Third Party Funding (“TPF”), also referred to as “Litigation Financing,” has emerged as a significant phenomenon in the global dispute resolution landscape. Typically, a third-party financier funds a party in consideration for an entitlement to receive a share in the proceeds of the outcome of the dispute if the funded party were to succeed.
Historically prohibited in common law jurisdictions like England, due to concerns over maintenance and champerty, TPF was viewed as susceptible to abuse by powerful individuals. However, modern legal frameworks are increasingly recognizing the role of TPF in promoting access to justice and leveling the playing field for litigants who lack the resources to enforce their legal rights. In India, TPF remains at a nascent stage—fraught with legal ambiguities and regulatory challenges.
Legal Viability of TPF in India
While there is no legal framework per se in place for TPF in the Arbitration and Conciliation Act, 1996, TPF is statutorily recognized for civil suits under some state amendments of Order XXV Rules 1 and 3 of the Code of Civil Procedure, 1908 (e.g., Maharashtra, Gujarat, Madhya Pradesh, and Uttar Pradesh). These provisions recognize the right of a plaintiff to transfer the right in suit property to a financier in civil suits, in the aforementioned states.
Moreover, TPF in India is supported by various judicial pronouncements. The Privy Council in Ram Coomar Coondoo v. Chander Canto Mookerjee (1876) acknowledged the legality of TPF agreements unless they are extortionate or contrary to public policy. This position was reinforced in Re: Mr. ‘G’, A Senior Advocate of the Supreme Court, wherein the Supreme Court observed that while rigid English rules may not apply, such agreements could be void as against public policy under Section 23 of the Indian Contract Act, 1872.
Courts have upheld TPF agreements that are fair and proportional, as seen in cases like Harilal Nathalal Talati v. Bhailal Pranlal Shah (1940) and Tomorrow Sales Agency Pvt. Ltd. v. SBS Holdings Inc. & Ors. (2023). The Supreme Court, in Bar Council of India v. A.K. Balaji (2018), further clarified that while TPF is permissible, advocates are barred from entering such agreements to prevent conflicts of interest.
Challenges and Suggestions to TPF
In order for India to become a feasible market for TPF, especially in domestic arbitration, it is crucial to reassess specific provisions of the Arbitration and Conciliation Act, 1996. The primary issue regarding the adoption of TPF in India is the lack of clarity in legislation and norms controlling its principles, resulting in regulatory ambiguity.
It is necessary to consider factors such as confidentiality, disclosure obligations, arbitrator bias, and conflict of interest in conjunction with the Act in order to fully comprehend its influence on the execution of TPF. For instance, the lack of disclosure requirements in India for TPF arrangements has the potential to lead to conflicts of interest in arbitrator appointments.
Significantly, if an arbitration is being financed by a third party and is located in India, or if the funder is also in India, then the regulations of the Foreign Exchange Management Act 1999 (“FEMA”) would be applicable. Given that FEMA does not clearly categorize TPF as either a current or capital account transaction, it is unclear how these funds would interact with the regulatory framework, even though it can be seen that the Delhi High Court, in NTT Dokomo Inc v Tata Sons Ltd., observed that in contrast to its archetype rule, the Foreign Exchange Regulation Act (FERA) 1973, FEMA itself neither restricts foreign exchange transactions, nor does it render them void if there should be any procedural non-compliance.
Conclusion
The absence of champerty and maintenance restrictions provides a foundation for TPF, but also highlights the need for a clear regulatory framework. Especially in post-COVID-19 times, TPF can be used as a mechanism to aid distressed companies and litigants. Not only does TPF save businesses during financially draining disputes, but it also provides equal access to justice—all while being a lucrative investment for funders. Therefore, the enactment of legislation that addresses the rights and obligations of third-party financiers, as well as other issues such as the level of participation and influence exerted by the party in the dispute resolution process, would be a constructive step by the legislature. Similarly, the integration of TPF into India’s arbitration landscape presents both opportunities and challenges. As India furthers its aim to be the arbitration hub and to align arbitration laws with global standards, the treatment of TPF will in many ways spearhead the path for shaping the country’s acceptability as an arbitration-friendly jurisdiction.