Third party Litigation financing in India is Legal !

At the outset, let me clarify that contrary to popular belief, third-party litigation funding is not prohibited in India.

While lawyers in India are not allowed to fund a litigation when they are representing one of the parties to the case, a third-party (non-lawyer) is allowed to fund the litigation cost of a disputing party. If the party wins the case, the third-party funder is allowed to take a fee, which could be a percentage of the claim received by the party. The funders do not get anything if the party loses the case.

Litigation funding, though not prevalent in India, has always been allowed. In fact, Privy Council in 1876 in Ram Kumar Coondoo v. Chunder Canto Mookerjee, permitted third-party funding on the grounds of promoting access to justice. Later, the Supreme Court in 1954 too confirmed as an obiter that there is nothing morally wrong, nothing to shock the conscience, nothing against public policy and public morals in a transaction where a third-party (non-lawyer) has financed a litigation. Again, in 2018, the Supreme

Court in Bar Council of India v AK Balaji 3 confirmed the legality of third-party funding in litigation. Certain states have also amended the Order XXV of the Code of Civil  Procedure, 1908 to set out the situations in which a funder can be made a party to litigations.

While third-party funding is allowed in India, it comes with certain riders. A funding agreement between a party in dispute and a funder should not be found to be extortionate and unconscionable, so as to be inequitable against the party and should not be made for improper objects, e.g. for the purpose of gambling in litigation, or of injuring or oppressing others. 4

Third-party litigation funding is allowed and far more prevalent in developed countries like the US and UK, and has been picking up pace in other countries like HongKong and Singapore. In most developed countries, the third-party funding is used for disputes relating to commercial contracts, international commercial arbitration and class action suits. In modern times, the doctrines of Champerty and Maintenance under old English common law are no longer relevant in litigation / arbitration between sophisticated parties and there has been a general trend towards liberalizing and abolishing these doctrines.

There have been instances where Indian parties have obtained third-party funding to conduct litigations / arbitrations in offshore jurisdictions, however, there have not been many instances of such fundings being used for domestic litigations / arbitrations.

Benefits of third-party funding

Third-party funding can increase access to justice as the parties with no or low financial wherewithal can also pursue or defend their case. It also helps in sharing the financial risk of losing a litigation with the funder. Large corporates also see this as an effective tool of cost management as third-party funding does not affect the company’s balance sheet.

It is also seen in developed countries that litigation funder brings to the table vast experience of complex litigation and helps the client in realistic estimation of a claim and analyzing the risks and rewards of a dispute.

The funding comes with a cost, as when a party wins a case, a lion’s share of the claim amount may have to be paid to the funder. But, for a party which was not able to fight a case due to lack of money, recovering a portion of the claim is better than nothing.

Areas of concern and mitigation

One of the areas of concern is that third-party funding may increase the volume of frivolous claims in India. However, this concern is unfounded as the funders are unlikely to risk their own investment for unmeritorious claims.

Litigants have been reluctant to seek third-party funding, as they fear that they will lose control over the litigation, as the lawyers will act on the instruction of the funder because their fees shall be paid by the funder. Some analysts fear that the third-party funding may create conflict situations as the lawyer-client relationship can become ancillary to the financial rewards pursued by the funder.

Another area of concern is confidentiality and privilege. During a litigation, a party is likely to disclose various confidential information to its lawyer, which is protected by lawyer-client privilege, however, this may not be the case with a funder. However, it is understood from the practices followed in developed countries that usually the funder and the party enter into robust and lucid funding agreements which details out the level of funder’s involvement in the case, its confidentiality and avoidance of conflict obligations.

It is also seen that litigation funders from developed countries are eyeing the Indian market considering the increase in the number of international disputes involving Indian parties. However, such overseas funds shall have to devise structures that are permissible under the Foreign Exchange Management Act and are tax efficient. These overseas funders shall also have to be cautious before funding a party in dispute, as litigations in India can be long-drawn and enforcement of foreign arbitral award in India is still a challenge. These challenges make the return on funder’s investment uncertain.

Regulatory environment needs to evolve

Third-party funding is a global growth story and is likely to spread its wings in India. However, a key driver of growth of third-party funding in India will be the evolution of the regulatory environment around it. On the basis of interpretation of a handful of judgments allowing third-party funding, in the absence of any legislative statute, the likelihood of third-party funding gaining momentum may not be bright. There is a need for a law which codifies the contours of third-party funding for litigation and arbitration and puts adequate global best practice standards to take care of the concerns of all stakeholders. The law also needs to set minimum ethical and financial standards and regulate conflicts and disclosure of funding.

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