarize, even though third-party funding arrangements are not specifically barred in India, the supporting factors which can make it a viable and plausible option, especially for the funders, are scanty. It is important to realise that the post-COVID-19 scenario provides an opportunity to unleash the potential of third-party funding by fostering access to justice without compromising liquidity. Having said that, the establishment of the Indian Association of Litigation Funders, a nascent professional body of stakeholders, which aims to be an association to create self-regulations and promote knowledge-development of litigation finance in India, is a step in the right direction and is likely to bring a positive impact in the development of such agreements in India in the coming years.

Footnotes

1. Philip Morris Products S.A. v. Oriental Republic of Uruguay, ICSID Case No. ARB/10/7 (2016).

2. [ Re Trepca Ltd. [1962] 3 All E.R. 351]

3. Ram Coomar Coondoo V. Chander Canto Mookerjee, (1876-77) 4 IA 23

4. Lawyers are prohibited to fund litigations or charge contingency fee under the Bar Council of India rules and the Advocates Act, 1961.

5. G Senior Advocate, AIR 1954 SC 557; Bar Council of India V. A.K. Balaji, (2018) 5 SCC 379

6. Suganchand v. Balchand, 1956 SCC OnLine Raj 127

7. Disclosures by arbitrators about their competence and independence under Section 12 of Arbitration and Conciliation Act, 1996.

8. Civil Law Act (1999) (amended 2017) (Sing.); Civil Law (Third-Party Funding) Regulations (2017) (Sing.).

9. https://sso.agc.gov.sg/SL-Supp/S68-2017/Published/20170224?DocDate=20170224

10. https://www.siarb.org.sg/images/SIArb-TPF-Guidelines-2017_final18-May-2017.pdf

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

12. ([2016] EWHC 2361 (Comm))

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