Authored By: Anubhav Chakravorty
Third Party Funding: The Status Quo
The concept of Third-Party Funding (“TPF”), particularly in the realm of domestic arbitration, is a fast emerging one across the globe. It is a medium that is typically used by a claimant to avail (more) finance to pursue its case. The legitimacy of TPF was restated by a Court of Appeal in England as recently as 2005 in the case of Arkin v. Borchard Lines Ltd. In TPF, litigation costs are covered by a funder in a manner that is pre-decided and, in return, it receives a share in the monetary award that is given to the claimant (or counter-claimant, or any party that stands to win a monetary award), if successful.[i]
These funders could be hedge funds, investment banks or organizations particularly established for the purpose of litigation financing. TPF would typically be preceded by a contract, which would detail all the various types of costs it would cover in relation to the dispute at hand. This would form part of the funder’s investment portfolio where it would first carry out its due-diligence to establish the quantum of the claims made, the merits and the likelihood of the claims going through. For this purpose, it could consult local law firms, subject experts, etc.[ii]
In 2018, the Supreme Court, in Bar Council of India v. AK Balaji[iii] held: “There appears to be no restriction on third parties (non-lawyers) funding the litigation and getting repaid after the outcome of the litigation. In (the) U.S.A., lawyers are permitted to fund the entire litigation and take their fee as a percentage of the proceeds if they win the case. Third Party Litigation Funding/Legal Financing agreements are not prohibited.”
On the Central level, there is no statute that caters to this issue directly. Although the Arbitration and Conciliation Act, 1996 makes no mention of TPF, the states of Maharashtra, Gujarat, Uttar Pradesh and Madhya Pradesh have amended Order XXV Rule 1 of the Civil Procedure Code, 1908 to include the power of courts to secure costs for litigation by involving a TPF and seeking the deposit of costs in court.
Advocates, however, are still barred[iv] from playing the role of TPF, as restated by the Supreme Court in the case of In Re: Mr. G, Sr. Adv.: “Now it can be accepted at once that a contract of this kind would be legally unobjectionable if no lawyer was involved. The rigid English rules of champerty and maintenance do not apply in India, so if this agreement had been between what we might term third parties, it would have been legally enforceable and good.”[v]
Although this concept is not new to India, in practice, it suffers the same loopholes and deficiencies that any under-legislated aspect would: the lack of boundaries. Any third-party agreement would have to be a valid contract as per the Indian Contract Act, 1872. That in itself would guarantee a bedrock for a generally equitable distribution of rights and duties, but it would fall short of catering to the specific nuances that this particular sort of agreement requires.
In light of the favorable mentions it received at the High-Level Committee to review the Institutionalization of Arbitration Mechanism in India (2017)[vi], legislation on this subject ought to be expedited, especially in the wake of Covid-19, for the equitable distribution of rights and duties in light of the heightened averseness to litigation and dispute resolution, owing to stunted cash flow. The adoption of the TPF mechanism by various far-sighted jurisdictions like Singapore, Australia and USA is reflective of its many advantages.
Advantages of Third-Party Funding
The many flexibilities that the TPF system would make available to the parties would make them better stationed to use the increased capital to enforce their rights, whilst ensuring that their core business activities are kept within a safety net. TPF also makes the circumstances conducive for the party to approach the matter in a holistic manner, and not forgo aspects of the claims that would have otherwise seemed ancillary.
Fulfilling the due-diligence standards of a prominent funder for TPF would reassure the complainant about the merits of its claim and might even result in the other party/parties moving to settle said claims. Typically, a funder would assess the risks, economic viability, settlement prospects, evidential strength, time to resolution, etc.
In a structure where lawyers’ fees are also linked to the monetary award or where the TPF oversees the activities of the lawyers, the trajectory towards the monetary award might become more streamlined. Several unanticipated costs of litigation may also be bolstered by the funder. Overall, it would allow both sides of the legal dispute to approach the matter on a more level playing field and deter large parties from cornering smaller ones to settle.
Other than the large return on investment, this would also encourage funders to diversify their investment portfolios by the introduction of a new asset class. They could also selectively fund causes they would publicly want to be seen supporting, resulting in increased social impact.
Broadly, the public could be expected to approach the legal machinery with lesser apprehension, backed by prominent stakeholders in the market with traceable success rates. The legal system seems to be in a reiterating loop where the biggest players are able to afford legal services of the best lawyers and law firms, causing them to inevitably win. Here, the merits of the case would be placed at the forefront and would lead to a more equitable access of justice.
The Way Ahead
Despite all the glaring pros outlined above, the inculcation of TPFs into the legal machinery would not be free of its own challenges; challenges unique to India’s legal system. Typically, class action lawsuits and high value commercial disputes are not seen to attract damages large enough to be a beneficial investment for funders. There is also a dearth of data and standardization, considering India’s quasi-federal nature, for funders to have a robust understanding of risks involved and market standards.
Another reason that could be a major cause of apprehension for funders is the uncertainty during the continuance of the case for procedural reasons and other volatile aspects that are inherent to the judicial machinery. The disposal of cases by courts is often slow, at worst and inconsistent, at best. Either way, it would add an additional layer of uncertainty to the risk analyses of the funders.
As outlined above, advocates in India are not allowed to act as third-party funders. This would eliminate the option of funders involving lawyers in the activity of risk sharing so as to incentivize them to perform their best and align their interests in achieving a monetary award. It could also have an adverse effect on the synchronization between the third party and the lawyers as both would have contradicting/differing financial motivations for approaching the matter.
Questions of whether foreign third parties can fund disputes ongoing in India, the alignment of these agreements with the welfare of the public, etc. can only be put to rest by specific legislation on the matter. This legislation is crucial now, because of Covid-19 and the other looming uncertainties related to it. If access to justice becomes capped by dwindling funds, instability in the market and in society can be preempted.
[i]  EWCA Civ 665.
[ii] Michael K. Velchik and Jeffery Y. Zhang, Islands of Litigation Finance (Harvard, 2017), http://www.law.harvard.edu/programs/olin_center/fellows_papers/pdf/Zhang_71.pdf (last accessed September 26, 2020)
[iii] AIR 2018 SC 1382.
[iv] Rule 20, Bar Council of India’s Standards of Professional Conduct and Etiquette, Chapter II, Part VI, Bar Council of India Rules, 1975, read with Section 49(1)(c) of the Advocate’s Act, 1961.
[v] (1955) 1 SCR 490.
[vi] Report of the High Level Committee to review the Institutionalization of Arbitration Mechanism in India (2017), http://legalaffairs.gov.in/sites/default/files/Report-HLC.pdf (last accessed September 10, 2020).
The author is an undergraduate student at Symbiosis Law School, Noida.