Litigation Funding – Permissible yet unexplored in India

When it comes to Litigation Funding (LF) in India, one may not find a direct legislative regime throwing much light on litigation funding in India yet litigation funding or more popularly known as ‘third-party funding’ is not prohibited in India. There have been precedents where the courts have, with the objective of promoting smooth access to justice, acknowledged third party funding of litigation.  In fact some states in India like Maharashtra, Madhya Pradesh, Uttar Pradesh and Madras have amended the Civil Procedure Code, 1908 to acknowledge LF and statutorily recognised the concept of litigation funding by third parties in India.

So what is Litigation Funding?As the expression ‘Litigation Funding’ indicate, it is the practice of financing a litigation, for a plaintiff, by a third party unrelated to the litigation that is being funded by such third-party. It is basically infusion of capital in a litigation. Consideration for such infusion of capital is an agreed percentage of the financial recovery or share in the property (outcome of litigation) that may happen in favour of the plaintiff in the lawsuit that is being funded. Litigation funding comes into picture especially where the plaintiff is either not willing to spend money on the proposed litigation or the plaintiff is not in a position to incur such expense to litigate a claim against the defendant. Favourable judgement in favour of the plaintiff would result into gain for the litigation funder and on the other hand an unfavourable judgement leaves the litigation funder out-of-pocket without any return. As far as the history of litigation funding is concerned, Wikipedia and indicates that litigation funding has been permitted in England and Wales since 1967. Commercial litigation funding has been allowed in Australia in the late 1990s and certain forms of litigation funding has since been authorised in other nations including the US, Canada and Asia1.

Indian Scenario

In India, there doesn’t seem to be any specific bar under any legislation against third-party litigation funding or litigation funding. On the contrary third party funding of litigation is statutory recognised in the Civil Procedure Code by virtue of certain state amendments, where it can be seen that the legislature has acknowledged the concept of litigation funding. State amendment to Order XXV of CPC by the State of Maharashtra reads as under:

XXV Rule 3: Power to implead and demand security from third person financing litigation. –

  1. where any plaintiff has for the purpose of being financed in the suit transferred or agreed to transfer any share or interest in the property in the suit to a person who is not already a party to the suit, the court may order such person to be made plaintiff to the suit if he consents and may either of its own motion or on the application of any defendant order such person, within a time to be fixed by it, to give security for the payment of all costs incurred and likely to be incurred by any defendant. In the event of such securities not being furnished within the time fixed, the court may make an order dismissing the suit so far as his right to, or interest in, the property in suit is concerned, or declaring that he shall be debarred from claiming any right to or interest in the property in the suit.
  2. if such person declines to be made the plaintiff, the court may implead him as a defendant and may order him, within a time to be fixed by it, to give security for the payment of all costs incurred in likely to be incurred by any other defendant. In the event of such security not being furnished within the time fixed, the court may make an order declaring that he shall be debarred from claiming any right to or interest in the property in the suit.
  3. any plaintiff or defendant against whom an order is made under this rule may apply to have it set aside and the provisions of sub-rules (2), (3) of Rule (2) shall apply mutatis mutandis to such application.

State amendment to Order XXV (1) of CPC by the State of  Uttar Pradesh reads as under:

XXV Rule 1: When security for costs may be required from the plaintiff.

  1. at any stage of the suit the court may, either of its own motion or on the application of any defendant, and order the plaintive for the reasons to be recorded to give within the time fixed by it, security for the payment of all costs incurred in likely to be incurred by any defendant:Provided that such an order shall be made in all cases in which it appears to the court that a sole plaintiff is, or (when there are more plaintiffs than one) that all the plaintiffs are, residing outside the state and that such plaintive does not possess that no one of such plaintiffs possesses any sufficient immovable property within the state other than the property in suit or that the plaintiff is being financed by any other person

State of Madras has applied the amendment made by State of Maharashtra and similar amendment has been made by the State of Madhya Pradesh.

In view of the above state amendments, it is clear that the concept of third party funding is very much in the mind of the legislature and is a permissible activity in India. In fact as recent as in 2018, in the matter of Bar Council of India Vs. AK Balaji 2 While dealing with the question whether the foreign lawyers or law firms can practice law in India, the Supreme Court after referring to various rules of the Bar Council of India3, observed that in India funding of litigation by advocates is not explicitly prohibited. It also observed that a conjoint reading of Rule 18 (fomenting litigation), Rule 20 (contingency fees), Rule 21 (share or interest in an actionable claim) and Rule 22 (participating in bids in execution et cetera) would strongly suggest that advocates in India cannot fund the litigation on behalf of their clients. It also noted that there appears to be no restriction on third parties (non-lawyers) funding litigation in getting repaid after the outcome of the litigation. In fact in the Supreme Court also noted that in India, partnerships with non-lawyers for conducting legal practice is not permitted.

In the case of ‘G’ Senior advocate4 though not related to the question of litigation funding, the court observed that the rigid English rules of champerty and maintenance do not apply in India. It also said that if the agreement in question had been between, a third party and a litigant it would have been legally enforceable and good. It also observed that there is nothing morally wrong, nothing to shock the conscience and nothing against public policy and public morals when in such an agreement a legal practitioner is not concerned. Thus, way back in 1954, the concept of litigation funding or champerty and maintenance were observed to be valid if a legal practitioner was not connected to such agreement of champerty and maintenance.

In Ram Coomar Coondoo V. Chunder Canto Mookerjee5 it was observed that a fair agreement to supply funds to carry on a suit in consideration of having a share of the property, if recovered, not to be regarded as being per se opposed to public policy. But agreements of such kind ought to be carefully watched and when extortionate, unconscionable or made for improper objects ought to be held invalid.

Therefore, what can be inferred on the legal position of litigation funding in India, is that there is a clear restriction on lawyers to fund litigation especially when they are representing their client in the particular litigation. Third-party funding is permissible and recognised and such third party may not be a party to the litigation but aides such litigation by funding it. Riders of such litigation financing in India can be summed up in the following terms:

  1. Lawyers are not permitted to fund any litigation for their clients.
  2. The agreement of funding the litigation should not be found to be extortionate, unconscionable or inequitable.
  3. Agreement for funding the litigation should not be made for improper objects.

Financing litigation can be beneficial in many ways. It can increase access to justice especially for the parties with low financial status/accessibility and can also help parties with low finances to defend their cases on merits without incurring any personal costs. For big companies and large corporates, it can help as a cost management tool as people tend to avoid spending good money over bad money in litigation. With litigation funding coming in, access to such cases in court may increase where the litigation funder spends substantial amount after carrying on necessary diligence on the matter and the person availing such finance also do not tend to lose in case the litigation is lost. Such third party funding does not affect the balance sheet of such corporates.

The areas of concern  go for litigation funding may be manifold if litigation funding is to set its base in India as a product. The main concerning areas could be confidentiality and privilege , however the same can be taken care of by entering into a well drafted, robust and lucid agreement protecting confidentiality and taking care of other conflict obligations. Important clauses with regard to right of the litigant, right and obligation of the litigation funders, termination of the agreement of litigation funding and its consequences, choice of counsel to conduct such litigation and right to choose counsel, fees/share of litigation funder in the event of successful litigation etc needs to be properly captured / structured in the litigation funding agreement.

India being a vast country and courts being overburdened with litigation, international disputes involving Indian parties, coupled with the fact the expensive nature of litigation, India is being eyed by litigation funders across the globe as the market in future for the product of litigation funding.

As is seen across the globe, especially in the developed countries, where litigation funding is quite prominent, India’s legislative environment and regulatory regime needs to cope up and spread it’s wings to welcome litigation funding in India as a completely regulated product. At present, if a litigation funder is a foreign entity then regulations of the Reserve Bank of India and the provisions of Foreign Exchange Management Act and it’s related regulations may be required to be complied with. A codified law regulating litigation funding keeping in view the environment in India is very much needed. Till such time a law is enacted, the aforesaid judgements of the Privy Council and the Supreme Court are the only guiding factors for subsistence of litigation funding in India.

1 Wikipedia search input ‘Litigation Funding’
2 (2018) 5 SCC 379
3 BCI Rules
4 AIR 1954 SC 557
5 1876 SCC Online 19

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