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In the recent case of Tomorrow Sales Agency Pvt Ltd vs. SBS Holdings, Inc. & Ors. 1 , the Hon’ble High Court of Delhi, while dealing with the issue of holding a third party liable under an arbitration agreement, appreciated the vital role played by third-party funders in ensuring access to justice. It was observed that the absence of third-party funding would restrain impecunious parties from pursuing claims for amounts which may legitimately be
due.

In making such observations, the Hon’ble Court re-invoked an essential topic in relation to the importance of third-party funding or litigation financing in India. The nation being witness to a substantial number of pending cases is also home to many individuals, who have genuine claims, but fail to pursue litigations due to an absence of relevant funds. In such cases, the presence of litigation funders or financiers (hereinafter referred to as the ‘financiers’) acts as a necessary facilitator, to help the aggrieved in recovering their dues while simultaneously promising the former financiers with a return on their investment.

Although, there is an absence of a special law which governs litigation financing in India, it finds its legality through a number of judicial precedents read with the provisions of the Indian Contract Act, 1872, both of which, in turn, provide a vast scope for the growth of the sector in the Indian economy.

Fundamental Aspects of Litigation Financing

The term ‘litigation financing’ seeks to define many forms of transactions including adverse order insurance, claim succeeding investment, as well as claim management and recovery. The most popular form of financing, though, is the quid-pro-quo agreement, where the financier, whether being a company, individual, or organization, having no interest in the case, agrees to fund the litigation of a party, in exchange for a monetary return, if the case
succeeds.

While the Indian economy is relatively novice in providing active grounds for litigation financing, countries like the United States of America and the United Kingdom are homes to a flourishing presence of financiers, even though the latter country restricts their functioning by way of the application of doctrines of champetry and maintenance, thereby
restraining the funding of litigation in exchange of considerations contingent on the outcome of the case or for pursing other cases.

India, having the advantage of imposing no such limitation, is yet to provide a definite potential to the market due to a number of reasons, the primary one of which is the average time taken for a case to culminate. However, it may be needful to note that even in the presence of such challenges, litigation financing has been attaining a gradual momentum in
the country.

Legality of the Concept in India

In India, the only form of litigation financing, which is in contravention to the applicable laws is an agreement where an advocate, representing either of the parties, funds the litigation of such party. Though, a mere perusal of the such applicable laws also gives a reasonable inference that financing by advocates may be allowed, if the latter does not act as a litigator to the parties in any form, in relation to the matter in question.

In terms of third-party funding, however, the absence of laws provides a greater avenue for companies to invest in Indian litigation. In the case of Bar Council of India vs. A.K. Balaji 2 , the Hon’ble Supreme Court had observed that

“…funding of litigation by advocates is not explicitly prohibited, but 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, etc.)
would strongly suggest that advocates in India cannot fund litigation on behalf of their clients. There appears to be no restriction on third parties (non-lawyers) funding the litigation and getting repaid after the outcome of the litigation.“

Even in the earliest case of Ram Coomar Coondoo & Ors. vs. Chunder Canto Mookerjee 3 , the Privy Council had observed that,

“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.”

Thus, while the agreements shall not be opposed to public policy, as provided in the aforementioned case as well as under Section 23 of the Indian Contract Act, 1872, litigation financing agreements have an implied acceptance under the Indian legal system.

Certain Loopholes in the Absence of a Law

In the Tomorrow Sales Agency Case, the Hon’ble High Court of Delhi was posed with the issue where the success of Respondent No. 1 in an arbitration led to an order directing the Appellant to disclose their assets, even when the latter were never a party to the arbitration, but merely acted as financiers to the other Respondents (Claimants). The impugned order, under challenge, was passed by the Ld. Single Judge on the basis of the reasoning that the Appellants ‘having funded the litigation for gain, could not escape the liability in case the result was contrary to its expectations.’

The Hon’ble High Court, after undertaking a detailed study of the judicial precedents on the issue of adding third parties to an arbitration as well as those pertaining to litigation financing in India held that the Appellant having fully disclosed to the Arbitral Tribunal as well as to the Respondent No. 1, about the funding agreement, as required under the SAIC
Rules of Arbitration, did not have any obligations to pay any amount under the Arbitral Award. The Hon’ble Court went on to observe that,

“In many cases, the claimants become impecunious on account of the very cause for which they seek redressal. The cost for pursuing claims in arbitration are significant; the same not only include fees paid to arbitrators and institution, but also professional fees for legal counsels and experts and other attendant expenses. A person without the necessary means would have no recourse, in the absence of third party funders. Third party funders play a vital role in ensuring access to justice.”

Thus, while the Hon’ble Court held the case in favor of the Appellants, an issue also came to the forefront, in relation to the obligations of the financiers, in case the litigation/arbitration did not succeed. In the absence of any law, however, the questions pertaining to such obligations, remains ambiguous.

Conclusion

It is undoubted that the Indian litigation financing sector is in a very nascent phase of development and requires more systematization, either in the form of a law or as guidelines. A systematic approach may not only aid in the underlining of the rights and liabilities of the litigants but may also work towards protecting the interests of the financiers.

That said, the Hon’ble Courts, in many cases have laid down observations and directions promoting the conducting of due diligence,

• by the financiers in relation to the extent of their exposure;
• by the litigants in order to expect transparency from the financiers; as well as
• by the Courts, in assuring the protection of litigants from exploitation and preventing the enforcement of any agreement which proves to be extortionate, unconscionable, or against public policy.

Nevertheless, the vitality of the sector and the need for its promotion cannot be denied.