The Unexplored Aspect of Litigation Financing in India

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Introduction:

Litigation Financing, as the name suggests is essentially an agreement where a non-beneficiary third party, funds a litigation/arbitration proceeding in exchange for a possible profitable return out of the court decree or award.[1] Such agreements are also referred to as Third Party Fundings (TPF). The concept recently gained global traction and has evolved rapidly, specifically in the jurisdictions of Australia, Germany, United Kingdom, Singapore, and Hong Kong.[2] This exponential growth can be attested to two main rationales; 1) It provides a level field for both parties in court by ensuring that legal rights are not compromised due to scarcity of funds and; 2) From a business perspective, it can be quite a bountiful investment for such funders.[3] The jurisdictions which saw a growth in Third Party Funding noticed similar benefits associated with the concept i.e., “enhanced capital, effective recovery mechanism, and facilitating access to justice”[4].

The Judicial History and Evolution of Litigation Financing:

One of the earliest cases decided on this topic was the case of Ram Coomar Coondoo and Ors. v. Chunder Canto Mookerjee,[(1876) L.R. 4 I.A. 23] where the Privy Council declared that if the agreement to supply funds to carry on a suit, with consideration being a share of the property may not be against public policy if it were to be recovered. Third Party Funding was permitted on the grounds of promoting access to justice as long as these agreements were agreed upon with bona-fide intentions and not for illegal objectives. Though they allowed funding, the Privy Council laid down that if such agreements were found extortionate, unconscionable, for improper object or for the purpose of gambling in litigation i.e., against public policy, they would not be valid. The Apex Court, in Re: ‘G’, A Senior Advocate of the Supreme Court,[G Senior Advocate, AIR 1954 SC 557; Bar Council of India V. A.K. Balaji, (2018) 5 SCC 379] laid down that the rigid English Laws and doctrines of champerty and maintenance [Historically, English law deemed TPFs illegal due to the application of doctrines of champerty and maintenance.] are not applicable in India. It was clarified that such funding agreements were not morally wrong or against the public policy of India. As long as such agreements do not shock the conscious of public morality, they will be good in law.

The consequences of such agreements being against public morals were seen in the case of Suganchand v. Balchand.[Suganchand v. Balchand, 1956 SCC OnLine Raj 127] The Rajasthan High Court laid down that, agreements made with the intent of gambling in litigation to earn huge profits cannot be legally upheld. Another aspect which would render litigation funding agreements void would be advocates funding such cases. In the case of Bar Council of India v. AK Balaji,[(2018) 5 SCC 379] the Apex Court acknowledges that litigation funding by advocates can be impermissible in India. The court also noted that this was the only restriction on third party funding. All non-advocates can become potential funders for such cases and may benefit from the profit returns if any. The bench in Re: ‘G’, A Senior Advocate of the Supreme Court,[G Senior Advocate, AIR 1954 SC 557; Bar Council of India V. A.K. Balaji, (2018) 5 SCC 379]  also explicitly barred advocates from entering into litigation funding.

The Legality of Litigation Funding in India:

Though much of Indian Legislature has been derived from English Common Law, India has not inherited the strict laws of maintenance and champerty which were initially the cause of Third-Party Funding being illegal in England.[Damodar Kilkar and Ors. v. Oosman Abdul Gani CITE] Thus, there was never an express bar or restriction preventing litigation funding to be applied in India.[Ibid] The Supreme Court in Bar Council of India v. AK Balaji[(2018) 5 SCC 379]held that third-party funding is not legally prohibited in India. The Civil Procedure Code even goes on to recognize third-party financing in states like Maharashtra, Gujrat, Karnataka and Madhya Pradesh by way of amendment to Order XXV rules 1 and 3 of the Civil Procedure Code, 1908. This empowers the courts to secure costs for litigation by asking the financier to become a party and depositing the costs in court. It is important to note that though the practice is legal in India, it still remains unregulated which could lead to potential complexities.

Potential Complexities with Third-Party Funding in India:

  1. The Domain of Public Policy: Public Policy is, by its very nature dependent on public morality. Courts have noted in several cases that public and societal morals change with time. Thus, they do not have any rigid laws governing them. Contemplating whether a particular litigation funding agreement is against public policy, changes on a case-to-case basis. This could potentially lead to a multiplicity of interpretations and judgements on what violates public policy.
  • Probability of Conflict of Interest: The third-party funder could have pre-existing relations with a judge on a bench or an arbitrator in the suit for contemplation. This would violate the principles of justice and could lead to a multitude of issues in court. Considering the example of an Arbitrator, their independence and impartiality may be challenged if such relationship comes to the knowledge of the opposite party. Further, an Arbitrator’s indirect interest is considered upon in the Fifth Schedule of Arbitration and Conciliation Act, 1996. One can logically infer that the Schedule may include or envisage litigation funding.
  • The Pre-Requisites of Being a Third-Party Funder:  Another unexplored aspect in third party litigation is the qualifications and conduct of third-party vendors. Taking the example of England, a code of conduct has been issued for third party litigation funders. It lays down that a third-party funder should “act reasonably”, resist from withdrawing funding expect under exceptional circumstances, maintain confidentiality and not take control of the litigation or settlements amongst other things. Similar such code of conducts can be seen in jurisdictions like Singapore, Wales and Hong Kong where TPF is a growing industry. Being an unregulated field in India, it does not lay down any qualifications for being a funder, which could prove to hinder the growth of litigation funding in India. The lack of these pre-requisites also raises the question of who is eligible to be funded. Therefore, the lack of regulations in India can lead to misappropriation of the idea, breach of confidentiality and dilution of autonomy. All of these factors can discourage the growth of TPF in India unless regulated.
  • Mere Right to Sue: It can also be argued that third-party funding is nothing but a disguised agreement of a mere right to sue, something explicitly prohibited under Section 6(e) of the Transfer of Property Act, 1882.
  • Confidentiality: The Arbitration and Conciliation Act, 2019 contains Section 43A which obliges the parties and the Tribunal to maintain confidentiality of all arbitral matters and proceedings. Though the provision is yet to be notifies, one cannot rule out the possibility of the opposite party alleging breach of confidentiality on account of litigation funding.

Does Litigation Funding Have a Future in India:

Litigation matters are notoriously known for being expensive and lengthy in India. This, in addition the financial crisis caused by Covid-19 could dissuade potential plaintiffs and petitioners from bringing their meritorious claims to court. The process of litigation funding would help the current financial situation of people and companies who are unable to afford litigation.

Citing a recent example, infrastructure majors like Patel engineering and Hindustan Construction Company have already secured litigation funding for their arbitral matters with the objective to ease their leveraged positions. Thus, the method can also be useful to major companies who are debt ridden. Further, anticipating a rise in contractual and bankruptcy cases, several international litigation funding firms are planning on entering the Indian market. Litigation financing can have a major role in the future of Indian Litigation and Arbitration. Though it is in its nascent stages in India, with proper regulations and legal frame-work, it can become popular. In jurisdictions where TPF is regulated and promoted, it has proven to be an effective tool for guaranteeing justice to the wronged, be it one individual or a major corporation.

This article is written by an intern from our office, Ms. Tanya Mahajan, under the supervision of a Senior of the firm.

The content of this document do not necessarily reflect the views / position of RKS Associate, but remains a probable view. For any further queries or follow up please contact RKS Associate at [email protected]