Is Third Party Funding a Workable Option for Indian Litigants?

I.                Third Party Funding, The Concept

Third Party Funding (“TPF”), also called Litigation Financing, is a practice wherein a financially competent party/funder agrees to monetarily support a party engaged in Litigation in exchange for a share in the monetary award/outcome of the litigation, if the funded party manages to obtain a favourable judgement. The funder is called the “third party funder”. Financial Institutions, inter alia, bank, hedge fund, insurance company, or some other entity or individual can act as these funders.[1] TPF, on a macro level enables access to justice for litigants who may otherwise might not be able to pursue their own legal causes, owing to financial inability and unviability. It also encourages the pursuance of Alternative Dispute Resolution (“ADR”) methods like arbitration and/or mediation, etc.[2] TPF allows for covering a wide range of expenses that are usually borne by the litigant, for e.g., lawyer’s fee, fee of the court/tribunal, fee for calling of expert witnesses, costs imposed in adverse orders, etc. This, however, in no way means that all costs are necessarily borne by the funders.

There also exists the concept of the party being funded by its advocate in return for an interest in the amount/relief granted by the court. However, as far as India is concerned, this is a contested issue as it goes against the prescribed professional ethics of advocates. This can be inferred from the judgement of the Indian Supreme Court (“SC”) in the case of Bar Council of India v. A.K. Balaji & Ors.[3], wherein it was observed that there seems to be “no restriction on third parties (non-lawyers) funding the litigation and getting repaid after the outcome of the litigation”. The SC “strongly suggested” that “advocates in India cannot fund litigation on behalf of their clients”. This special emphasis of the SC on ‘non-lawyer’ and the afore-cited obiter is the case in point behind the author’s inference.

II.             Status of TPF in India

The recognition of TPF in India can be traced as far back to 1876, when in the case of Ram Coomar Coondoo v. Chunder Canto Mookerjee[4] the Privy Council acknowledged that though champertous agreements were considered invalid in England due to their conflict with the country’s public policy (a principle which has now been reversed in the United Kingdom), the prohibition does not apply in its entirety in India. The Applications of champertous agreements would be applicable only to transactions that are deemed to be “inequitable, extortionate and unconscionable and not made with the bona fide objects of assisting a claim”. The instant case laid down such exceptions as would make such agreements illegal in India, these were “improper objects, gambling in litigation, or of injuring or oppressing others by abetting and encouraging unrighteous suits”.[5]

As mentioned above, the case of A.K. Balaji (supra), quite lucidly explains the status of Indian Law on the concept of TPF, being that TPF is recognised and primarily not illegal in India, despite a lack of central statutory recognition. However, the SC, being aware and pre-emptive of the malpractices that can be involved in TPF has also held that, “agreements of this kind ought to be carefully watched, and when found to be extortionate and unconscionable, so as to be inequitable against the party; or to be made, not with the bona fide object of assisting a claim believed to be just, and of obtaining a reasonable recompense therefore, but for improper objects, as for the purpose of gambling in litigation, or of injuring or oppressing others by abetting and encouraging unrighteous suits, so as to be contrary to public policy, effect ought not to be given to them.”[6]

Some states in India, which have in fact given TPF a statutory recognition are, inter alia¸ Gujarat, Madhya Pradesh and Uttar Pradesh by amending Order 25 Rule 1 of the Code of Civil Procedure, 1908.[7] An example of a Corporate Entity engaging a third party funder is Hindustan Construction Company entering into an Agreement with the consortium of investors led by BlackRock to monetise an identified pool of arbitrational awards and claims for a consideration of Rs 1,750 Crore for which a Special Purpose Vehicle had been created.[8]

III.           TPF in other Jurisdictions: Doctrines of Maintenance and Champerty

Owing to the common law doctrines of champerty and maintenance, third parties were prohibited from funding unconnected parties’ litigation in return for a share in the amount/relief granted by the court. Maintenance refers to an unconnected third-party assisting to maintain litigation by providing, for example, financial assistance, while bearing no interest in the outcome of the case. Champerty is a form of maintenance, where a third party pays some or all of the litigation costs in return for a share of the proceeds.[9] These doctrines find their roots in the Roman and Greek laws.[10] In England, the law has since evolved to decriminalise and recognise champerty and maintenance as legal.[11][12] Most states in the USA also allow TPF and broadly, it can be said that US law allows for attorneys to work on the basis of a contingent fee (on percentage basis) for cases especially those involving personal injuries.[13] Other countries such as Australia, Singapore and territories like Hong Kong have also begun recognising TPF.[14] In Hong Kong, the HKIAC Administered Arbitration Rules, 2018 define TPF. It provides for an agreement for financial support between a funded party and a third-party funder, wherein the financial benefit to the funder is contingent upon the successful outcome of the arbitration, in accordance with the terms set forth in the funding agreement.[15] The Supreme Court of Hong Kong, in the case of Cannonway Consultants Ltd. v. Kenworth Engineering Ltd. also nullified the doctrine of champerty in arbitration proceedings.[16] Singapore was the first country in Asia to legalize and recognise TPF for arbitrations by passing the Civil Law (Amendment) Act, 2017, and the Civil Law (Third-Party Funding) Regulations, 2017 which abolished the tort of champerty and maintenance as far as international arbitration is concerned, including enforcement proceedings in Singapore Court.[17]

IV.           Prospects presented by TPF

TPF is undoubtedly a necessary associate to the growth of commercial litigation since it enables the parties who cannot afford or find it difficult to sustain protracted litigation, arbitration or mediation, etc. It is an enabling method for parties representing against those with greater influence through resources thereby levelling the playing field. Objective analysis of the dispute by the funder can bolster the assessment of winnable claims. It would also desist deep-pocketed parties from defeating the dispute resolution system by burying the smaller party in paper.[18]

TPF also promises, after careful consideration and analysis, high comparative return on investment for the third-party funders. It also proposes a distinct and profitable investment category for those engaged in financing others for litigation.[19]

Furthermore, given the popularity and presence of TPF mechanisms in the International Arbitration landscape, TPF can enable India to truly become a hub, as envisioned, of Arbitration it recognised through a Central statute. Such a statue and framework therein would assist in attracting investment, domestic and foreign, thereby stimulating economic growth of the country.

Upcoming TPF-assisting platforms like LegalPay in India, also present a valuable prospect. Such platforms offer innovative ways for structuring and enabling TPFs. Examples include the Debt Defense & Quicksettle options that LegalPay offers. Through Debt Defense, the company essentially designs financing solutions for Defendants facing large settlement amounts to help them manage payments without hindering their growth. Quicksettle is another option designed to help individuals defend themselves against aggressive debt collection practices by providing tools and support to negotiate settlements, avoid harassment, and manage legal notices, empowering the funded parties to regain control of their finances.[20] Various other platforms offer a variety of facilities to litigants like debt counselling and comprehensive legal advisory services for micro, small and medium enterprises, and individuals, brokering between funders and litigants, etc. At the time of writing this article, it has been found that a majority of the TPF-based platforms are focusing on arbitration and insolvency cases.[21] Provisions of the Arbitration & Conciliation Act, 1996 (“Arbitration Act”) like fast-track arbitration, strict adherence to timelines and faster passing of award has been the reason behind funders being attracted towards arbitration matters.[22]

V.              Concerns around TPF

The concerns revolving around TPF in India need a careful consideration too. Questions often arise on transparency of the funding arrangements, balance of confidentiality v. disclosure, features of an exploitative TPF agreement; payment of adverse costs and conflict of interest in case a funder is connected to both the parties in a dispute in one way or another. Moreover, there are even graver financial considerations which need to be carefully heeded to. A few of those being; treatment of reparation funds, tax questions, and treatment of income from funding arrangements.

Owing to the absence of a comprehensive legislation on TPF in India, the above cited questions remain unanswered and pose as murky waters for parties who do not undertake the accounting and assessment of these considerations beforehand. The TPF market in India functions largely on self-regulated practices in the absence of, as aforementioned, any statutory guidelines or comprehensive legislation on the subject. It is especially seen as a concern in cases of Arbitration, where the funder can use his leverage of withdrawing financial support to dilute the litigant’s autonomy, breach confidentiality of the proceedings[23] and discourage or influence the settlement of the dispute in the name of financial unviability.

VI. Standard Requirements of a Funding Arrangement[24]

1. Duties of the Party: To carry out all necessary acts with reasonable care and skill; to continue diligently with the advice of the lawyers; to cooperate with the funder; to request consent of the funder where it’s required to incur costs, dispose of claims, discontinue the proceedings, enforce the judgment; to report all material events to the funder, etc.

2. Duties of the Funder: To review the case; to cover the agreed costs; etc. In some jurisdictions, funders may also have the duty to liaise with the lawyers.

3. Distribution of proceeds following successful claim: Includes the waterfall of distribution of a successful claim, the definition of proceeds, set-off rights etc. While the stake of the funder is a matter of commercial negotiation, several funds indicate the range of their stake upfront, subject to the risk assessed for each case.

4. Representations by the Party: Fundamental conditions including the rights of assignment, presence of counterclaims, validity of documents provided, etc.

5. Representations by the Funder: Funder’s capital adequacy, lack of any relationship with the counter-party, independence regarding the merits, no interest in the merits of the dispute, etc.

6. Assignment of Claims to Funder as security: The details of assignment of rights to claim costs and all subsidiary rights to the funder. In some agreements, funders may seek the right to on-sell.

7. Termination: The events and circumstances upon which the Agreement can be terminated and its consequences.

8. Settlement proposals by court or opponent: Stipulations as to the plan of action in the case of a settlement proposal, its acceptance, termination, continuance of proceedings etc.

9. Confidentiality and Disclosure: Explains the confidential nature of the agreement, for example: the existence of the funding and the identity of the funder, the background of the claim; the procedural status of the claim; the planned strategies and the tactics, the expected recovery, billing arrangements, litigation risk, etc. Agreed process for disclosures where required under law or by regulator.

10. Data transfer by Funder to third parties: The circumstances when transfer of data by the funder to any other third party (example, witness, expert, insurance companies, etc.) would be permissible.

---

[1] Sahani, Victoria, Third-Party Funding in Dispute Settlement in Africa, Proceedings of the Annual Meeting (American Society of International Law), Vol. 110 (2016), p. 90, (https://www.jstor.org/stable/26420162).

[2]Third-Party Funding in India, , p. 4, (https://www.cyrilshroff.com/wp-content/uploads/2019/06/Third-Party-Funding-in-India.pdf).

[3] Bar Council of India v. A.K. Balaji & Ors., (2018) 5 SCC 379.

[4] Ram Coomar Coondoo v. Chunder Canto Mookerjee , 1876 SCC Online PC 19.

[5] Id at 5.

[6] Id  at 4.

[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-funding-in-international-arbitration-devising-a-legal-framework-for-india/).

[8] Rachita Prasad, HCC in Pact with BlackRock to Raise Rs 1750 crores via Monetisation of Claims, Economic Times, (https://economictimes.indiatimes.com/markets/stocks/news/hcc-to-sell-litigation-claims-to-blackrock-led-investors/articleshow/68579183.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst).

[9] Maintenance and champerty, Norton Rose Fulbright, (https://www.nortonrosefulbright.com/en-in/knowledge/publications/bf0fd6fe/maintenance-and-champerty).

[10] 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-funding-in-international-arbitration-devising-a-legal-framework-for-india/).

[11] 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).

[12] British Cash and Parcel Conveyors v. Lamson Store Service Co, [1908] 1 K.B. 1006

[13] 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).

[14] 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-funding-in-international-arbitration-devising-a-legal-framework-for-india/).

[15] 98G, Arbitration Ordinance, Hong Kong

[16] Cannonway Consultants Limited v. Kenworth Engineering Limited, HCCT 5/1994, 25 November 1994

[17] Civil Law (Amendment) Act, 2017 (Singapore); Civil Law (Third-Party Funding) Regulations, 2017 (Singapore).

[18] Third Party Funding in India, (https://www.cyrilshroff.com/wp-content/uploads/2019/06/Third-Party-Funding-in-India.pdf).

[19] Id at 15.

[20] Litigation Financing Deep-dive: In conversation with LegalPay founder Kundan Shahi, (https://www.barandbench.com/news/litigation-financing-deep-dive-in-conversation-with-legalpay-founder-kundan-shahi)

[21] Maulika Vyas, Economic Times, Litigation Funding Startups Eyeing Arbitration and Insolvency Resolution cases. (https://economictimes.indiatimes.com/tech/startups/litigation-funding-startups-eyeing-arbitration-and-insolvency-resolution-cases/articleshow/111908630.cms?from=mdr)

[22] Sakshi Srivastava, Third Party Funding In Arbitration In India, The American Review of Intl. Arb., (https://aria.law.columbia.edu/third-party-funding-in-arbitration-in-india/)

[23] Section 43A of The Arbitration and Conciliation (Amendment) Act obliges the parties and the Tribunal to maintain confidentiality of all arbitration proceedings.

[24] Id at 15.