Third-party funding (TPF), as its name suggests, involves an entity financing the legal expenses of one party in a dispute in exchange for a portion of any successful monetary award. This funding covers various costs including legal representation and may also include advances towards tribunal fees. It’s important to differentiate TPF from contingency fee agreements and insurance against claims. The concept of TPF originated from the need to provide individuals lacking sufficient resources access to justice despite the high costs involved in dispute resolution. The United Kingdom was among the first common law jurisdictions to introduce and implement this concept.

This sentiment is further supported by court rulings, such as the England and Wales High Court’s decision in the case of Gulf Azov Shipping Co Ltd. In this case, the court acknowledged that it is now seen as beneficial for third parties to assist in ensuring that all parties involved in litigation have access to legal representation, in line with public policy aimed at facilitating access to justice. Since then, in recent years, TPF has gained momentum in various jurisdictions including the USA, Singapore, and Hong Kong. This trend is particularly noticeable in corporate circles, where companies utilize TPF to finance disputes. The advantages of TPF for corporations are twofold: it aids companies facing financial constraints that might hinder their ability to finance disputes, and it allows financially stable companies to share risks while maintaining liquidity.

India and TPF

India’s engagement with third-party funding (TPF) in legal matters has been a relatively recent development, with the concept gaining attention and interest in the country’s legal landscape. Historically, third-party funding was not explicitly addressed or regulated under Indian law. However, with the growth of international arbitration and complex commercial disputes involving Indian parties, the need for alternative financing options like TPF has become apparent.

In 2018, the Law Commission of India released a report recommending the legalization of third-party funding in arbitration. This report recognized the potential benefits of TPF in increasing access to justice and promoting the efficient resolution of disputes. Following the recommendations of the Law Commission, the Indian government has taken steps to regulate third-party funding. In 2019, the Arbitration and Conciliation (Amendment) Act was passed, allowing third-party funding in arbitration proceedings. However, certain restrictions and safeguards were introduced to ensure transparency, ethical conduct, and the protection of parties’ interests. Despite these developments, the use of third-party funding in India is still relatively limited compared to other jurisdictions. Cultural and ethical considerations, as well as concerns about potential conflicts of interest and confidentiality issues, have contributed to cautious adoption. Nevertheless, as India continues to integrate into the global economy and its legal landscape evolves, the use of third-party funding is expected to grow, providing parties with an additional tool to navigate complex legal disputes.

Over time, Indian courts have departed from traditional legal principles regarding champerty and maintenance, as evidenced by significant rulings such as the Supreme Court of India’s judgment in the case of Mr G. Senior Advocate in 1954.

In this landmark decision, the Court declared that the strict doctrines of champerty and maintenance, which prohibit third-party funding of legal proceedings, are not applicable in India. Instead, the Court ruled that agreements for third-party funding are not against public policy and should be permitted. This stance was further supported by the Law Commission of India in its 2017 report, which recommended the legalization of third-party funding in the country. However, it’s important to note that certain conditions were proposed. For instance, advocates representing parties in legal proceedings are prohibited from funding those proceedings, as per the regulations set forth by the Bar Council of India. This prohibition aims to maintain the integrity of legal representation and prevent conflicts of interest.

India currently lacks explicit regulations or laws specifically addressing third-party funding (TPF) in legal matters. This absence is evident upon examination of the Arbitration and Conciliation (Amendment) Act of 2015 and its subsequent 2019 amendment. However, a review of the Code of Civil Procedure, 1908 reveals implicit recognition of TPF. Particularly noteworthy is Order XXV Rule 1 of the code, amended by states such as Maharashtra, Gujarat, Madhya Pradesh, and Uttar Pradesh. This provision empowers courts to secure litigation costs by requiring financiers to become parties and deposit costs with the court. Additionally, the Supreme Court’s ruling in Bar Council of India v. AK Balaji reinforces this stance. The court observed that there are no restrictions on third parties, excluding lawyers, from funding litigation and receiving repayment post-litigation outcome. Thus, there exists no blanket prohibition on financing parties involved in disputes, provided funders adhere to Indian Bar Council Rules.

However, the legal landscape surrounding TPF in India has recently seen significant development. The Delhi High Court, in its judgment in Tomorrow Sales Agency v/s SBS Holdings Inc, has offered much-needed clarity on this matter, marking an important step forward in Indian jurisprudence concerning TPF.

Way forward

The recent recognition of third-party funding (TPF) by Indian courts indeed raises several important questions and concerns that require careful consideration. One key issue is the potential for the funder to exert influence over the choice, appointment, and fees of legal representatives, potentially leading to a situation where legal representatives are directly accountable to the funder for their actions during arbitration proceedings.

This raises questions about whether disclosure of TPF by a party should be discretionary or mandatory, as well as the extent of funding provided. Additionally, confidentiality becomes a significant concern, as third-party funders may require access to sensitive information about the dispute and the progress of arbitration, potentially infringing on the confidentiality of the opposing party’s information. Opposing parties may rightly object to such inquiries and demand assurances of confidentiality. Moreover, conflicts of interest must be disclosed not only between the arbitrator and the third-party funder but also between the legal representatives of the parties involved in the dispute.

Addressing these concerns and ensuring transparency, confidentiality, and the avoidance of conflicts of interest will be crucial as India navigates the evolving landscape of TPF in its legal system.

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