- Apprentice Lawyer
India’s emergence as one of the top five economies in the world made it one of the most preferred destinations for foreign investment in recent years. However, disruptions and uncertainties brought by the COVID-19 pandemic could give rise to a new wave of litigation.
Due to widespread economic distress, parties to such disputes may find themselves unable to bear the high costs of litigation or arbitration. India is but a cost-effective jurisdiction for litigation and dispute resolution. Therefore, bringing back the focus on the asset class being third party finance.
Shortage of resources triggered by the COVID-19 pandemic has already made business operations for industries extremely onerous. Businesses are combating shrinking balance sheets and sudden reduction in the available credit. These factors could increase opportunities for litigation funding and for funders to help businesses pursue their litigation claims through the Third Party Funding route.
According to a press note released by the Government of India in 2016, the amount involved in infrastructure-related arbitration disputes was a staggering USD 9.2 billion (approximately).
Third Party Funding (TPF) is an agreement by an entity that is not party to a dispute to provide a party, an affiliate of that party, or a law firm representing that party, funds or other material support in order to finance part or all of the cost of the proceedings, either individually or as part of a specific range of cases. Such support or financing is either provided in exchange for remuneration or reimbursement that is wholly or partially dependent on the outcome of the dispute, or provided through a grant or in return for a premium payment.
Over recent years, the concept has attained global impetus and jurisdictions such as Australia, Germany, United Kingdom, Singapore, and Hong Kong have taken steps to abrogate the legal barriers associated with TPF. Evidently, these jurisdictions have acknowledged the benefits associated with the concept, which include enhanced capital, effective recovery mechanism, and facilitating access to justice, to name a few.
Historically, TPF in litigation was deemed illegal in most common-law jurisdictions owing to the application of the doctrines of maintenance and champerty. English law principles of champerty and maintenance do not stricto sensu apply to the Indian jurisdiction. It has been laid down that the mere fact of an agreement being champertous is not of itself sufficient to render it void, but it must be shown in addition that it is contrary to the public policy of India as envisaged under Section 23 of the Indian Contract Act, 1872.
Parties who have substantial receivables and unable to recover these costs owing to a financial crunch, thus need succour, which can be explored through this mechanism of TPF.
TPF through the Judicial Lens
In one of the early decisions passed in Ram Coomar Coondoo and Ors. v. Chunder Canto Mookerjee, the Privy Council acknowledged that a fair agreement to supply funds to carry on a suit in consideration of having a share of the property, if recovered, may not be opposed to public policy. However, the Privy Council did caution that such agreements, if found extortionate and unconscionable, not made with the bonafide object of assisting a claim believed to be just, for improper objects, as for the purpose of gambling in litigation, ought not to be effectuated being opposed to public policy.
The Supreme Court of India in Re: 'G', A Senior Advocate of the Supreme Court, expressed that the rigid English rules of champerty and maintenance do not apply in India. If there is an agreement of the nature of a TPF, it could be legally enforceable and good. Though the question was not directly before Court, it can be deduced from the Court’s observations that there is nothing morally wrong, nothing to shock the conscience, nothing against public policy and public morals in a TPF arrangement per se.
A Division Bench of the Kerala High Court in Damodar Kilikar and Ors. v. Oosman Abdul Gani considered the question as to whether champerty agreements are illegal in India. The Court held that if no advocates are involved in the agreement, the agreement does not become illegal or enforceable in India for the sole reason that the same is champerty. The champerty agreement which was considered by the Court did not have the junction of any advocate.
Most recently, the Supreme Court in Bar Council of India v. AK Balaji, acknowledged that funding of litigation by advocates in India may be impermissible. However, there appears to be no restriction on third parties (non-lawyers) funding the litigation and getting repaid after the outcome of the litigation. The Court also noted that the United Kingdom and United States of America are open to the concept of third-party litigation funding and legal financing agreements.
An intrinsic examination of the emerging position thus, is that arrangements to fund litigations where legal practitioners are not involved would not be opposed to public policy. Therefore, various third-party funders who may be willing to facilitate access to justice for under-resourced litigations could explore the TPF mechanism provided it is not extortionate and unconscionable as highlighted above.
Possible complexities associated with TPF in Litigation and Arbitration
While there appears to be no legal bar to a third party funding arrangement In India, yet, there could be certain complexities associated with such arrangement in India.
Public Policy considerations
For one, the rules of public policy do not belong to a fixed or customary law. The question whether a contract is opposed to public policy or not is to be decided on general principles only. Public policy could include violation of a statute and whatever is against the good morals when made the object of a contract.
Mere right to sue
In addition to the argument that the agreement is opposed to public policy, one could argue that a particular arrangement is nothing but a clothed assignment of a mere right to sue which is prohibited by Section 6(e) of the Transfer of Property Act, 1882.
In Union of India v. Sri Sarada Mils Ltd., the Supreme Court observed that claims to damages for breach of contract or claims to damages for tort and assignment of the mere right of litigation, are bad. The reason behind the rule is that a bare right of action for damages is not assignable because the law will not recognize any transaction which may savour of maintenance or champerty. It is only when there is some interest in the subject matter that a transaction can be saved from imputation of maintenance. That interest must exist apart from the assignment, and to that extent, must be independent of it.
Conflict of Interest
A third party funder could have a pre-existing relationship with a member of the Arbitral Tribunal, in which case the independence and impartiality of an arbitrator may be challenged if such factum comes to the knowledge of the opposite party. From the Fifth Schedule of the Arbitration and Conciliation Act, 1996 (as amended), which considers an arbitrator’s indirect interest, one can deduce that it may envisage TPF.
The Arbitration and Conciliation (Amendment) Act, 2019 has inserted Section 43A which obliges the parties and the Tribunal to maintain confidentiality of all arbitration proceedings. Though the said provision is yet to be notified, in a given circumstance, the possibility of the opposite party alleging breach of confidentiality on account of such TPF arrangement cannot be ruled out.
Qualifications & conduct of third-party funders vis-à-vis the party receiving the funding
Another aspect of TPF that requires regulation is the qualification and conduct of such third-party funders vis-à-vis the party receiving the funding, as well as the adjudication process. In England and Wales, for instance, a code of conduct is administered for litigation funders, requiring the funders, among other things, to ‘act reasonably’, resist from withdrawing such funding except under certain specific circumstances, maintain confidentiality, and not take control of the litigation or settlement negotiations. Similar regulations governing conduct and qualification of third party funders have also been introduced in Singapore and Hong Kong.
In the absence of such regulatory checks being in place in India, there will always be a looming threat of parties receiving TPF here being exposed to issues relating to dilution of autonomy, breach of confidentiality, and discouragement of a potential settlement process.
TPF as the way forward?
Some states in India including Maharashtra, Gujarat, Madhya Pradesh, Uttar Pradesh, Andhra Pradesh, Orissa and Tamil Nadu have expressly recognized TPF after bringing in an amendment in Order XXV Rule 1 of the Code of Civil Procedure, 1908, which empowers the courts to secure costs for litigation by asking the financier to become a party and depositing the costs in court.
Taking a cue, infra majors like Patel Engineering and Hindustan Construction Company have already secured TPF with regard to their pending claims in arbitrations. The primary objective appears to be to ease their leveraged positions. It is thus evident that TPF is now emerging as a preferred route for tackling stress in debt-laden engineering and construction companies.
The uncertainty looming over market conditions resulting from the COVID-19 pandemic, along with the global economic slowdown, could dissuade claimants having meritorious claims from pursuing these on account of a financial crunch. Dispute financing as a mechanism in the present economic scenario could aid small companies and other claimants facing hardship in meeting their general operating expenses or expanding their business by infusing the capital saved on litigation.
The growth of TPF in India is still at an embryonic stage. Yet, it has the potential to grow manifold in light of the COVID-19 pandemic, which may drive many businesses to the verge of bankruptcy. These businesses will thence explore the means to recover their receivables. Banks and other institutions which are not affected by the erratic market conditions can aid such businesses, in the bargain, making India an attractive dispute resolution hub.
The practicalities associated with implementing TPF mechanisms into and outside India, could also involve an examination of the Foreign Exchange Management Act, 1999 (‘FEMA’) and rules and regulations thereunder.
The asset class of litigation finance is still in a nascent stage in India, owing to both lack of a regulatory regime surrounding this process as well as scepticism associated with businesses in identifying and engaging litigation finance firms.
Having said that, global litigation financiers are planning to enter the Indian market, anticipating a rise in contractual disputes and bankruptcy related cases. Some of the funding firms have also expressed their inclination towards collaborating with law firms to set up an Indian Association for Litigation Finance to promote their business in the country.
One can therefore hope that the government proactively engages with stakeholders on evolving a robust mechanism to support the TPF infrastructure in India and eliminate the ambiguities associated with this concept in the current regulatory environment.
Sumeet Lall is the Founder Partner, Sidhant Kapoor is a Senior Associate, and Ananya Singh is an Associate at CSL Chambers.