“ANALYSIS OF THIRD-PARTY FUNDING: A CONCEPTUAL REVIEW” BY - PRIYANK DHADUK
AUTHORED BY - PRIYANK
DHADUK
Abstract
This paper explores the evolving landscape of
third-party funding (TPF) in Indian arbitration and litigation. While TPF lacks
explicit legislation, recent Supreme Court endorsements and state-level
acknowledgments reveal a positive trajectory. Drawing insights from global
jurisdictions, the study advocates for nuanced analysis over blanket
prohibitions, emphasizing the potential role of TPF in leveling the arbitration
playing field. The distinctions between litigation and arbitration, coupled
with concerns about frivolous claims, are addressed, suggesting TPF as a
pragmatic solution to enhance accessibility. The paper calls for comprehensive
regulation, acknowledging the need for systemic improvements within India's
justice delivery system.
Key Words: Third-party funding (TPF), Indian
arbitration, Litigation financing, Champerty and maintenance, Supreme Court
endorsements, Access to justice, International arbitration, Legal claims,
Systemic improvements, Justice delivery system.
INTRODUCTION
Third-party funding, also known as litigation
financing, occurs when a participant in legal proceedings, including
arbitration, seeks financial assistance from an external entity instead of
covering its own legal representation costs (Victoria, 2016). This external entity, commonly known
as a “Third-party Funder,” offers financial support in return for a stake in
the potential profits (Victoria, 2016). Third-party funders can include banks,
hedge funds, insurance companies, or other entities or individuals. This type
of financing involves assessing the potential value of legal claims before
their adjudication, assisting parties in making informed decisions about
whether to pursue litigation (Das gupta, 2021). On a broader scale, third-party
funding promotes access to justice and encourages the resolution of disputes
based on the merits of the claims, outside of court (Cyril Amarchand Mangaldas, 2019).
The structure of litigation-financing contracts can
vary based on the specific legal case, incorporating clauses to safeguard the
interests of both the funder and the funded party, along with confidentiality
and non-disclosure provisions (Cyril Amarchand Mangaldas, 2019). Third-party funding
can cover a range of expenses, including legal counsel fees, court or tribunal
fees, costs associated with expert witnesses, pre-deposits, adverse costs
orders, and other dispute-related expenditures like venue costs. This form of
financing extends to various commercial disputes, such as commercial suits,
international or domestic commercial arbitrations, class action suits, tortious
claims like medical malpractice and personal injury claims, anti-trust
proceedings, insolvency proceedings, and similar claims with the potential for
substantial monetary awards (Cyril Amarchand Mangaldas, 2019).
In recent years, third-party funding has gained
popularity in countries like “Australia”, “Germany”, the “United Kingdom”,
“Singapore”, and “Hong Kong” (Mayank Mishra, 2021). The rapid growth of
third-party funding in foreign jurisdictions can be attributed to two primary
reasons: ensuring a fair playing field for both parties and preventing
legitimate rights from being compromised due to financial constraints, and
providing investment opportunities for funders. Advocates argue that
third-party funding levels the playing field in disputes, while critics call
for either banning or heavily regulating it (Kalajdzic, 2013).
Historically, the evolution of Third-party Funding
(TPF) has encountered obstacles from common law doctrines like champerty and
maintenance, originating in the fifteenth century with roots in Greek and Roman
civilizations (Pinheiro, 2021). Maintenance involves providing
financial aid to a third party without an interest in the case's outcome, while
champerty entails assistance with an expectation of a share in the award. In
England, perspectives on champerty and maintenance transformed, and since 1967,
they are no longer considered criminal or tortious (Pinheiro, 2021).
Recent legislative actions in Hong Kong and
Singapore, including “The Arbitration and Mediation Legislation (Third Party
Funding) (Amendment) Ordinance, 2017, and Civil Law (Third-Party Funding)
Regulations, 2017”, respectively, reflect a growing need for analysis. “Hong
Kong Courts restrict champerty's application to litigation, asserting that in
arbitration, it shouldn't impede private consensual adjudication” “(Cannonway Consultants Ltd. v. Kenworth Engineering Ltd)”. “Balancing
champerty or maintenance with access to justice is emphasized, and in
Singapore, public interest prevails in both arbitration and litigation (Otech Pakistan Pvt. Ltd. v.
Clough Engineering Ltd)”.
Critics argue that champerty and maintenance should
not bluntly invalidate third-party funding; instead, a qualitative analysis of
the arrangement's nature is suggested (Garg, 2020).
In civil law countries like Germany, unfamiliar with maintenance and champerty,
the absence of these doctrines promotes balanced growth in the third-party
funding market in Europe. The consistent implication is that the public policy
of ensuring access to justice should outweigh maintenance and champerty. The
key criterion for assessing these agreements is whether their object is
unconscionable or unfair to any party, a perspective shared by scholars on both
sides of the Atlantic (Garg, 2020).
India
currently lacks a specific law governing Third-Party Funding (TPF), but it
doesn't explicitly prohibit it. Notably, the “Privy Council” in the case of “ (Ram Coomar Coondoo v. Chunder
Canto Mookerjee)”
stated “That English common law and statutes related to maintenance and
champerty have no force in India”, though agreements deemed extortionate or
unconscionable could be opposed to public policy. The Supreme Court of India in
“ ("G"
Senior Advocate v. Unknown )”, and “ (Bar Council of India v. A.K. Balaji)”acknowledged TPF
agreements, with certain restrictions. The Court suggested that non-lawyer
third parties could fund litigation but strongly discouraged advocates from
doing so (Dalal, 2022).
Despite
these observations, there hasn't been explicit reference to the Privy Council's
judgment. The Supreme Court recognizes “TPF agreements if the third party is
not an advocate participating in the litigation”. However, each agreement
must adhere to the principles outlined in the Contract Act, 1872, ensuring it
doesn't violate public policy and morals. Some Indian states, including
Gujarat, Madhya Pradesh, and Uttar Pradesh, have statutorily recognized TPF
through amendments to the Code of Civil Procedure, 1908. Maharashtra's Bombay
High Court, in 1983, empowered courts to secure costs for litigation by
involving financiers as parties (Dalal, 2022).
While
strides have been made in corporate India with companies like Hindustan
Construction Company entering agreements with investors, TPF has yet to gain
widespread recognition and popularity. Suggestions to regularize and legislate
TPF in India have been made, with a 2017 report on institutional arbitration
recognizing existing TPF frameworks from arbitration-friendly jurisdictions.
However, introducing legislation alone might not be sufficient, as systemic
issues in the justice delivery system, notably delay and unpredictability,
remain significant challenges. Despite efforts such as the Commercial Courts
Act, 2015, and amendments to the Arbitration and Conciliation Act, 1996,
addressing docket explosion and delays in deciding disputes is crucial for the
effective growth of TPF in India. Currently, the large number of pending cases
at the district and taluka levels, coupled with the lack of clarity on the
duration of litigation, presents a significant impediment to the development of
TPF in India (Dalal, 2022).
The
expansion of third-party funding (TPF) in India has been limited, receiving
recent attention from Indian courts. While there is no precedent for TPF in
Indian arbitration, the recent endorsement of third-party funding in litigation
by the Supreme Court, especially when facilitated by non-lawyers, is a positive
development. “The High-Level Committee Report on Institutionalisation of
Arbitration in India briefly acknowledges TPF, hinting that its implementation
could improve arbitration practices”. Although Indian laws do not
explicitly forbid TPF, obstacles arise from the “historical interpretation of
maintenance and champerty as contrary to public policy”. The Indian Supreme
Court clarified that the stringent English rules on maintenance and champerty
are not applicable in India. Despite some subsequent rulings deeming such
agreements against public policy, the author advocates for a balanced approach,
aligning with the international arbitration regime and underscoring the
importance of weighing public policy considerations (Victoria, 2016).
Another
argument for introducing TPF in arbitration is the material differences between
litigation and arbitration. Arbitration is based on party autonomy, allowing
parties to involve third-party funders when necessary. “The author suggests
relaxing the standards of maintenance and champerty in arbitration, as the
state has minimal or no stake in private disputes” (Garg, 2020). Unlike litigation,
which has statutory provisions for providing free legal aid to the financially
incapable party, the Arbitration Act lacks such provisions. This creates a
situation where a party must present or defend its claim independently or
forfeit it due to financial constraints. Third-party funding, according to the
author, can play a crucial role in financing less privileged parties in
arbitration, levelling the playing field (Garg, 2020). Acknowledging the
substantial costs involved in arbitration, the author suggests that the Supreme
Court's justification of high costs implies an acceptance that arbitration
costs cannot be reduced easily. In the author's view, third-party funding might
be the solution to address the challenge of expensive arbitration and promote
its accessibility. Critics often argue that enabling TPF may encourage
frivolous claims. However, existing provisions in the Arbitration Act allow
courts to impose penalties for vexatious or frivolous proceedings. The author
contends that funders, motivated by potential benefits, would carefully
evaluate cases, ensuring they are not frivolous or unlikely to succeed (Garg, 2020).
Despite
India lacking specific legislation governing TPF, the courts have displayed a
cautious acceptance, emphasizing adherence to principles outlined in the
Contract Act, 1872, to prevent violations of public policy and morals. Some
Indian states have taken steps to recognize TPF through statutory amendments,
showcasing a growing awareness of its potential benefits. The discussion
surrounding the scope of applicability emphasizes the need for a nuanced and
purpose-oriented analysis of TPF agreements, moving away from using champerty
and maintenance as blanket prohibitions. The distinctions between litigation
and arbitration, particularly the autonomy in party decisions in the latter,
argue for a relaxation of standards, enabling TPF to play a vital role in
levelling the playing field for less privileged parties. While proponents
highlight the potential for TPF to address the financial constraints in
arbitration, critics' concerns about frivolous claims are mitigated by existing
legal provisions for penalties in the case of vexatious proceedings. The
Supreme Court's acknowledgment of high arbitration costs suggests that TPF
might be a pragmatic solution to combat the challenges associated with
expensive arbitration, making it more accessible to a broader segment of
society. In the broader context, the call for regularizing and legislating TPF
in India aligns with global trends and recognizes the need for a comprehensive
framework. However, it is acknowledged that addressing systemic issues within
the justice delivery system, such as delays and unpredictability, remains
crucial for the effective growth of TPF in India.
In
conclusion, the landscape of third-party funding (TPF) in India is gradually
evolving, marked by recent attention from the legal community and the
acknowledgment of its legitimacy in litigation by the Supreme Court. While TPF
in arbitration is yet to witness explicit precedents, the positive development
in the litigation sphere, particularly the endorsement of non-lawyer funders,
sets a precedent that may extend to arbitration. The historical hurdles posed
by the common law doctrines of champerty and maintenance have been addressed in
various jurisdictions, including the United Kingdom, Australia, Singapore, and
Hong Kong. The recognition that these doctrines should not unduly restrict access
to justice and the balanced growth of TPF markets in these jurisdictions
provide valuable insights for India.
The
author proposes introducing TPF in the Indian arbitration regime, emphasizing
its advantages and the absence of concrete arguments against it. The Supreme
Court's approval of TPF in litigation by non-lawyers is seen as a precedent
that could pave the way for a similar approach in arbitration (Garg, 2020). The evolving stance
of Indian courts, the recognition of TPF in select states, and the broader
global trends in jurisdictions with similar legal frameworks collectively
advocate for a thoughtful and inclusive approach towards incorporating TPF into
the Indian arbitration regime. The positive trajectory indicates a potential
paradigm shift that could enhance access to justice and contribute to the
efficient resolution of disputes in the country.
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