Litigation financing/ funding or third-party funding of disputes is an arrangement between a third party and a party to a litigation, where the former agrees to fund legal expenses in relation to the dispute, including legal counsel’s fees, court fee, and other costs, in exchange for a share in the claim proceeds if it succeeds in the dispute. It is basically infusion of capital for furthering resolution of disputes, in litigation, arbitration and/or mediation.
Many a times, owing to the obvious hurdles that litigants face, meritorious claims get delayed or do not reach the courts due to the high costs of litigation. In such circumstances, third-party funding is advantageous for parties as it frees the value of a legal claim much prior to its recovery from the courts. This practice comes into picture especially where the plaintiff is not able to incur any expenses on the proposed litigation or where he is not willing to incur such expenses Moreover, with the aid of these third-party funders, parties in different disputes are able to seek better options, as they can then solicit better lawyers and firms to build their case. It is pertinent to note that a judgement which is in favour of the plaintiff would result into gain for the funder, while an unfavourable judgement leaves the funder out-of-pocket without any return.
LITIGATION FINANCING: INDIAN PERSPECTIVE
Although there is no piece of legislation that oversees or regulates litigation financing for litigations and/or arbitrations in India, this concept has recently garnered much attention within the Indian legal field. However, before delving into the recent developments, it is pertinent to understand the position of law in relation to litigation financing.
The Code of Civil Procedure, 1908 (CPC) does not expressly prohibit litigation financing in India. Under Order XXV, Rule 3 of the CPC, the concept of litigation financing has been allowed in few states such as Maharashtra, Gujarat, Karnataka and Madhya Pradesh, through their respective state amendments. It expressly acknowledges the role of the funder and sets out the situations when such funder may be made a party to the proceedings.
The concept of litigation financing is not entirely new and can be traced back to the common law doctrines of champerty and maintenance. Maintenance refers to funding of disputes by an unconnected third party, whereas champerty refers to financing of disputes by third parties in exchange for a share in the profits. As early as 1876, the Privy Council in the case of Ram Coomar Coondoo v. Chaunder Canto Mukherjee, observed that champertous agreements would only contravene public policy of India if they were inherently inequitable, unconscionable, and not made with malafide objects of supporting a claim. However, in Lala Ram Swarup v. Court of Wards, the Privy Council held that an agreement to finance a dispute in consideration of receiving a share in the property, would not per se be illegal and opposed to public policy, and that regard must be given to not just the value of the property claimed but to the commercial value of the claim.
In this context, the last few decades have witnessed the Indian Courts deviating from the common law decisions, as for instance, the Hon’ble Supreme Court of India in the case of Re: Mr ‘G’ A Senior Advocate v. Unknown heldthat the strict rules of maintenance and champerty as enshrined in common law are not applicable in India and agreements of champertous nature will not per se be violative of public policy as long as advocates are not part of such transactions. Nevertheless, in following years, some courts have held that while champertous agreements are legal under the Indian laws, the same could become unenforceable under certain conditions and that they could be violative of public policy if on the face of the agreement, the object of the agreement was unlawful.
Among these decisions wherein the enforceability of litigation financing could only be inferred in between the lines of the decisions, the Hon’ble Supreme Court’s decision in Bar Council of India v. A.K. Balaji marked a paradigm shift, as it expressly clarified the legal permissibility of litigation financing and observed that “There appears to be no restriction on third parties (non-lawyers) funding the litigation and getting repaid after the outcome of the litigation.”
It is crucial to note that advocates cannot seek contingency fees or even share the results of litigation and are therefore, prohibited from financing the litigation costs of a party as per Rule 20 of Section 2 of the Bar Council of India Rules (Standard of Professional Conduct and Etiquette). Further, the Arbitration and Conciliation Act, 1996 makes no mention of third-party funding, hence any possible third-party funding agreement would largely depend on it being a valid contract under the Indian Contract Act, 1872. However, a favourable reference to litigation financing has been given by the ‘High Level Committee to review the Institutionalisation of Arbitration Mechanism in India’ in its report.
LITIGATION FINANCING: INTERNATIONAL PERSPECTIVE
With the passage of time, litigation financing has ceased to be considered as a crime and has been an acceptable practice in many jurisdictions around the world. For instance, England and Wales abolished the classification of champerty and maintenance as crimes under the Criminal Law (Amendment) Act, 1967. Similarly, the Code of Conduct for Litigation Funder was published by the Civil Justice Council – an agency of the UK’s Ministry of Justice – in November 2011, and the Association of Litigation Funders were charged with administering self-regulation of the industry. Additionally, in a landmark decision of Essar Oilfields Services Ltd. v. Norscot Rig Management, the England and Wales High Court 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. Similarly, in the case of UK Trucks Claim Limited v. Fiat Chrysler Automobiles NV and Road Haulage Association Limited v. Man SE, the Competition Appeal Tribunal described third-party litigation funding as a well-recognised feature of modern litigation which facilitates access to justice for those who otherwise may be unable to afford it.
Notably, in 2017, the Paris Bar Council also indicated its support for litigation financing by passing a resolution stating that the same is not prohibited by French Laws. The resolution confirmed that litigation financing is in the interests of both clients and counsel, particularly in the context of international arbitration.
Even Singapore, in March, 2017, promulgated the Civil Law (Amendment) Act, 2017 along with the Civil Law (Third Party Funding) Regulations, 2017 which confirmed that the use of third-party funding in litigation and arbitration was not contrary to public policy or illegal, if used by eligible parties and in the categories so reserved for its use. Similarly, Hong Kong amended its legislation and enabled the third-party funding in arbitration and mediation.
Among these various jurisdictions, Australia has been the home to a proper litigation funding practices, wherein, litigation financing has been actively used in insolvency claims and even civil and commercial disputes. The first instance wherein an Australian Court validated litigation financing was Campbells Cash and Carry Pty Ltd v. Fostif Pty Limited, wherein the High Court of Australia held that litigation funding of a class action was not an abuse of process or against public policy. The said trailblazing case opened new doors for the Australian legal system. The Australian Securities and Investments Commission Act, 2001, has laid down that as providers of financial services and credit facilities under the said Act, funders are prohibited from stipulating unfair contract terms, and performing misleading, deceptive and unconscionable conduct. The provisions of the said Act inter alia, also provide avenues for redress against unfair or false and misleading terms in the funding agreements.
WAY FORWARD
It is incontrovertible that in a fast-pacing world like todays, where there is liberalisation of economic policies and countries openly invite foreign investments, a progressive legal framework that would augment dispute resolution is crucial. The process of traditional litigation is expensive and time consuming, and resultantly many a times, parties forego the route of legal redressal. Litigation funding in such a case acts as the perfect alternative by aiding disputing parties in seeking a proper legal recourse and access justice. Although currently, there does not exist any formal regulation for this practice, the recent interest in the same is certainly promising.
Moreover, while the concerns of the Courts predicate upon the shared belief that these fundings could subvert the legal process by promoting vexatious claims, suborning witnesses, or debilitating the integrity of public justice. One should also bear in mind that third party funders invest a lot of time and resources in studying the cases they choose to fund, and only invest in ones with high chances of success. Moreover, litigation financing facilitates not only access to justice but could also play a role in cases of insolvency and is therefore needed today more than ever. Where the country, just like the rest of the world is battling with the outbreak of Covid-19 pandemic, cash flow for many businesses is not adequate, thereby rendering pursuing legal remedies onerous. Pursuing litigation has always been arduous for parties and one cannot deny that with litigation financing, the road to recovery from the aftermath of the pandemic will undoubtedly be easier, if not smoother.
Resultantly, a proper and precise legal framework regulating these fundings is required to make proper use of its potential. Due to the negligible laws regulating litigation financing, there is a blank canvas available to the legislator and this canvas can be painted by colours of any choice. A proper regulation that stipulates the requisites a third party funder has to meet before entering into the agreement, such as ensuring that it has adequate financial resources to fund the disputes, paying the debts when they become due and payable, a provision that lays down the procedure to be followed in case a conflict ensues between the funder and the client, etc., are some provisions that would certainly help in laying the foundation for litigation financing without damaging the sanctity of civil justice system in India.