Third-Party Funding in Dispute Resolution in India

I. India third-party funding

Dispute resolution finance is a for-profit, generally non-recourse funding of a litigation, arbitration, mediation or any other form of dispute resolution by a third party which is not a party to a dispute nor an advocate representing any of the parties in dispute situation.

Report of the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration, International Council for Commercial Arbitration, Report no. 4 of 2018, (ICCA Report) defines third party funding as:²

“In its simplest form, third-party funding involves an entity, with no prior interest in the legal dispute, providing financing to one of the parties (usually the claimant). Typically, this financing is offered on a ‘non-recourse’ basis, meaning that the funder has no recourse against the funded party if the case is unsuccessful. Under this model, the funder’s recourse for repayment of the capital advanced and return on the capital invested is limited only to the claim proceeds recovered, if any.”

The definition attached to third party funding by the ICCA Report brings in a new angle to the third-party funding arrangement whereby it highlights on the aspect of risk assumption by the funder. The funding provided by the third-party funder against a financial return is a “without recourse” investment. Therefore, the risk element is highlighted under the definition whereby the third-party funder cannot approach any forum or does not have redressal if the claim of the funded party fails.

The UNCITRAL Working Group Report III (Investor-State Dispute Settlement Reform) 2019, (UNCITRAL Report) defines third party funding under Article 2A (1) (5) as:³

“Third-party funding is generally defined as an agreement by an entity (the “third-party funder”) that is not a party to a dispute to provide funds or other material support to a disputing party (usually the claimant or a law firm representing the claimant), in return for a remuneration, which is dependent on the outcome of the dispute. The remuneration can take any form, though more common forms include a multiple of the funding, a percentage of the proceeds, a fixed amount, or a combination of the above.”

Under this definition third-party funding usually covers all or part of the cost of the proceedings, such as legal fees (as well as fees of experts, arbitrators and arbitral institution) and the costs associated with subsequent enforcement actions or appeals.⁴ The definition under the UNCITRAL Report has expanded the role of third-party funder in a funding arrangement. To clearly elucidate upon the broad-base allocated by the definition, we have enumerated below the essentials in third party funding according to the UNCITRAL Report:

(a) Agreement by an entity that is not a party to the dispute;

(b) Agreement is to provide funds or other material support to the disputing party;

(c) The agreement is done by the funder in return of a remuneration;

(d) The remuneration is dependent on the outcome of the dispute;

(e) The form of remuneration can be a multiple of funding, percentage of proceeds, a fixed amount or a combination of all

If properly employed, third-party funding could benefit the parties by level playing field and at the same time benefit the society as a whole by promoting the goal of access to justice. It is also considered an important, sophisticated tool in international dispute resolution used by corporations, states and investors as a measure of risk and liquidity management.

(A) Framework and Eligibility Criteria in Third-Party Funding

Claimants as well as counter claimants shall be eligible to seek third party funding from willing funders. It may be noted that addition to specialized third-party funders, investment banks, hedge funds, insurance companies and pension funds also invest in legal claims as an asset class. Funders may have ready investible capital or may raise funds for specific claims in an ad hoc manner.

For example, in the US – Citigroup backed finance company made USD 11 million profit on a USD 35 million investment in a class action lawsuit brought by workers who developed illnesses working at the World Trade Centre following the September 11, 2001 terrorist attacks. Recently in India, Hindustan Construction Co. Ltd (“HCC”) agreed to sell a big chunk of project claims under litigation to an investor group led by BlackRock Inc.⁵

The opportunity in India is large. Indian companies in sectors such as infrastructure, construction and energy are embroiled in several disputes both locally and overseas. Additionally, shipping companies getting into international contracts and joint ventures among Indian and foreign partners are also potential areas for third party funding.

Funders can cover all dispute related expenses including legal counsel’s fees, cost of dispute resolution centres/courts/tribunal etc, pre-deposits, adverse costs orders etc. Generally, disputes are in the nature of commercial contracts, international commercial arbitration, class action suits, debt recovery, insolvency proceedings, and other like claims that have a calculated chance of resulting in a substantial monetary award. Third party funding is also extensively used and most reported in investor state arbitrations (bilateral investment treaty arbitrations).

There a definitely other benefits as well such as, allowing for TPF of disputes also releases a sizeable chunk of the company’s resources usually reserved for litigation expenses and allows such resources to be diverted into revenue-generating sectors of the business. More importantly, TPF of disputes enables companies and business to pursue claims and remedies it would under normal circumstances not pursue owing to budgetary restraints, at no cost - no risk and also facilitates in expediting and driving high value settlements.

So, based on market trends and practices there are a few models of third-party funding. Some of the categories are:

(i) Risk Management Model: Insurance or Indemnity based model.

(ii) Recourse Model: Non- Recourse finance or Recourse finance.

(iii) Based on the number of claims: Single case finance or Portfolio funding

(iv) Based on the stage of proceedings: Before settlement or after settlement

The above shows us the wide range of possibilities that third party funding brings to dispute resolution. It is a tool which if regulated properly can be an indelible value addition to a model for international dispute resolution.

II. Status of third-party funding

(A) Legal Framework/ Judicial Recognition

There is neither a specific legislation on TPF nor is there a mention of it in the laws of India. Owing to India’s history, there were questions as to whether doctrine of maintenance and champerty were applicable to India creating a prohibition on TPF.

The judicial precedents in India right from the time of the Privy Council, bifurcate actions of champerty and maintenance into two categories: (a) An advocate funding/maintaining a litigation in lieu of a success fee; and (b) Funding of litigation cost by an unrelated third party who is not the advocate representing the party in the matter. As early as 1877, the judgment of Privy Council in the case of Ram Coomar Coondoo v. Chunder Canto Mookerjee,⁶ clarified that the laws on maintenance and champerty as applicable in England and Wales are not applicable in India. It was held that the doctrines would be applicable only on those agreements which are inequitable, extortionate, unconscionable and made with malafide objectives. This opinion was also followed in the case of Bhagawat Dayal Singh vs. Debi Dayal Sahu.⁷

Additionally, though there is no specific mention of TPF in Indian law, reference may be made to statutory recognition conferred on TPF via Order XXV, Rules 1 and 3 of the Civil Procedure Code, 1908 by some states like Maharashtra, Gujarat, Madhya Pradesh and Uttar Pradesh. Order XXV Rule 1 of the Code as amended by the specified states provides that the courts have the power to allow a third party to finance the litigation by asking the third party to become a party to the dispute.⁸ The same has been replicated by states such as Gujarat and Maharashtra. Therefore, although not universal, the idea of TPF is not uncommon in India.

Moreover, in the recent case of Bar Council of India v. A.K. Balaji,⁹ the Supreme Court clearly specified that there is no prohibition on third parties with respect to funding the litigation and getting paid for the same on the basis of the outcome of the case. The only limitation in place with respect to the matter seems to be restriction placed on lawyers in financing disputes of the parties. This can be inferred from professional conduct rules made by the Bar Council of India under Advocates Act, 1961 which states that advocates cannot enter into conditional or contingency fee agreements.¹⁰

Further, in the case of Re:‘G’ A Senior Advocate of the Supreme Court,¹¹ it was observed that that an agreement wherein the third party has placed a stake on the case contingent on the success of the outcomes of the litigation would not be presumed to be unenforceable and illegal unless the advocate or lawyer has been impleaded as a party. Accordingly, TPF is permitted in India so long as the lawyer does not act as the funder.

(B) Lacunae in Existing Framework

Although the report on High Level Committee to review the Institutionalization of Arbitration Mechanism in India had specified the need for enabling legislation such as that of TPF laws created in other jurisdictions for the growth of India as an international arbitration hub,¹² no such provision has been incorporated in the ADR laws of the country.

However, one of the primary concerns when including TPF is the lack of regulatory oversight which can have detrimental effects on its usage. Some of the problematic features one should consider with respect to TPF are the following:

a. Confidentiality:

The funder may require the parties to disclose all the material facts, evidence from the party to assess if it’s worth funding the claim. This can be problematic especially in the case of commercial arbitration which gives great significance to confidentiality. In order to engage the services of a funder, the parties are often required to provide information to assess the case which may lead to misuse.¹³ This is particularly problematic in relation to India because parties to arbitration are not allowed to disclose progress of arbitration proceedings with any other person under Section 42A of Arbitration and Conciliation Act, 1996.

b. Disclosure Requirement:

Another aspect is whether the identity of the funder and the fact that one of the parties are having TPF should be disclosed compulsorily. Conflicts of interest is an established possibility that trickles from TPF. This may be in the form of existing relationship between funder and party, or funder and arbitrator or one of such combinations which can affect the independence and impartiality of the judgment. As our laws lack clarity pertaining to the disclosure requirement except under Arbitration and Conciliation Act,1996¹⁴ (which is also limited to the rules for arbitrator), challenges may be made on the ground of bias which could affect quick disposal of cases. In lieu of this, some jurisdiction such as Hong Kong have already made certain disclosures compulsory to the arbitrator as well as the other party.¹⁵

c. Control on Dispute:

The amount of control the funder can exercise over the case and its proceedings is another factor that ought to be clarified. If the funder is allowed excessive control over the proceedings for example, decision-making power as to when to settle the case then, the actual parties to the dispute might not be able to access justice which is one of advantages of TPF. Also, excessive control might also be construed to be contrary to the public policy and thereby effect the enforcement of judgment. The dispute getting affected due to third party meddling is a significant factor to be introspected in case of TPF.

d. Non-fulfillment or performance of funding agreement

There may be circumstances where the funder lose interest in the matter in light of the changed circumstances during the pendency of legal proceedings. In such scenarios there are questions as to what remedies are available to the party funded especially when the funder stops funding without any reasonable cause. Similarly, enforceability of funding agreements and payment to funder on successful dispute resolution is important for the market of third-party funding to take off.

III. Laws governing third-party funding in other jurisdictions: perspectives on international best practices

(A) Singapore

The Civil Law Amendment Act, 2017 brought in changes that abolished the age-old common law tort of maintenance and champerty, so long as the contract for funding is not contrary to public policy.¹⁶ The amendments now allow for lawyers to recommend third-party funder to their clients and advise clients on third party funding contracts as long as they do not receive any direct financial benefit from their recommendation or advice – this excludes legal fees paid for legal services to the funded party.

Additionally, there have been amendments made to the Legal Profession Act, 1967 (LPA) and the Legal Profession (Professional Conduct) Rules, 2015 (LPPCR) which discuss about a lawyer’s action with respect to TPF. An additional amendment to the LPPCR which makes it mandatory for the legal practitioner to disclose the existence and all necessary details pertaining to a TP agreement and the funder. This clause is only applicable to legal practitioners registered in Singapore, as is the object of the LPA and foreign counsel who conduct arbitrations/ appear in courts are not bound by this Rule. These regulations are restricted to what has been enacted under the above statutes and do not cover a wider range of issues in TPF.

(B) Hong Kong

Prior to the enactment of specific legislation regarding TPF, Hong Kong was following the doctrine of champerty and maintenance which prohibited funding of cases by third parties for lack of good faith.¹⁷ Recently, in 2019, a new law was formulated on TPF permitting parties to obtain funding for disputes in relation to arbitration. Hong Kong Code of Practice for Third Party Funding (“HK Code”) in arbitration was created as per the powers conferred under The Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance, 2017 (“HK Ordinance”). HK Ordinance distinguishes arbitration and mediation from traditional litigation and legalized third-party funding of arbitration and mediation in Hong Kong. The HK Code so formed specifies the rules, standards and practices followed in TPF in Hong Kong. It specifies that the funded party should disclose the existence of funding agreement and the identity of third party to each other and the arbitration body.¹⁸

(C) London

Unlike Singapore and Hong Kong, the laws on maintenance and champerty was eliminated through the Criminal Law Act 1967 in UK.¹⁹ Since then, third party funding is common phenomenon in UK. Yet, no specific legislation has been created for its regulation. The system followed in UK is that of self- regulation. In 2011, the Association of Litigation Funders was established and a Code of Conduct for Litigation Funders was created. This voluntary code has been adopted as the guiding rules for operation with respect to TPF. The Association of Litigation Funders has been charged with administering and supervising self- regulation as per the code. The code deals with certain standards that funders must abide by with respect to various aspects such as capital adequacy of funders, termination and approval of settlements and control of litigation and settlement negotiations.

(D) Dubai

Dubai International Finance Center (“DIFC”) is a free zone within the United Arab Emirates. It is a specific zone where common law jurisdiction is followed with special courts to deal with the disputes arising out of it. Definite rules have been formed within this area to conduct court proceeding. However, at inception, these rules made no mention to the concept of TPF. As a common law jurisdiction, it would have followed the outdated doctrines of champerty and maintenance but in 2017, the DIFC Courts issued Practice Direction No.2 of 2017 (“PD“) in relation to TPF.²⁰ While DIFC Courts have recognized the existence of third party funding in the case of Rafed Al Khorafi and Others v Bank Sarasin-Alpen (ME) Ltd and Bank Sarasin & Co Ltd,²¹ the PD provides clear instructions regarding the necessities to be complied by funded parties and how they should interact with funders in legal proceedings. DIFC’s practice direction provided clarity with respect to permissibility of funding and the level of disclosure mandated in relation to TPF.

(E) Abu Dhabi

The Abu Dhabi Global Market (“AGDM”) Courts released the Litigation Funding Rules in May 2019. ²²The Rules provide for various matters, including: that the Funder’s principal business must be in funding proceedings to which the Funder is not a party; the Funder must have qualifying assets of not less than USD 5 million; the Litigation Funding Agreement must contain some minimum terms including to ensure there are no conflicts of interest; the Funder’s involvement in the settlement of proceedings; and the Funder’s obligations about dealings with lawyers. ²³

IV. Conclusion

In light of the above, third party funding is a growing phenomenon internationally and has gained acceptance. India as a nation with many contractual disputes should support this innovative practice of litigation funding for dispute resolution. The need of the hour is to facilitate Indian companies in sectors such as infrastructure, construction and energy are embroiled in several disputes both locally and overseas, through TPF. It has a great potential for providing access to justice. Given the present scenario of pandemic, it has become difficult for parties to combat expensive litigation due to financial downturn increasing the need for acceptance of TPF in India. However, there should be presence of some regulations to avoid frivolous cases and ethical complaints.

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