Introduction

Third-Party Litigation Funding (TPLF) is a legal and financial arrangement wherein a third party, unrelated to the litigation, provides funds to a litigant to cover legal costs in exchange for a share in the monetary outcome of the dispute. This practice has gained significant traction globally, particularly in jurisdictions like the United States, the United Kingdom, and Australia, as a means of increasing access to justice. In India, while the concept of TPLF is not new, it operates within an evolving legal framework that continues to generate significant debate. This article delves into the legal perspective of TPLF in India, its current standing, judicial precedents, challenges, and the need for regulatory mechanisms, supported by authoritative citations.

Understanding about TPLF

TPLF typically involves three parties:

• The Litigant: The individual or entity pursuing or defending a legal claim.
• The Funder: A third-party financier who agrees to bear the cost of litigation in exchange for a share in the proceeds.
• Legal Professionals: Lawyers representing the litigant, who may interact with funders on behalf of their client.

The primary objective of TPLF is to enable litigants, particularly those with limited financial resources, to pursue meritorious claims without being deterred by the high costs of litigation.

Global Trends in TPLF

Globally, TPLF has grown into a multi-billion-dollar industry, particularly in commercial disputes and international arbitration. Countries like the United States and the United Kingdom have robust litigation funding markets supported by clear legal frameworks. The landmark case of Excalibur Ventures LLC v. Texas Keystone Inc. ([2016] EWCA Civ 1144) in the UK highlighted the importance of ensuring that TPLF agreements do not encourage frivolous litigation but support genuine claims.

In Australia, the High Court in Campbells Cash and Carry Pty Ltd v. Fostif Pty Ltd ([2006] HCA 41) upheld the validity of litigation funding agreements, emphasizing their role in promoting access to justice.

TPLF in India: Legal Framework and Historical Perspective

 Legal Framework in India

In India, TPLF is neither expressly permitted nor prohibited by statutory law. The practice finds its legitimacy primarily in judicial precedents and general contract law principles under the Indian Contract Act, 1872. Section 23 of the Act provides that agreements are void if they are unlawful or against public policy. Thus, the validity of TPLF agreements is contingent upon their terms being fair, reasonable, and not unconscionable.

Judicial Recognition of TPLF

Indian courts have, on several occasions, examined the permissibility of TPLF agreements.

• Privy Council in Ram Coomar Coondoo v. Chunder Canto Mookerjee [(1876) ILR 4 Cal 233 (PC)]:

In this case, the Privy Council held that champertous agreements (where a thirdparty funds litigation in return for a share of the proceeds) are not per se illegal in India. However, such agreements could be struck down if they were extortionate or contrary to public policy.

• Mohammed v. Wilson [(1889) ILR 13 Mad 214]:

The Madras High Court upheld the validity of a champertous agreement, stating that such agreements are enforceable unless they are inequitable or unconscionable.

• Bar Council of India v. A.K. Balaji [(2018) 5 SCC 379]:

The Supreme Court of India observed that advocates are prohibited under the Bar Council of India Rules from entering into contingency fee arrangements or funding litigation. However, the Court clarified that there is no prohibition on third parties (non-lawyers) funding litigation, provided such arrangements do not contravene public policy.

• Tomorrow Sales Agency Pvt. Ltd. v. SBS Holdings, Inc. & Ors. [2023 SCC Online Del 3191]:

The Delhi High Court acknowledged the importance of third-party funding in arbitration and emphasized the need for transparency and disclosure of funding arrangements to prevent conflicts of interest.

Key Benefits of TPLF

• Access to Justice:

 TPLF facilitates access to justice for litigants who lack the financial resources to pursue or defend a claim. This is particularly relevant in India, where the high cost of litigation can deter individuals from seeking redressal.

• Levelling the Playing Field:

TPLF can bridge the financial gap between litigants, ensuring that weaker parties can compete against well-resourced adversaries.

• Risk Mitigation:

By transferring the financial risk of litigation to funders, litigants can focus on the merits of their case without being burdened by legal costs.

• Encouragement of Merit-Based Claims:

Litigation funders typically conduct rigorous due diligence before agreeing to fund a claim, thereby discouraging frivolous or unmeritorious litigation.

Challenges and Concerns in the Indian Context

• Regulatory Vacuum:

The absence of specific legislation governing TPLF in India creates uncertainty and exposes litigants to potential risks. There is no statutory mechanism to oversee the conduct of funders or the terms of funding agreements.

• Ethical Concerns:

TPLF agreements may give funders undue influence over the litigation process, potentially compromising the litigant’s autonomy and the integrity of the legal system.

• Public Policy Issues:

Agreements with exorbitant or oppressive terms could be struck down as being contrary to public policy under Section 23 of the Indian Contract Act, 1872.

• Confidentiality and Privilege:

Sharing sensitive case-related information with funders may jeopardize client confidentiality and privilege, raising ethical and legal concerns.

• Potential for Abuse:

The lack of regulation could lead to exploitation of financially weaker litigants by unscrupulous funders.

 Proposed Regulatory Framework for TPLF in India

To address the challenges and harness the potential of TPLF, India needs a comprehensive regulatory framework. The following measures could be considered:

• Registration of Funders:

Litigation funders should be required to register with a regulatory body to ensure transparency and accountability.

• Standardized Agreements:

The terms of TPLF agreements should be standardized to prevent exploitation and ensure fairness.

• Mandatory Disclosure:

Litigants should be required to disclose the existence of TPLF arrangements to the court or tribunal, along with details of the funder, to prevent conflicts of interest.

• Preservation of Confidentiality:

Mechanisms should be put in place to ensure that information shared with funders remains confidential and is not used for any purpose other than the funded litigation.

• Ethical Safeguards:

Funders should be prohibited from interfering in legal strategy or decision-making, ensuring that the litigant retains autonomy over their case.

• Regulation of Returns:

To prevent exploitation, the returns payable to funders should be capped at a reasonable percentage of the proceeds.

 TPLF and Arbitration in India

With the rise of arbitration as a preferred mode of dispute resolution in India, TPLF has gained prominence in this domain. Arbitration proceedings, particularly in complex commercial disputes, can be prohibitively expensive. TPLF offers a viable solution by enabling parties to pursue claims without being constrained by financial limitations.

The Delhi High Court’s decision in Tomorrow Sales Agency Pvt. Ltd. v. SBS Holdings, Inc. underscores the growing relevance of TPLF in arbitration. The court’s emphasis on transparency and disclosure highlights the need for tailored regulations to address the unique challenges of TPLF in arbitration.

Comparative Analysis: TPLF in Other Jurisdictions

1. United States:

The TPLF industry in the US operates largely unregulated, with courts focusing on the enforceability of funding agreements and ensuring that they do not violate ethical standards.

2. United Kingdom:

The UK has a well-established TPLF market supported by clear legal principles. The Association of Litigation Funders (ALF) has issued a voluntary code of conduct to regulate the conduct of funders.

3. Australia:

Australia has embraced TPLF, particularly in class actions. The Campbells Cash and Carry case affirmed the legitimacy of litigation funding agreements and highlighted their role in facilitating access to justice.

The Way Forward

India’s legal landscape is gradually evolving to accommodate TPLF, driven by judicial recognition and the increasing demand for alternative funding mechanisms. However, the absence of a clear regulatory framework remains a significant impediment.

Introducing a comprehensive legal framework tailored to Indian conditions would provide the necessary safeguards while encouraging the growth of the TPLF industry. This framework should strike a balance between promoting access to justice and preventing potential abuse, ensuring that TPLF serves its intended purpose of empowering litigants without compromising the integrity of the legal system.

Conclusion

Third-Party Litigation Funding is a promising development in India’s legal landscape. By enabling financially weaker parties to pursue legitimate claims, TPLF has the potential to democratize access to justice. However, the challenges associated with the practice necessitate the introduction of a robust regulatory framework. Judicial precedents have laid the groundwork for the acceptance of TPLF in India, but legislative interventionis essential to address the ethical, procedural, and substantive issues associated with the practice.As India continues to embrace globalization and economic growth, a well-regulated TPLF regime could play a pivotal role in strengthening the country’s legal and arbitration ecosystem, ensuring justice for all stakeholders.