Author: Ayushi Jain
Introduction
Third-party funding, commonly known as ‘TPF’, means financing provided by any person or entity who is not a party to the dispute and to provide such funding, the disputing party agrees with a third-party to obtain finance or cost of proceedings in exchange for economic interest dependent upon the favourable outcome of a dispute.
The Task Force provides the following definition,
“The term “third-party funding” refers to an agreement by an entity that is not a party to the dispute to provide a party, an affiliate of that party or a law firm representing that party, a) 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, and b) 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.”
Significance of Third-Party Funding
There are various types of third-party funding in international arbitration, such as litigation funding, success based legal fee arrangement, loan agreements, insurance policy, etc. TPF helps cover the cost of litigation, especially in arbitration proceedings where disputes involve monetary amounts in generous quantities. TPF aids in achieving the level playing fields between the disputing parties. TPF assists in the following areas: paying legal counsel’s fee, tribunal cost, expert fees, arbitration institution fees, and costs associated with the dispute, including enforcement cost.
There are numerous advantages of TPF in arbitration proceedings, such as security to dispute funding, allowing parties to focus on their core business. The equal position of parties in terms of expenditure will help them enforce legal rights effectively and make the wrong party accountable for their harmful actions. Moreover, it removes the risk of monetary domination of one party over another so that financially stronger parties cannot take unfair advantage of weaker parties.
TPF improves the bargaining capacity of parties to enter into a settlement rather than stretching the dispute to infinity. Altogether, third-party funding helps in strengthening the dispute mechanism process as well as access to justice. It will allow parties to settle their claims based on the merits of the case and prevent the filing of unnecessary lawsuits and settling their scores in legal proceedings.
Existing Indian Legal Jurisprudence
In understanding TPF in Indian laws, it is desirable to understand common law doctrines of Maintenance and Champerty. The doctrine of Maintenance encompasses the doctrine of Champerty as well. Maintenance means an act of financial support given to a disputed party without any expectation of receiving any share or economic interest in the remuneration or final amount recovered from the outcome of dispute if the party receiving financial assistance succeeds. Champerty is an act of providing similar financial aid to a disputing party. It expresses the expectation of receiving an economic interest or share from remuneration obtained if the outcome of dispute comes in favour of the party receiving financial support.
Historically, above English law, doctrines were considered an offence and were illegal predominantly in many common law jurisdictions. The problem related to the adoption and application of Maintenance and Champerty doctrines in Indian law was settled by Privy Council. In Ram Coomar Coondoo vs. Chunder Canto Mookerjee, Privy Council held that English laws related to Maintenance and Champerty in India are not enforceable.
It affirmed that a fair agreement to supply funds to carry on a suit in consideration of a share of the property, if recovered, is not to be regarded as opposed to public policy. However, such agreements ought to be observed if found to be unreasonable, unconscionable, inequitable against a party or not made in a bonafide manner to support the claim and obtain reasonable compensation. Moreover, such agreements are considered as contrary to public policy, and no effect should be given if they are made with the purpose of gambling in litigation, encouraging improper objects, oppressing others, etc.
The concept of third-party funding finds its statutory recognition in matters comprising of civil nature under the Civil Procedure Code, 1908 in few states in India such as Maharashtra, Madhya Pradesh, Gujarat, and Uttar Pradesh, Andhra Pradesh, Orissa and Tamil Nadu. These states have amended Order XXV Rule 1 of the Civil Procedure Code to consent to third-party funding.
These amendments empower civil courts to have the power to ask the financing party to pay for securing costs in a litigation matter. It gives strength to courts to order to deposit the fees in the court. Hence, it can be argued that third-party funding is not an alien concept to Indian legal jurisprudence. India does not recognize Classic third-party funding agreements, although such agreements are not expressly prohibited by India, as there are no precedents or Statutes to address this concern. Indian Arbitration law does not contain any provision related to TPF. Similarly, Indian laws neither expressly nor bar TPF in arbitration proceedings seated in India.
Inadequate Legal Framework
In India, multiple barriers prevent the implementation of TPF in arbitration proceedings. Firstly, lawyers are expressly barred from funding litigation and being repaid after the favourable outcome of a dispute, primarily when a lawyer is representing the contesting party in a legal dispute. Secondly, agreements related to third-party funding may be rendered as void agreements on the ground of violation of public policy under Section 23 of the Indian Contract Act.
Moreover, public policy as a ground to declare agreement void does not have any specific definition to understand it rightly. Justification of public policy is generally dependent on the discretion of courts that is decided following the facts and circumstances of each case. Uncertainty regarding public policy prevents the parties (non-law firms) to enter into funding agreements. Thirdly, lack of legal precedents and relevant law to recognize the validity of third-party agreements entered India and the absence of appropriate regulations related to the engagement of foreign investors in funding litigation in India.
Contemporary Developments
Recently, Indian Supreme Court has passed an obiter remark in Bar Council of India vs. A.k. Balaji & Ors. In India, there is no explicit prohibition on funding of litigation by advocates. Still, a conjoint reading of the Bar Council of India Rules strongly suggests that advocates of their clients cannot fund litigation. However, no restrictions appear on third-party (non-lawyers) funding litigation and getting repaid by its outcome. Thus, it seems like parties may enter into third-party funding agreements with commercial organizations that do not advocate or non-law firms.
Furthermore, in 2017, the Report of the High-level committee to review the institutionalization of arbitration mechanism in India, under the Chairmanship of Justice B.N Srikrishna, provides a favourable response towards the third-party funding. The Report mentioned that the enactment of supporting legislation and arbitration legislation such as third-party funding has significantly contributed to the growth of various jurisdictions and created a conducive environment to become arbitration hubs. Lately, Singapore has allowed third-party funding in international arbitration. A step taken in the right direction, “on January 10, 2017, Singapore’s parliament passed the Civil Law (Amendment) Bill No. 38/2016 permitting third-party funding in an international arbitration seated in Singapore as well as related court and mediation proceedings.” However, Bill expressly provides that such agreements cannot be contrary to public policy. Likewise, Hong Kong Legislative Council also enacted the “Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance 2017” to allow third-party funding in arbitration and mediation in Hong Kong.
Way Forward
While keeping in mind the current economic growth and global development of various jurisdictions in enhancing the environment related to arbitration matters, India must adopt an appropriate legal framework to recognize third-party litigation. Additionally, due to the expensive nature of the International Arbitration process, it is urgent to demand a feasible solution to save time and cost in arbitration proceedings. The following recommendations will assist in advancing the situation related legality of third-party funding relating to arbitration in India. India should consider enacting a legislative framework like Singapore or Hong Kong to provide legal validity to third-party agreements in arbitrations seated in India and acknowledge enforcement of arbitration awards passed in other jurisdictions.
While drafting the law related to third-party funding, authorities ensure that the factors like transparency, party autonomy, confidentiality privilege, preventing undue advantage, public policy etc. to be maintained during the resolution of disputes by arbitration. Legislative authorities can provide a regulatory framework for foreign capital investment related to third-party funding in India. Apart from expressing legal recognition to TPF, legislation should also adopt appropriate remedies, limitations, and penalties to prevent the misuse of third-party financing. In addition, Indian courts can recognize third-party agreements if they align with the existing legal framework. Moreover, the Supreme Court can provide guidelines or directions to enforce third-party funding agreements until legislative authorities bring relevant law.
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