The Growth of Third-Party Litigation Funding in India: A 2026 Legal Overview

For many years, pursuing justice in India depended heavily on financial strength. Even strong legal claims were often dropped because parties could not afford long and expensive court proceedings. As India moves through 2026, this reality is changing. Third-Party Litigation Funding (TPLF), which was once discussed only in academic circles, has now become a practical and widely used tool. It helps individuals, startups, MSMEs, and large corporations pursue legitimate legal claims without bearing the full financial burden.

This article explains the concept of TPLF, its legal foundation, recent judicial developments, and the regulatory position in India as it stands in 2026.

Meaning and Nature of Third-Party Litigation Funding

Third-Party Litigation Funding is an arrangement where a person or entity that has no direct interest in a legal dispute agrees to pay the legal costs of the case. In return, the funder receives a pre-agreed share of the amount recovered if the case succeeds, whether through a settlement, court decree, or arbitral award.

The most important feature of modern TPLF in India is that it is non-recourse. This means that if the case fails, the funder loses the money invested and the claimant is generally not required to repay anything. As a result, the financial risk of litigation is shifted from the claimant to the funder.

Legal Basis of TPLF in India

India has traditionally taken a liberal view towards litigation funding, unlike England where old common law doctrines once treated such arrangements as illegal. Indian courts have consistently held that funding litigation is not unlawful by itself.

As early as 1876, in the case of Ram Coomar Coondoo v. Chunder Canto Mookerjee, the Privy Council held that the English doctrines of champerty and maintenance do not apply in India. The Court clarified that an agreement to fund litigation in exchange for a share in the proceeds is valid unless it is unfair, unconscionable, against public policy, or intended purely as a form of gambling in litigation.

This position was later affirmed by the Supreme Court of India in Bar Council of India v. A.K. Balaji (2018). The Supreme Court made it clear that there is no legal restriction on third parties funding litigation. However, the Court also clarified that lawyers are not permitted to charge contingency fees under the Bar Council of India Rules. This distinction is important, as it allows external funders to finance litigation while maintaining ethical boundaries for legal professionals.

Regulatory Position in India as of 2026

India does not yet have a specific legislation governing Third-Party Litigation Funding. Instead, its legality and regulation are derived from a combination of procedural law, contract law, arbitration law, and judicial interpretation.

Under the Code of Civil Procedure, 1908, certain states such as Maharashtra, Gujarat, and Madhya Pradesh have introduced amendments to Order XXV. These amendments recognise the role of third-party funders and give courts the power to ask such funders to provide security for costs. This ensures that defendants are protected from frivolous claims backed by unknown financiers.

From a contractual perspective, TPLF agreements are governed by the Indian Contract Act, 1872. Their validity is tested under Section 23, which prohibits agreements that are opposed to public policy. By 2026, Indian courts have increasingly recognised access to justice as a key element of public policy. As a result, funding arrangements that enable genuine claims to be pursued are more likely to be upheld.

In the field of arbitration, transparency has become a central concern. With India positioning itself as a hub for international commercial arbitration, draft amendments introduced between 2024 and 2025, along with institutional rules of bodies such as the MCIA and IIAC, now generally require disclosure of third-party funding arrangements. This helps prevent conflicts of interest between arbitrators and funding entities.

Key Judicial Developments Between 2023 and 2025

Recent court decisions have clarified the legal position of litigation funders in India. One of the most important judgments is the Delhi High Court’s decision in Tomorrow Sales Agency Private Limited v. SBS Holdings, Inc. (2023).

In this case, the Court held that a litigation funder is not automatically a party to the dispute and cannot be made liable for adverse cost orders merely because it funded the litigation. Such liability can arise only if the funder is formally impleaded in the proceedings and the funding agreement permits such responsibility. The Court also emphasised the importance of transparency and disclosure, stating that funding arrangements must not undermine the integrity of the justice system.

This judgment provided much-needed clarity and confidence to funders by confirming that their exposure is usually limited to the amount they invest.

Importance of TPLF in the Indian Legal Market

In the economic and legal environment of 2026, Third-Party Litigation Funding offers several practical advantages. It helps level the playing field by allowing MSMEs and startups to challenge large corporations in complex commercial, contractual, or intellectual property disputes without facing financial collapse.

For large corporations, TPLF offers a way to pursue strong legal claims without affecting cash flow, balance sheets, or profitability metrics. Litigation expenses can be treated as off-balance-sheet risk, allowing better financial planning.

Another important benefit is that funders conduct detailed legal and financial due diligence before investing. As a result, a funded claim often signals that the case has strong merits, which can encourage early settlement discussions and reduce overall dispute duration.

Risks and Legal Challenges in TPLF Arrangements

Despite its growing acceptance, Third-Party Litigation Funding is not free from challenges. One major concern is excessive control by funders. If a funder attempts to dictate legal strategy or forces a settlement, courts may treat the agreement as being against public policy.

Another unresolved issue is legal privilege. Sharing confidential case documents with funders may raise questions about waiver of attorney-client privilege. Recent High Court decisions suggest that a common interest privilege may apply, but careful drafting and confidentiality safeguards are essential.

Conflicts of interest are particularly sensitive in arbitration. If an arbitrator has a direct or indirect relationship with a funding entity, it may give rise to challenges under the Fifth and Seventh Schedules of the Arbitration and Conciliation Act, 1996.

Essential Clauses in a TPLF Agreement

In 2026, lawyers advising on litigation funding must ensure that certain clauses are clearly drafted. The agreement must explain how recoveries will be distributed, usually by first reimbursing the funder’s costs, followed by the agreed success fee, and finally the remaining amount being paid to the claimant.

The agreement should also specify when a funder is allowed to terminate funding, particularly if new evidence shows that the case no longer has merit. At the same time, it must clearly state that the final decision to settle the dispute rests with the claimant, even if the funder is allowed limited rights to object to an unreasonably low settlement.

Strict confidentiality obligations are essential to protect sensitive legal and commercial information shared during the due diligence and funding process.

Conclusion: The Way Forward

By 2026, Third-Party Litigation Funding has moved beyond being a fringe concept in Indian law. It has developed into a recognised and increasingly accepted financial mechanism that supports access to justice and efficient dispute resolution.

With courts encouraging alternative dispute resolution and the government focusing on ease of doing business, TPLF acts as a bridge between legal rights and effective remedies. For law firms and corporate legal teams, understanding litigation funding is no longer optional. It is now a necessary part of providing complete and commercially aware legal advice in an era where law and finance are closely connected.

Contributed By: Siddharth Bankal(Intern)