含羞草社区

Corporate counsel Sushant Mahajan explores the status of third-party litigation funding in India, drawing comparisons with developed jurisdictions where the practice is more accepted

Third-party funding (TPF) of litigation is where a non-party to a dispute finances the legal costs of a party in return for a share of the damages awarded, or the settlement. It has become a significant aspect of the legal landscape in various jurisdictions and gained substantial traction, providing litigants with access to justice, particularly in cases involving high legal costs. However, in India, TPF remains an emerging concept and its adoption has been slow, hindered by regulatory ambiguities and cultural resistance.

The concept

TPF involves a private commercial entity providing financial support to a party involved in litigation or arbitration in exchange for a portion of the resulting financial recovery from the case. This practice allows parties who might otherwise be unable to afford the costs of litigation and be dissuaded by it to pursue their claims. The concept is especially relevant in jurisdictions where legal costs can be sky high, or where litigants face significant financial risks.

TPF has its roots in the common law doctrines of maintenance and champerty, which were originally intended to prevent wealthy individuals from meddling in legal disputes in which they had no direct interest. Over time, as legal systems evolved, particularly in the UK and the US, these doctrines were relaxed, allowing TPF to emerge as a legitimate practice.

In the 20th century, the relaxation of maintenance and champerty laws in countries like the UK led to the formalisation of TPF, particularly in the context of personal injury and commercial disputes. The rise of international arbitration in the late 20th and early 21st centuries further propelled the growth of TPF globally.

US: An established model

In the US, TPF has evolved into a well-established industry. The permissive legal framework, combined with a robust litigation culture, has created an environment where TPF can thrive. The US legal system’s contingency fee arrangement, where lawyers take a percentage of the settlement or judgment, has also laid the groundwork for the acceptance of TPF.

One of the key factors contributing to the success of TPF in the US is the legal system’s openness to innovation in financing litigation. The courts generally uphold the validity of TPF agreements, provided they do not contravene public policy or ethical standards. The presence of sophisticated legal infrastructure, including specialised litigation finance companies, has bolstered the industry’s growth.

However, the US market for TPF is not without challenges. Critics argue that TPF can lead to frivolous litigation, as funders may encourage claims that would otherwise not be pursued. Additionally, the transparency of TPF arrangements in the US remains a contentious issue, particularly concerning whether such agreements should be disclosed to opposing parties and courts.

Critics argue that without disclosure conflicts of interest may arise, especially if funders influence litigation strategy or settlements. Proponents of mandatory disclosure believe it is crucial for maintaining fairness and ensuring that all parties are aware of the financial dynamics behind a claim, while opponents argue that such disclosures could unfairly prejudice litigants and reveal sensitive financial details.

Singapore’s balanced model

In the Asia-Pacific region, Singapore has emerged as a key jurisdiction for TPF, particularly in the context of international arbitration. The country’s legal framework for TPF has been carefully crafted to balance the interests of funders, litigants and the integrity of the judicial process.

In 2017, Singapore passed amendments to its Civil Law Act to expressly permit TPF in international arbitration and related proceedings. The legislation provides a clear legal basis for TPF while also imposing certain safeguards. For instance, the rules require parties to disclose the existence of TPF agreements to ensure transparency and prevent potential conflicts of interest. This regulatory approach has been crucial in attracting global litigation funders and reinforcing Singapore’s position as a hub for international arbitration.

The Singaporean courts have taken a proactive stance in addressing potential ethical concerns associated with TPF. The judiciary has emphasised the importance of maintaining the independence of the funded party’s legal team and ensuring that funders do not exert undue influence over the litigation process.

Status in India

含羞草社区 approach to TPF is still in its early stages. While there is no explicit legal prohibition against TPF in India, the practice has not gained widespread acceptance and there are significant regulatory uncertainties. Indian courts have not yet developed a comprehensive body of case law addressing the legality and enforceability of TPF agreements, leading to uncertainty in the industry.

Historically, the doctrines of maintenance and champerty, aimed at preventing third-party interference in litigation, have influenced Indian judicial attitudes towards TPF. However, these doctrines have not been strictly enforced in India. Instead, Indian courts have focused on the fairness and equity of TPF agreements, upholding them as valid if they are not extortionate or contrary to public policy.

The Privy Council seated in the UK observed, in Ram Coomar Coondoo v Chunder Canto Mookerjee (1876), that agreements where a third-party funds litigation in exchange for a share of the proceeds are permissible, provided they do not shock the conscience or undermine public policy. This principle has been reiterated in various Indian judgments, such as Harilal Nathalal Talati v Bhailal Pranlal Shah (1939), where the Bombay High Court invalidated a TPF agreement that was deemed extortionate and unconscionable.

Recent cases further illustrate the cautious yet evolving approach of Indian courts towards TPF. In Tomorrow Sales Agency Pvt Ltd v SBS Holdings Inc, Delhi High Court refused to impose a security for costs against a third-party funder, distinguishing the case from the English Arkin and Excalibur cases. The court noted that Indian legislation does not explicitly provide courts with broad discretion to order costs against third-party funders, a power that is well-established in English law.

Notably, in Bar Council of India v AK Balaji, the Supreme Court emphasised that while advocates in India are prohibited from entering into contingency fee arrangements under the Bar Council of India Rules, there is no explicit prohibition against third-party funding by non-lawyers. This decision highlighted the potential for TPF in India, especially if appropriately regulated.