Third-Party Funding of Litigation — A Damocles Sword or a Welcome Step

Introduction

Third-party funding (TPF) of litigation is one of the hottest discussion topics in India given the usurious cost of litigation. As the name indicates, it involves an entity/person who is not concerned with, or involved in a dispute between two (or more) parties funding the costs of conducting a litigation by one of the parties. A more scientific and comprehensive definition is the one suggested by the Task Force of the International Council for Commercial Arbitration and Queen Mary University of London in their April 2018 Report, which takes into account multiple models of funding:[1]

The term “third-party funding” refers to an agreement by an entity that is not a party to the dispute to provide a party, an affiliate of that party or a law firm representing that party,

(a) funds or other material support in order to finance part or all of the cost of the proceedings, either individually or as part of a specific range of cases; and

(b) such support or financing is either provided in exchange for remuneration or reimbursement that is wholly or partially dependent on the outcome of the dispute, or provided through a grant or in return for a premium payment.

As the definition demonstrates, the benefactor is not impelled by considerations of altruism, but by a possibility of a profit, or gaining the asset in dispute. The profit, too, is made by either obtaining a share in the eventual sum awarded, or a fixed figure to be paid in the event of a successful outcome.

The concept, as outlined above, is bound to cause some discomfort in the minds of any student or practitioner of law. This is because a diligent student or practitioner of law will be quick to draw an analogy to a prohibited practice in Indian law – that of contingent fee arrangements, where a lawyer agrees to represent a party in a dispute subject to being paid a share in the amount eventually awarded. While contingent fee arrangements are legal in many other countries, it is still strictly frowned upon in India, with such agreements not only being illegal, but also capable of inviting disciplinary action against the practitioner concerned. This approach of Indian law seems justified given the experiences of countries like the United States, where lawyers are termed “ambulance chasers”, when they pursue victims of accidents to represent them on a contingent fee basis.

It is worthy recounting here the observations of the Supreme Court in “G” Senior Advocate, In re[2], where a practitioner had entered into a contingent fee arrangement with his client for 50% of the monies recovered to be his fees. When the agreement was defended by the practitioner drawing reference to the practice in parts of the United States of America, the Court observed:

  1. We see no reason why we should import what many feel is a mistake, even in the country of its origin, from another country and seek to perpetuate their error here when a sound and healthy tradition to the contrary already exists in our Bar. The reasons for exacting these high standards in this country, where ignorance and illiteracy are the rule, are even more important than they are in England where the general level of education is so much higher….

TPF transactions, however, do not involve funding from advocates or solicitors, and to such extent, do not run afoul of the above observations. Much of the legitimacy for TPF transactions in India is presently claimed from an observation by the Supreme Court in Bar Council of India v. A.K. Balaji[3]  that there appears to be no prohibition to TPF so long as they are not lawyers. The obiter observation is merely suppositional, with the Supreme Court not having any occasion to consider the issue. Thus, such obiter cannot be considered binding but merely directional. Though a similar observation has been made by the Supreme Court in the judgment in “G”  Senior Advocate, In re[4], it is submitted that the observations, as in the A.K. Balaji decision[5], are obiter as well.

History – Maintenance and Champerty

To consider the legitimacy of TPF transactions in the context of extant laws in India, one needs to first understand the concept of maintenance and champerty. Briefly put, maintenance, in its modern form, is when a third-party cause or promotes unwanted litigation by causing or supporting a person to sue another. Champerty is an aggravated form of maintenance where the third party funds a party to enable such party to sue another, in return for funds if the litigation were successful. As is apparent from the definitions, champerty and TPF transactions are significantly similar to each other, since both involve an unrelated person funding a party to initiate or continue to prosecute a dispute, in return for monetary consideration. It is thus essential to consider the law of champerty and assess whether TPF transactions stand the test of prohibition against champerty.

Dating back to as early as the year 1275, champerty was a common feature in the first two Statutes of Westminster,[6] as well as the articles upon the Charter.[7] It was initially intended to prevent powerful lords, noblemen and officers of the courts from funding or maintaining disputes that they otherwise had no interest in. The observations of Lord Mustill, speaking for a unanimous House of Lords in Giles v. Thompson,[8] on the history of champerty is particularly instructive in this regard:

the crimes of maintenance and champerty are so old that their origins can no longer be traced, but their importance in medieval times is quite clear. The mechanisms of justice lacked the internal strength to resist the oppression of private individuals through suits fomented and sustained by unscrupulous men of power. Champerty was particularly vicious, since the purchase of a share in litigation presented an obvious temptation to the suborning of justices and witnesses and the exploitation of worthless claims which the defendant lacked the resources and influence to withstand. The fact that such conduct was treated as both criminal and tortious provided an invaluable external discipline to which, as the records show, recourse was often required.

With the evolution of a stronger and more independent judiciary, as well as quality of legal ethics, the need to prosecute persons for the offences of champerty and maintenance were obviated. However, the civil consequences remained even after Parliament repealed champerty as an offence, with issues arising on considerations of contracts being contrary public policy.[9] An analysis of the evolution of champerty in the United Kingdom is beyond the scope of this essay.[10] It is, however, apparent that the primary concerns of the law in respect of champerty arises from the fact that it causes the maintenance of litigation that would ordinarily not be maintained, by a person who has no greater interest than the financial benefits that will accrue to them from a successful outcome.

Position in India on Maintenance and Champerty

In India, however, maintenance and champerty were never made offences, largely because the circumstances that existed in mediaeval England did not obtain in the courts operated by the East India Company (and later by the Crown). Nonetheless, the law, as with England, remained relevant to consider validity and enforceability of agreements on questions of public policy and morality.[11] The law in this regard, set by a few decisions in the late 19th century by the Judicial Committee of the Privy Council, remains unchanged till date, and are particularly instructive of how courts viewed champerty.

The earliest occasion when the Judicial Committee had occasion to consider the issue was in G.F. Fischer v. Kamala Naicker,[12] where it had to consider whether an agreement must not be enforced merely because it was champertous in nature. Observing that the Sudder Adawlut was perhaps overzealous in assessing whether the agreement was champertous when the parties were not even at issue on the same, the Judicial Committee nonetheless laid the principal test for assessing whether a champertous agreement violates public policy in the following terms:[13]

The Court seem very properly to have considered that the champerty, or, more properly, the maintenance into which they were inquiring, was something which must have the qualities attributed to champerty or maintenance by the English law: it must be something against good policy and justice, something tending to promote unnecessary litigation, something that in a legal sense is immoral, and to the constitution of which a bad motive in the same sense is necessary….

Thus, the Judicial Committee, in effect, imported principles of champerty and maintenance from England to India, albeit for the limited purpose of assessing whether an agreement is void on considerations of public policy. This was further expounded upon by the Judicial Committee in Ram Coomar Coondoo v. Chunder Canto Mookerjee,[14] where the Court, in considering a TPF transaction, held:

Their Lordships think it may properly be inferred from the decisions above referred to, and especially those of this tribunal, that a fair agreement to supply funds to carry on a suit in consideration of having a share of the property, if recovered, ought not to be regarded as being, per se, opposed to public policy. Indeed, cases may be easily supposed in which it would be in furtherance of right and justice, and necessary to resist oppression, that a suitor who had a just title to property, and no means except the property itself, should be assisted in this manner.

The Committee, however, went on to clarify in the very next paragraph:

But agreements of this kind ought to be carefully watched, and when found to be extortionate and unconscionable, so as to be inequitable against the party; or to be made, not with the bona fide object of assisting a claim believed to be just, and of obtaining a reasonable recompense therefor, but for improper objects, as for the purpose of gambling in litigation, or of injuring or oppressing others by abetting and encouraging unrighteous suits, so as to be contrary to public policy, — effect ought not to be given to them.[15]

The above decisions were regularly followed by the various courts in India, to assess whether agreements where a third party financed litigation fall on the right side of morality. Since there may be situations where a litigant has a genuine cause of action, but is unable to proceed due to lack of funds, a champertous agreement in such a situation may be valid, indicating that not every champertous agreement will be considered as being against public policy. Nonetheless, however salutary the principles laid down may be, the reality of champertous and maintained litigations were bleak in pre-Independence India, especially given the socio-economic conditions and the state of literacy.[16]

While much discussion can and may be had on what transactions may amount to an unenforceable champertous agreement, the law is silent on the issue that is being considered in the present essay: how best to govern and control such agreements. Even the recommendation of the Civil Justice Committee,[17] which was at great pains to narrate the ills of champerty in British India, was merely to offer a remedy to the uninformed and illiterate victim of speculative champertous agreements to avoid such agreements. Even extant provisions of law[18] and decisions[19] deal only with the aspect of enforceability or otherwise of such agreements, and not the regulation thereof.

A TPF transaction, no matter how it may be structured, is in essence?? of a dealing in a right to sue, inasmuch as it empowers a third party to control and take decisions in a litigation, and also obtain benefit under the litigation. It is pertinent to note that under Section 6(e) of the Transfer of Property Act, 1882, a mere right to sue cannot be transferred. This derives from the salutary principles prohibiting champertous agreements.[20] An agreement made to defeat a provision of law is in itself unlawful and cannot be enforced. Historically, the maxim ubi jus ibi remedium[21] was understood in reverse in common law. Courts dispensing the Crown’s justice had pre-written writs that were drawn up for specific purposes, such as compelling a person to pay damages. The system of having pre-written writs soon devolved into forms of actions, with assumpsit[22] and indebitatus assumpsit[23] rapidly growing as popular writs.

Tempered by equity and eventually abolished by successive Judicature Acts, the concept of writs, and of forms of actions played a significant role in enabling the modern lawyer to determine what is known as the right to sue. What is of significance of the modern rights is that a party is expected, even till date, to take a conscious decision to exercise and enforce their right against another, for the law to help vindicate their right. Thus, for instance, sleeping over one’s right results in claims becoming barred, and having to dispel presumptions of acquiescence. So too is a person expected to bear the fee of initiating their action, as a compensation to the Court for its service, howsoever meagre it be.

Thus, a clear image emerges regarding modern rights, which is that they are always accompanied by the right to sue. The right to sue has its own set of socio-economic as well as legal factors attached to its exercise or non-exercise thereof. It would be quite myopic to contend that the right to sue can be exercised by a person merely by being funded by another, with absolutely no application of mind by the person exercising such right. A person with a right to sue may choose to not sue, if only to avoid indulging in speculative litigation, which likelihood is highly reduced if no restrictions are placed on TPF transactions.

Thus, a TPF transaction is not merely champertous in its nature, it deals with the very basis of modern civil justice delivery system – the right to sue and enforce such right. Transactions of such nature, though they may be beneficial in certain instances, ought to not be enforced without any law governing it. It is submitted that appropriate legislation of TPF is absolutely essential. Such legislation ought to, at the first instance, compel parties to disclose the factum of the litigation being funded by a third party. Clear guidelines that are more detailed than the presently existing “public policy” principles must be adopted for discriminating permissible from impermissible TPF transactions. A counterparty must have a right to seek summary disposal by calling upon the Court to consider whether the TPF transaction is above board and genuine, and not merely speculative litigations. Indian courts cannot bear the burden of a surge in litigation when the backlog and case disposal schedule make interim relief the new means to a sometimes-unjust end.

We hope that this practice does not commence given the interest being shown in this area before a framework for its use has been implemented. The Government should seriously consider such an initiative. TPF is not per se bad but its champertous nature requires careful handling and strict regulation. After all, public policy is amorphous but ever improving as society develops.

The author would like to thank Madhura Ajit Zende for her contribution to this article. Madhura is an associate of ASA Legal Services LLP and is based in Mumbai.


* Practicing Advocate in Delhi and other places in India.

** Experienced lawyer with over 20 years of experience at various law firms. Currently, heads Ashwin Mathew & Associates, a commercial law firm in Mumbai.

[1] <https://cdn.arbitration-icca.org/s3fs-public/document/media_document/Third-Party-Funding-Report%20.pdf>
(last accessed on 5-2-2020).

[2] (1955) 1 SCR 490.

[3] (2018) 5 SCC 379.

[4] Supra note 2, para 11.

[5] Supra note 4.

[6] Statute of Westminster, 3 Edw. 1, c. 25 and 13 Edw. 1, c. 49.

[7] 28 Edw. 1, c. 11

[8] (1994) 1 AC 142, 153 : (1993) 2 WLR 908 (HL).

[9] See Giles v. Thompson, (1994) 1 AC 142 :  (1993) 2 WLR 908 (HL).

[10] For a comprehensive analysis of the history and evolution of the law of champerty, see Winifield, P.H., The History of Conspiracy and Abuse of Legal Procedure, Cambridge University Press, 1921, particularly Ch. VI.

[11] A survey of the early decisions of subordinate courts on the issue can be found in Ram Coomar Coondoo v. Chunder Canto Mookerjee, 1876 SCC OnLine PC 19 :  (1876-77) 4 IA 23, 40-44.

[12] 1860 SCC OnLine PC 2 : (1859-61) 8 Moo IA 170.

[13] Id., 187.

[14] 1876 SCC OnLine PC 19: (1876-77) 4 IA 23, 47.

[15] Ibid.

[16] See Ch. 43 of the Report of the Civil Justice Committee, 1924-1925 for a detailed discussion of the extensive speculative and champertous litigations that were observed in courts.

[17] Ibid.

[18] See the amendments by High Courts of Bombay, Gujarat, Madhya Pradesh and Allahabad in Order 25 of the Code of Civil Procedure, 1908 whereby courts are empowered in those States to compel third-party financiers to furnish security for costs.

[19] See S.V.R. Mudaliar v. Rajabu F. Buhari, (1995) 4 SCC 15.

[20] Per K.K. Mathew, J. in Union of India v. Sri Sarada Mills Ltd., (1972) 2 SCC 877. The majority does not express any opinion on this, and differs from Mathew, J’s opinion on facts.

[21] Translates to “where there is a right, there is a remedy”.

[22]A promise by which someone assumes or undertakes an obligation to another person. The promise may be oral or in writing, but it is notunder seal. It is express when the person making the promise puts it into distinct and specific language, but it may also be implied because the law sometimes imposes obligations based on the conduct of the parties or the circumstances of their dealings. Taken from Assumpsit legal definition of assumpsit (thefreedictionary.com).

[23] That species of action of assumpsit, in which the plaintiff alleges in his declaration, first a debt, and then a promise in consideration of the debt, that the defendant, being indebted, he promised the plaintiff to pay him. The promise so laid  is, generally, an implied one only. Taken from ibid.

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