Returns that can can exceed one hundred percent of net investment, a healthy funding requirement that routinely runs into millions, and indications that this could well be the next big thing. Over the last decade or so, third party funding (TPF) has evolved into a highly profitable business. Yet, it is one that exists on the fringes of the legal industry.
On September 15 this year, in the case of Essar vs. Norscot, the English High Court held that costs incurred on arbitration funding are recoverable by the successful party; in this case the third party funder made an investment of £647,000 which yielded a return of £1.94 million.
Most commonly referred to as ‘litigation financing’- TPF has a number of subsets, including litigation financing and arbitration financing. In the simplest of terms, litigation funding is a mechanism through which funds are provided to either or both the parties so that a litigation can proceed.
In the common law systems of the UK and India, the concept of litigation funding is closely linked to the doctrine of barratry, maintenance and champerty.
- ‘Maintenance’ may be defined as an agreement whereby a stranger promises to help another person by money or otherwise in litigation without the expectation of any monetary gain.
- ‘Champerty’ on the other hand, is an agreement whereby a person agrees to assist another in litigation in exchange promise to hand over a portion of the proceeds of the action.
- ‘Barratry’ is the offence of frequently exciting and stirring up quarrels and suits, either at law or otherwise.
In simplistic terms maintenance is essentially helping maintaining someone a lawsuit, champerty is maintenance for money, and barratry is serial maintenance, often to frustrate the other party. These concepts owe their origins to Ancient Greece, and became part of English law during medieval times as a way of trying to “weaken the hold of gangster barons” and provide for equal justice and due process of law. In common law, however, champerty and maintenance were both, crimes and torts, as they were considered tools that promoted vexatious litigation.
So while litigation financing may be similar to TPF, the two are not the same. This is particularly true when it comes to arbitration, where the common law understanding of third-party litigation may no longer be applicable.
Jurisdictions such as Hong Kong, for example, expressly allow arbitration funding but not litigation funding. Interestingly, some international arbitration cases such as Siegfried Adalbert Unruh v Hans-Joerg Seeberger and Another have held that TPF doesn’t necessarily equate to champerty and maintenance.
Third party funding, a humble origin
While introduced as a mechanism of funding litigation for those with insufficient means wanting to pursue bona fide litigation, TPF has evolved from this legal aid mission to a commercial business run by fund houses. It owes its roots to Roman times, but resurfaced about 50 years ago in Australia first.
Over the years, what has happened is that claimant companies and even law firms (mostly in U.S.A where contingency fee model is allowed) began setting up funds for the purpose of financing such expenses. The funding entity receives a share of the reward only if the claimants succeed in the suit.
In fact in the US, there is an increasing collaboration between TPFs and law firms working on a contingency fee model, which stems from the benefit of risk-sharing between both.
While there are no rigid rules in this regard, but as a matter of practice, the practice of TPF requires an element of seclusion i.e. the funding party is required to remain at arm’s length from the entire dispute settlement process, since an interested party, among other things, might settle for a lesser claim in the interest of making money for themselves.
Although litigation funding has existed in a restricted form for some years in U.S.A, it has grown quickly in the past decade in Australia and Canada, as it has in the U.K.
The position on the funding of litigation in U.S.A. is almost the converse of England and Wales: the U.S.A. has widespread contingency fees and so far relatively limited litigation funding, whereas England and Wales have no full-blown contingency fees but forms of litigation funding are expanding.
Australia has some amount of regulation, the U.K. has an established voluntary code and the U.S.A is currently studying the need for any legislation in this regard.
Just recently, Singapore introduced the Civil Law (Amendment) Bill of 2016 that aims to create a “regulatory framework for third-party funders”.
Lord Justice Jackson, is pioneering the path for litigation funding the U.K, realizing that costs have been an obstruction for access to justice to many. In fact, in Essar v Norscot it was held that “legal and other costs” was a term wide enough to include the recovery of TPF costs for arbitration matters.
So where does TPF stand in India?
While litigation financing is not expressly allowed in India, there is nothing that prohibits it either. If one were to believe the whispers in the court corridors, then TPF has been happening for some time now; defendants impleaded for no other reason than to prolong litigation, intervening applications filed, or even petitions filed by rival companies.
Much of this is difficult, if not impossible, to prove. But it certainly exists.
Add this to the fact that Indian courts have repeatedly held that the doctrine of champerty and maintenance do not apply in India.
In Lala Ram Swaroop vs. The Court of Wards, the Bombay High Court held that the rules of champerty and maintenance do not apply in India, and that if a person is willing to finance the litigation of a poorer person, he may do so.
“The uncertainties of litigation are proverbial; and if the financier must needs risk losing his money he may well be allowed some chance of exceptional advantage.”
Almost after two decades, it was held in Re: Mr G. that,
“The rigid English rules of champerty and maintenance do not apply in India, so if this agreement had been between what we might term third parties, it would have been legally enforceable and good”
Therefore, there is nothing illegal if a third party is willing to fund a suit for a person with lesser means for a share in the reward which such person may receive.
Will institutional TPF pick up in India?
Maybe not, at least as far as litigation is concerned. The slow pace of litigation, for one, would mean that TPF fund houses would either have deep pockets or significant amounts of patience (or both). Combine that with the inherently high-risk nature of TFP’s, and you get a far from ideal investment.
Having said that, arbitration in India, especially that of the institutional kind, could just well prove to be the opening that TPF needs. The MCIA for instance, has no restrictions on TPF.
And, as Norscot notes, the ICC Commission Report of 2015 explicit recognises TPF costs.
“Where a successful claimant or counterclaimant has been funded by a third party, the third-party funder is usually repaid (at least) the costs of the arbitration from the sum awarded.
Therefore, the successful party will itself ultimately be out of pocket upon reimbursing such costs to the third-party funder and may therefore be entitled to recover its reasonable costs, including what it needs to pay to the third-party funder, from the unsuccessful party.
The tribunal will need to determine whether these costs were actually incurred and paid or payable by the party seeking to recover them, and were reasonable. The fact that the successful party must in turn reimburse those costs to a third-party funder is, in itself, largely immaterial.“
The commercial world then, is ready for TPF’s. The question that needs to be asked is whether India is as well?
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