What is third-party litigation funding
Third-party funding is “an arrangement in which a party involved in a litigation” which could include an arbitration proceeding “seeks funding from an outside entity for its legal representation instead of financing its own legal representation”.[1] The outside entity is called a ‘‘third-party funder’’ and finances the party’s legal representation in return for a profit.[2] The third-party funder could be a bank, hedge fund, insurance company, or some other entity or individual.[3] Third-party funding (TPF) is also known as litigation financing. This type of financing “adjudges the value of legal claims even before they can be adjudicated upon and recovered before a court or tribunal”.[4] This helps parties understand the merits or demerits of their claim in order to enable them to take a judicious decision on whether or not to pursue the litigation. At a macro level, TPF helps to facilitate access to justice and also encourages out of court settlement of disputes based on the merits of a claim.[5]
The litigation-financing contract/TPF may be structured in a variety of different ways depending on the specific litigation.[6] It would include standard clauses that take care of the interests of both the financer and the party who is being financed and it would also include clauses covering confidentiality and non-disclosure.[7] TPF can cover legal counsel’s fee, the court or tribunal’s fee, cost of expert witnesses, pre-deposit, adverse costs order, and other dispute-related expenses including venue costs.[8] The disputes that this type of financing can cover includes a wide range of commercial disputes such as commercial suits, international or domestic commercial arbitrations, “class action suits, tortious claims like medical malpractice and personal injury claims, anti-trust proceedings, insolvency proceedings, and other like claims that have a calculated chance of resulting in a substantial monetary award.”[9]
In recent years, TPF has gained impetus in countries such as Australia, Germany, United Kingdom, Singapore, and Hong Kong.[10] The rapid evolution of TPF in foreign jurisdictions is 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”.[11]
Supporters of TPF have stated that TPF would introduce a level playing field between the parties to a dispute, while opponents favour banning or heavily regulating TPF.[12]
The law in common law jurisdictions
Historically, the common law doctrines of champerty and maintenance were an impediment to the growth of TPF. These doctrines which developed in the fifteenth century originated from Greek and Roman civilisations.[13] Broadly speaking, maintenance is an “overarching doctrine that encompasses providing financial assistance to a third-party/stranger while bearing no interest in the outcome of the case” while “champerty refers to providing similar assistance with the expectancy of receiving a share from the award and thus, bearing interest in the outcome of the case”.[14] In England, the attitude towards champerty and maintenance has undergone a change and since 1967 neither of them were considered criminal wrongs or tortious wrongs.[15] In 2011, the Civil Justice Council (Agency of the United Kingdom’s Ministry of Justice) published the Code of Conduct for Litigation Funders which was administered by the Association of Litigation Funders.[16] Most States in USA also allow TPF and US law generally allows attorneys to use a contingent fee (percentage basis) for certain cases like personal injuries.[17] Other common law countries such as Australia, Singapore and territories such as Hong Kong, have also diluted the applicability of these doctrines to pave the way for TPF. The High Court of Australia recognised the legitimacy of TPF in 2006.[18] Singapore enacted the Civil Law (Amendment Act) in 2017, permitting TPF for international arbitration and related proceedings.[19] Similarly, Hong Kong approved TPF for arbitration in the same year by adopting the Arbitration and Mediation Legislation (Third Party Funding)(Amendment) Bill, 2016.[20] Both Singapore and Hong Kong confined these amendments only to arbitration.
The law as it stands in India
India does not have any law regulating TPF. However, Indian law does not prohibit TPF. Perhaps one of the earliest decisions on this issue was of the Privy Council in Ram Coomar Coondoo v. Chunder Canto Mookerjee[21]in which the Judicial Committee held that“English common law and the statutes as to maintenance and champerty are not applicable and are considered as having no force in India”.[22] However, the Privy Council stated that such agreements, if found extortionate and unconscionable and not made with the bona fide object of assisting a claim would be opposed to public policy.[23]
The view of the Privy Council subsequently echoed by a five-Judge Bench of the Supreme Court of India in “G”, A Senior Advocate, In re[24], however, the observation did not constitute the ratio decidendi of the case. In a recent judgment delivered in 2017, the Supreme Court in Bar Council of India v. A.K. Balaji25observed that there “appears to be no restriction on third parties (non-lawyers) funding the litigation and getting repaid after the outcome of the litigation”. But the Court “strongly suggested” that “advocates in India cannot fund litigation on behalf of their clients”. This observation is also obiter dictum. However, both Supreme Court decisions have not referred to the aforementioned judgment of the Privy Council26. Nevertheless, a reading of the Supreme Court decisions would show that the Court has recognised TPF agreements provided the third party is not an advocate participating/appearing in the litigation on behalf of one of the parties. But these agreements have to pass the muster of the principles set out in the Contract Act, 187227 and “each agreement must be examined independently to ensure that it does not in fact intend to violate public policy and public morals”.28
Apart from the judgments of the Supreme Court, some States in India that include Gujarat, Madhya Pradesh and Uttar Pradesh had already given statutory recognition to TPF by amending Order 25 Rule 1 of the Code of Civil Procedure, 190829 (CPC).30 In Maharashtra, the Bombay High Court amended Order 25 Rule 1 in 1983 to specifically provide the courts with the power to secure costs for litigation by asking the financer to become a party to the suit and deposit the cost in the Court.31
Other than these minor amendments, there has not been any impetus to regulate TPF. This is probably because TPF as a concept is yet to gain recognition and popularity due to lack of awareness. Some strides have however been made in corporate India with companies such as Hindustan Construction Company entering into an agreement with a consortium of investors led by BlackRock to monetise an identified pool of arbitrational awards and claims for a consideration of Rs 1750 crores for which purpose a special purpose vehicle (SPV) had been created.32 Similar arrangements had also been made by companies such as Patel Engineering and Era Infra Engineering.33
There have been suggestions from various quarters to regularise and even legislate TPF in India. In fact, a 2017 report on institutional arbitration in India even recognised existing TPF frameworks provided by arbitration-friendly jurisdictions.34 However, merely introducing a legislation in India to govern TPF would be missing the woods for the trees. This is because of the systemic problems that are prevalent in the justice-delivery system, the most important being delay and unpredictability of the judicial system while deciding a matter. Though efforts have been made to streamline commercial litigation by legislating the Commercial Courts Act, 201535 and by the amending the Arbitration and Conciliation Act, 199636 in 201537 and 201938, the problem of docket explosion that results in an inevitable delay in deciding all disputes including commercial disputes at various stages has not been effectively addressed. For instance, after the introduction of the Commercial Courts Act in 2015, the number of commercial disputes increased by 123% from 2015 to 2017.39 A perusal of the National Judicial Data Grid would also show that as on date there are 1,08,27,889 civil cases pending at the district and taluka level out of which 68.45% are civil suits.40 Therefore, an investor who would want to fund a dispute, for either the plaintiff/claimant or the defendant/respondent, would while conducting a due diligence on the merits and demerits of the matter would be unable to factor the time period by which a litigation would conclude. This, it is submitted would be the biggest impediment to accelerating the growth of TPF in India.
While TPF would be a novel and innovative way in streamlining commercial dispute resolution in India, delay and unpredictability of the justice-delivery system at various stages of litigation would be the biggest hindrance to its development.
*Advocate practising at the Bombay High Court and NCLT, Mumbai. Author can be contacted on Twitter@DormaanD.
[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]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>.
[3]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>.
[4] Das Gupta, Anshuman, Third-Party Litigation Financing: Asset or Liability, Vol. 4, Issue 1 (2021), p. 1764, <https://www.ijlmh.com/wp-content/uploads/Third-Party-Litigation-Financing-Asset-or-Liability.pdf>.
[5] Third-Party Funding in India, <https://www.cyrilshroff.com/wp-content/uploads/2019/06/Third-Party-Funding-in-India.pdf>, p. 4.
[6] Samra, Emily, The Business of Defence: Defence-Side Litigation Financing, The University of Chicago Law Review, Vol. 83, No. 4 (2016), 2302,<http://www.jstor.org/stable/44090016>.
[7]Third-Party Funding in India, <https://www.cyrilshroff.com/wp-content/uploads/2019/06/Third-Party-Funding-in-India.pdf>, p.5.
[8]Third Party Funding in India, <https://www.cyrilshroff.com/wp-content/uploads/2019/06/Third-Party-Funding-in-India.pdf>, p. 2.
[9]Third Party Funding in India, <https://www.cyrilshroff.com/wp-content/uploads/2019/06/Third-Party-Funding-in-India.pdf>, p. 2.
[10]Sumeet Lall, Sidhant Kapoor and Ananya Pratap Singh, Third party funding: India’s time is now, Bar and Bench, <https://www.barandbench.com/columns/third-party-funding-indias-time-is-now>.
[11]Mayank Mishra, Mohit Chadha, Vaishnavi Rao and Swati Mittal, India: Third-Party Funding – Is India Ready?, <https://www.mondaq.com/india/civil-law/1093690/third-party-funding-is-india-ready>.
[12]Kalajdzic, Jasminka, Peter Cashman, and Alana Longmoore, Justice for Profit: A Comparative Analysis of Australian, Canadian and US Third-Party Litigation Funding, The American Journal of Comparative Law, Vol. 61, No. 1 (2013), p. 94,<http://www.jstor.org/stable/41721716>.
[13]Pinheiro, Kaira and Chitalia, Dishay, Third-Party Funding in International Arbitration: Devising a Legal Framework for India, Vol. 14 NUJS L. Rev. 2 (2021),
[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]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>.
[16]Pinheiro, Kaira and Chitalia, Dishay, Third-Party Funding in International Arbitration: Devising a Legal Framework for India, Vol. 14 NUJS L. Rev. 2 (2021),
[17]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>.
[18]Pinheiro, Kaira and Chitalia, Dishay, Third-Party Funding in International Arbitration: Devising a Legal Framework for India, Vol. 14 NUJS L. Rev. 2 (2021),
[19]Pinheiro, Kaira and Chitalia, Dishay, Third-Party Funding in International Arbitration: Devising a Legal Framework for India, Vol. 14 NUJS L. Rev. 2 (2021),
[20]Pinheiro, Kaira and Chitalia, Dishay, Third-Party Funding in International Arbitration: Devising a Legal Framework for India, Vol. 14 NUJS L. Rev. 2 (2021),
[22]Ram Coomar Coondoo v. Chunder Cando Mookerjee, 1876 SCC OnLine PC 19.
[23]Ram Coomar Coondoo v. Chunder Cando Mookerjee, 1876 SCC OnLine PC 19.
[24]AIR 1954 SC 557, 559, para 11.
25(2018) 5 SCC 379, 411-412, para 38.
26Ram Coomar Coondoo v. Chunder Cando Mookerjee, 1876 SCC OnLine PC 19.
28Mayank Mishra, Mohit Chadha, Vaishnavi Rao and Swati Mittal, India: Third-Party Funding – Is India Ready?, <https://www.mondaq.com/india/civil-law/1093690/third-party-funding-is-india-ready>.
29Civil Procedure Code, 1908, Or. 25 R. 1.
30Pinheiro, 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/>.
31Bombay High Court Notification, No. P. 0102/77 dated 5-9-1983, Amendment (1).
32 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>.
33 Amritha Pillay, Infrastructure Companies Eye Litigation Funding to Settle Claims, Business Standard, <https://www.business-standard.com/article/companies/infrastructure-companies-eye-litigation-funding-to-settle-claims-119021800035_1.html>.
34Justice B.N. Srikrishna, Report of the High-Level Committee to Review the Institutionalization of Arbitration Mechanism in India, p. 43,
35Commercial Courts Act, 2015.
36Arbitration and Conciliation Act, 1996.
37Arbitration and Conciliation (Amendment) Act, 2015.
38Arbitration and Conciliation (Amendment) Act, 2019.
39Pradeep Thakur, Commercial Cases Pendency in Courts up by 123%, The Times of India, <https://timesofindia.indiatimes.com/india/number-of-pending-commercial-disputes-has-arisen-by-123-in-2017/articleshow/65168645.cms>.
40National Judicial Data Grid, <https://njdg.ecourts.gov.in/njdgnew/?p=main/pend_dashboard>.