LEGAL LANDSCAPE OF THIRD-PARTY FUNDING IN INDIAN ARBITRATION

Author: Akanksha Chowdhury, Department of Law, Calcutta University



The concept of TPF:

Third party litigation funding (“TPF”) is the financial support for litigation, provided by a person or an entity that is not a party to the litigation and has no direct interest in the outcome.[1] In return, the third party funder expects certain predetermined payment or a success fee, from any monetary relief that the plaintiff might be awarded by way of decree, from a Court or an out-of-Court settlement.[2] Third party litigation funding is mainly offered to the plaintiff, but a defendant with a substantial counterclaim may also try to avail it.

Is TPF permissible in India?

· Civil Procedure Code, 1908

Indian law does not have specific provisions on TPF. However, Section 35 of the Code of Civil Procedure (CPC)[3] can be read to infer that, in certain circumstances the cost may be awarded to a third party by the Court. Costs are in the discretion of the Court that is adjudicating the matter. Judicial discretion cannot be exercised by the Courts without keeping in mind the general legal principles. Moreover, some States have amended Order XXV to cover cases in which the plaintiff is financed by a third party, for example, Order XXV of CPC was amended for the State of Maharashtra[4].

In the case of Maniankutty v. Venkiteswaran,[5] the Court observed that “it cannot be said that [the] Court has no power to award costs against persons, who are not parties to the suit in exceptional cases”.

· The Indian Contract Act, 1872

Section 23 of the Indian Contract Act[6] states that the consideration or object of an agreement is unlawful, if the Court regards it as immoral, or opposed to public policy, and such agreements are void. The definition and scope of “public policy” can be determined through judicial precedents.

In Fender v. St. John Milday,[7] Lord Atkin observed that “the doctrine does not extend only to harmful effects; it has to be applied to harmful tendencies. Here the ground is less safe and treacherous”. Relying on Lord Atkin’s observation, Justice Subba Rao noted that “Public policy or the policy of the law is an illustrative concept. It has been described as an ‘untrustworthy guide’, ‘variable quality’, ‘unruly horse’, etc…”[8]

Furthermore, in ONGC Saw Pipes case,[9] the Supreme Court of India observed that “The concept of what is for the public good or in the public interest or what would be injurious or harmful to the public good or the public interest has varied from time to time”. The term public policy has been held to include ‘tending to the perversion of or interference with the administration of justice’. This head covers maintenance, champerty, and agreements to stifle prosecution. Ergo, agreements of maintenance and champerty that tend to the perversion or interference with the administration of justice have been held void. A similar observation has been made by Courts in cases of Mr. G.[10] and A.K. Balaji.[11]

Section 70 of the Indian Contract Act[12] may be relevant for cases of pure funding, wherein funders are motivated to financially support the claim of a party non-gratuitously. This section is not applicable in cases of commercial funding, where the funding is mainly done for monetary returns or profit. It has also been noted by the Supreme Court that Section 70 of the Indian Contract Act does not apply to cases where there is a subsisting contract.[13] Therefore, if the pure funding is done vide a contract, Section 70 of the Indian Contract Act will not apply, and the act by the third party will become gratuitous.

· Bar council of India Rules

The Bar Council of India Rules[14] does not explicitly prohibit litigation funding by advocates. However, it has been noted in the A.K. Balaji case[15] that “a conjoint reading of Rule 18[16] (fomenting litigation), Rule 20[17] (contingency fees), Rule 21[18] (share or interest in an actionable claim) and Rule 22[19] (participating in bids in execution, etc.)” indicates that advocates in India cannot fund the litigation on behalf of their clients.

TPF and Judicial precedents:

The reservation against TPF is predicated on ancient common law doctrines of ‘maintenance’ and ‘champerty’, and the implications that such an arrangement could have on the public policy considerations under law. In brief, maintenance refers to the funding of disputes by an unconnected third party, while champerty (which is a sub-set of maintenance) refers to financing of disputes by third parties in exchange for a share in the profits (if any) thereof.

The Privy Council as early as 1876 in Ram Coomar Coondoo v. Chaunder Canto Mukherjee[20] watered down the principle of champertous agreements being hit by the public policy principle in common law and held that such agreements would only contravene the public policy of India if they were inherently inequitable, unconscionable and not made with malafide objects of supporting a claim. Accordingly, Ram Coomar set the stage for the interpretation of transactions including TPF and restricted it to transactions which had the possibility of injuring or oppressing others by aiding and abetting unrighteous suits.

In Kunwar Ram Lal v. Nil Kanth (1893)[21], the Privy Council categorically held that the common law approach to champertous agreements cannot ipso facto be imported into Indian jurisprudence and reaffirmed the Ram Coomar test, i.e., of the agreement being extortionate and unconscionable for it to fall foul of the public policy doctrine and hence becoming unenforceable in law.

In Lala Ram Swarup v. Court of Wards (1939)[22], the Privy Council had occasion to expand upon the scope of champertous agreements under Indian law. The Court held that an agreement to finance a dispute in consideration of receiving a share in the property (if recovered by the successful party) is not per se illegal and opposed to public policy.

The Supreme Court in Re: Mr. ‘G’, A Senior Advocate (1954)[23], while deciding on the issue of whether an advocate recovering proceeds from the success of his client amounts to professional misconduct, held that while it is a settled proposition in law that third party financing of disputes is not against public policy and unconscionable, the standards applicable to advocates funding disputes of their clients or recovering proceeds therefrom ought to be different. Accordingly, while the Court ultimately held against Mr. G and ruled that his agreement with his client for recovery of proceeds would be unenforceable in light of it amounting to professional misconduct, there was no restriction under Indian law for such agreements to be executed between willing parties and third party investors.

However, the Rajasthan High Court just a year later in Suganchand v. Balchand (1956)[24] observed that while champertous agreements are prime facie legal under Indian law, they would become unenforceable if the following conditions are satisfied:

(a) if they are extortionate and unconscionable so as to be inequitable against the party

(b) if they are made not with the bona fide object of assisting a claim believed to be just and obtaining a reasonable recompense therefore, but for improper objects as:

i) For the purpose of gambling in litigation; or

ii) Injuring or oppressing others by abet-ting and encouraging unrighteous suits.

Yet another interesting aspect of TPF was highlighted by the Andhra Pradesh High Court in Nuthaki Venkataswami v. Katta Nagi Reddy (died) (1962)[25], wherein the Court had the occasion to adjudicate upon whether the quantum of the proceeds that ultimately vest in a third party financier may have a bearing on the enforceability of such agreements. In the instant case, the agreement envisioned the financier to retain 3/4th of the claimant’s property should its claim be successful before the court. Refusing to recognize such an agreement, the Court, relying upon established precedents held that such an arrangement of sharing of profits was not held to be fair or reasonable in any other case and, as such, was unconscionable and ex facie extortionary.

The judgment in Nuthaki’s case heralded a shift in the narrative of the Indian Courts towards TPF of disputes. It seemed to suggest that while the courts would look favourably upon recovery of the amount extended as funds towards the dispute, financiers would be unable to enforce contracts and recover money where the fund disbursed was either in consideration of recovery of a large portion of the stake or was executed with the malafide intent of merely making profits on the possibility of the Claimant’s success.

More recently however, the Supreme Court in Bar Council of India v. AK Balaji (2018)[26] reaffirmed the legal permissibility of TPF in litigation and observed that though advocates in India are prohibited from funding litigation, there appears to be no similar restriction on third parties (non-lawyers) funding litigation and recovering the amount due to them after the outcome of the dispute. TPF of disputes has also been received favourably in the Report of the High Level Committee to Review the Institutionalisation of Arbitration Mechanism in India.[27]

Conclusion:

In its recent years of development, TPF has been engulfed by diverse issues. Presently, the restrictive nature of applicable laws (including the definition of ‘party’ and ‘costs’) and the exceptionally exercised jurisdictional powers of tribunals on third parties (except traditional principles of agency and assignment) result in a shortfall of arbitral practice vis-à-vis third party funders. Unless arbitral practice establishes, or applicable laws evolve, to expressly include funders in costs orders, this power remains largely subject to discretion and application of third party principles, keeping alive the pervasive foundation of arbitration, i.e. , party consent. While it will be quintessential to consider the roots of amicable dispute resolution, arbitral practice beckons wider purview to encompass third party funders in certain circumstances to meet the interests of justice and equity.

[1] David Abrams & Daniel L. Chen, A Market for Justice: A First Empirical Look at Third Party Litigation Funding, 15 U. PA. J. BUS. L.1075, 1083 (2013). [2] Id. at 1083. [3] Code of Civil Procedure, 1908, No. 05, Acts of Parliament,1908 [4] Order XXV of CPC was amended for Maharashtra by Bombay High Court Notification P. 0102/77 dated 5-9-1983. This same amendment has been adopted by Gujarat and Madhya Pradesh. Allahabad has added only R. 2 of Or. 25, which states that costs may be secured from the third-party funding of litigation. [5] Maniankutty v. Venkiteswaran, (1978) KLT 841 at 842 [6] The Indian Contract Act 1872, Act 9 of 1872. [7] Fender v. St. John Milday, 1983 AC 1 (HC). [8] Gherulal Parekh v. Mahadevdas Maiya, AIR 1959 SC 781. [9] ONGC Ltd. v. Saw Pipes Ltd., 2003 (2) RAJ 1 (SC). [10] In Re: Mr. ‘G’, A Senior Advocate of the Supreme Court v. The Hon’ble Chief Justice and Judges of the High Court of Judicature at Bombay, 1955 1 SCR 490. [11] Bar Council of India v. A.K. Balaji and others, 2018 (5) SCC 379. [12] The Indian Contract Act 1872, Act 9 of 1872. [13] Mulamchand v. State of Madhya Pradesh, 1968 SCR (3) 214. [14] The Bar Council of India Rules, 1975. [15] Supra. [16] The Bar Council of India Rules, 1975, Rule 18. [17] Id. [18] Id. [19] Id. [20] Ram Coomar Condoo and another v. Chunder Canto Mookerjee (1876), ILR2CAL233. [21] Kunwar Ram Lal v. Nil Kanth (1893) 20 I.A. 112. [22] Lala Ram Swarup v. Court of Wards (1939), AIR 1938 Lah 23 [23] Id. [24] Suganchand v. Balchand; 1956 SCC OnLine Raj 127 [25] Nuthaki Venkataswami v. Katta Nagi Reddy (died) (1962), AIR 1962 AP 457 [26] Bar Council of India v. AK Balaji (2018), AIR 2018 SC 1382. [27] http://legalaffairs.gov.in/sites/default/files/Report-HLC.pdf.

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