At this juncture, it is undeniably true that the novel coronavirus has caused the populace to collectively rethink the fundamental manner in which businesses conduct themselves, and the sustainability of the same in not only the current times, but in the future. A systemic change is being wrought about at the helm, with businesses being forced to find creative ways to reduce costs so as to enable them to stay afloat. Necessity indeed is the mother of all invention, and in an extended metaphor, innovation too. One such innovation is third party litigation funding, or as is more popularly known, simply Third Party Funding (“TPF“). While TPF is already widely utilised in jurisdictions such as the United States, the United Kingdom and Australia, its reach in India has been limited, with very few dedicated outfits and firms dealing with TPF.
TPF is where a third party offers funding for litigation or arbitration or any such proceedings (“Dispute“), on a non-recourse basis to a litigating party in exchange for a share in the damages awarded (if successful) or settlement reached. As may be apparent, owing to the nature of the funding, the financier is always at a risk of losing the entirety of the investment if the outcome of the Dispute does not favour the litigating party. Therefore, since the financier’s return is tied to the success of the case, financiers look to fund cases with relatively high prospects of success.
Legality of TPF in India
TPF has not been barred by any statute in India but there is no legislation which addresses the same comprehensively. That said, it is pertinent to note that TPF has been recognised in the context of civil suits in Allahabad, Andhra Pradesh, Bombay, Madras and Madhya Pradesh, Orissa by way of an amendment to Order XXV of the Code of Civil Procedure 1908. The amendment explicitly acknowledges the role of the financier in the case it is bearing the claimant’s costs, and it provides for the impleadment of the party to such suit.
The reluctance in fully embracing TPF can be traced back to the common law principles of ‘champerty’ and ‘maintenance’, as well as the related bar of public policy. ‘Maintenance’ is when an unconnected third party supports and ‘maintains’ the Dispute, for instance, through financial assistance, and ‘champerty’ is when a third party finances a Dispute in exchange for a share of the profits. However, the torts of champerty and maintenance have not been imposed strictly by Indian courts, indeed their applicability to India has been denied on occasion, and judgments in regard to any such third party arrangements have focussed on whether the arrangement itself was inherently inequitable in some manner.
Judicial precedents in this regard harken back to 1876, when the Privy Council, in the case of Ram Coomar Coondoo vs. Chunder Canto Mukherjeei revealed the tenuous link between the torts of champerty and maintenance and their impact on public policy. It held that:
“a fair agreement to supply funds to carry on a suit in consideration of having a share in the property, if recovered, ought not be regarded as, per se, opposed to public policy…But agreements purporting to be made to meet such cases, when found to be extortionate and unconscionable so as to be inequitable; or to be entered into for improper objects…are contrary to public policy and ought not to have effect given to them.”ii
The above was upheld in the judgment rendered in the judgment rendered in the case of Kunwar Ram Lal vs. Nil Kanthiii.Furthermore, in the case of Lala Ram Sarup vs. Court of Wards and Ors.iv, the Privy Council made mention of the dicey nature of ‘agreements of finance’ but ultimately held forth as follows:
“Champertous agreements are in their essence speculative and the fairness of a particular bargain is almost always open to some debate…and where [the concerned parties] have viewed the probabilities in a manner which has not operated unfairly, it is more reasonable to regard this as confirming their shrewd estimate of chances than to condemn the agreement outright as unfair, by reason only of the possibility that a great gain to the claimant would have to be shared with the financier…the uncertainties of litigation are proverbial; and if the financier must need risk losing his money he may well be allowed some chance of exceptional advantage.”v
More recently, the Supreme Court in the case of Bar Council of India vs. A.K. Balaji and Ors.vi, acknowledged that “there appears to be no restriction on third parties funding the litigation and getting repaid after the outcome of the litigation.”vii
While stating the above, the Apex Court made sure to reinforce the established fact that funding of litigation by advocates on behalf of their clients would be unethical and would fall foul of the code of conduct that each lawyer in India must adhere to. In Re: Mr. ‘G’, A Senior Advocate of the Supreme Courtviii, the Supreme Court unequivocally held that a profit-sharing arrangement between an advocate and his client would amount to professional misconduct.
The above instances lay credence to the gradual evolution and even slower acceptance of TPF arrangements in India, wherein other jurisdictions are witness to these agreements on an every-day basis. It becomes crucial to note however that litigation in India can be an arduous and long drawn process and might work as a discouraging factor for TPF transactions due to the risks involved. On the flip side, a strong case can be made for making TPF arrangements the mainstay of arbitrations, which are much more streamlined and operate under strict, statutorily mandated timelines.
i [1876 PC 19]
ii Paragraphs 43 and 44, ibid
iii (1893) L.R. 20 I.A. 112,
iv AIR 1940 PC 19
v Paragraph 10, ibid
vi AIR 2018 SC 1832
vii Paragraph 35, ibid
viii AIR 1954 SC 557