#Columns: “Saving arbitration from arbitration costs”. Is Third Party Funding the answer?

Payal Chawla and Aastha Bhardwaj

As arbitrations enhance in India, so will arbitration claims and their quantum. There will be a consequent rise in arbitration costs, be it legal fees, arbitrators’ fees, security on costs, and/or costs payable by the unsuccessful party.

Arbitral costs can be exorbitant, and sometimes even prohibitive – even for a party with a legitimate and meritorious claim. As India matures as an arbitral market, access to funds will not only be desired, but also required.

Jurisdictions around the world have been bringing about necessary changes to their legal regimes in order to legalise and provide for third party funding of legal proceedings – including Hong Kong, Singapore and Paris. And, hold your breath – even Dubai! It is no wonder that there is so much recent debate in India around third party funding (TPF), particularly of arbitrations.

The reluctance to TPF comes from the historic common law rules against maintenance and champerty, and the public policy bar. While jurisdictions around the world move away from these archaic doctrines, India, despite some early progressive decisions on the subject, continues to demonstrate legislative inertia. 

Maintenance and champerty are medieval common law doctrines. Maintenance refers to the funding of legal proceedings by an unconnected third party, and champerty is a sub-set of maintenance, whereby a third party funds legal proceedings for a share in the proceeds thereof.

As early as 1876, the Privy Council, in Ram Coomar Coondoo v. Chunder Canto Mookerjee [1876 SCC OnLine PC 19], recognising that champertous agreements are void in England as they are contrary to public policy, held that this principle is not applicable in toto to India, but would apply to a transaction which is “inequitable, extortionate and unconscionable and not made with the bona fide objects of assisting a claim”. This case set the early tone that the prohibition was not absolute, but restricted to “improper objects, gambling in litigation, or of injuring or oppressing others by abetting and encouraging unrighteous suits”.

In fact, the Privy Council, in 1893, in the case of Kunwar Ram Lal v. Nil Kanth [1893 SCC OnLine PC 7] went so far as to hold that “Agreements to share the subject of litigation, if recovered in consideration of supplying funds to carry it on, are not in themselves opposed to public policy”. Previously, in Ahmedbhoy Hubibhoy v. Vullebhoy Cassumbhoy [(1882) 6 Bom. 703], an agreement to purchase a pendente lite property leaving the vendor no interest in the property, was held not to be champertous.

In 1940, the Privy Council, albeit somewhat circumspectly, in the matter of Lala Ram Sarup v. Court of Ward [AIR 1940 PC 19 at 23] observed that given the uncertainties of litigation, the financier “may be allowed some chance of exceptional advantage”. The Supreme Court, in 1955, in the case of ‘G, A Senior Advocate [(1955) 1 SCR 490], albeit in obiter, making a distinction between litigations that involve lawyers and those that involve non-legal persons, was of the view that in case of the latter, “… there was, “nothing against public policy and public morals in such a transaction per se…”.

However, a year later, in Suganchand v. Balchand [1956 SCC OnLine Raj 127], an agreement to share half the property in case of success was held to be champertous, opposed to public policy and void. Thereafter, in Nuthaki Veukataswami v. Katta Nagireddy [1962 SCC OnLine AP 100], the quantum of the share which the financier was entitled to, was held to be an important consideration in judging the validity of a funding agreement.

The shift in the legal precedent appeared to suggest that while recovery of the funded amount, and perhaps interest, was permissible, but if the funding was either for a large portion of the stake, or was success-fee-linked, it was violative of public policy and hence prohibited. This was akin to the proposition laid down in Raja V.V. Subhadrayamma v. Poosapati Venkatapati [1924 SCC OnLine PC 22], where the validity of a charge on the probable decretal amount in favour of the financier was upheld on the ground that the financier did not derive an undue benefit and was trying to recover only the amount loaned.  And more recently, in the matter of Khaja Moinuddin v. S.P. Ranga Rao [1999 SCC OnLine AP 583], it was held if a contract fell within the mischief of Section 23 of the Indian Contract Act, 1872, it would be void ab initio, but advancing monies for reasonable interest would withstand legal scrutiny.

TPF and other jurisdictions

Over the years, many jurisdictions around the world have relaxed the crimes of maintenance and champerty. England and Wales abolished them back in 1967, pursuant to the recommendations of the Law Commission of England in 1966 which described maintenance and champerty as “dead letters” that were no more than useless ‘lumber’ that ‘ought to be discarded in practice’.

England and Wales introduced a Code of Conduct for TPF in 2011 which applied to arbitration funding as well. A recent landmark case [Essar Oilfield Services Ltd v. Norscot Rig Management Pvt. Ltd. (2016) EWHC (Comm) 2361] held costs of funding a legal proceeding may be recoverable in arbitrations, upholding the arbitral award, which allowed a successful claimant to recover nearly £2 million in arbitration funding costs from the defendant, as “other costs”.

The Paris Bar Council, in February 2017, adopted a Resolution confirming there was nothing under the law to preclude parties from being funded by a third party. Eager to maintain its strides towards becoming the arbitral leader of the world, Singapore, in March 2017, promulgated the Civil Law (Amendment) Act, 2017, with the Civil Law (Third-Party Funding) Regulations, 2017. Related amendments were also made to the Legal Profession Act and the Rules of Professional Conduct for lawyers.

The amendments, along with abolishing the torts of champerty and maintenance, confirmed that TPF is not contrary to public policy, or illegal, if used by eligible parties in prescribed categories. Around the same time, Hong Kong too passed the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance, 2017, to “ensure that third party funding of arbitration and mediation is not prohibited by common doctrines of maintenance and champerty; and to provide related measures and safeguards”.

Lawyers and TPF

Third party funding by lawyers, albeit not unknown, has been a sensitive issue worldwide.

In the UK, Lord Justice Jackson’s Report, recommended substantial changes in the legal funding regime with a view to reduce costs in litigation basis the ‘freedom to contract’ argument. He opined that litigants should also have access to as many funding methods as possible. Following which, in April 2013, contingency fees, or damages-based agreements were permitted for contentious work  – litigation or arbitration – in England and Wales.

Singapore’s amendments to its Legal Profession Act in 2017 enabled lawyers to assist their clients with third-party funding arrangements, as long as the lawyer does not receive a direct financial benefit from the introduction or referral.

Until recently, courts in Hong Kong had often emphasized the importance of lawyers adhering, strictly, to professional codes, in the context of champertous arrangements between clients and lawyers [See Winnie Lo vs. HKSAR (2012) HKEC 263; and HKSAR vs. Mui Kwok Keung (2013) HKEC 610]. By Hong Kong’s amended regime of 2017, however, lawyers are permitted to fund arbitrations, as long as they “do not have an interest recognized by law in the arbitration other than under the funding agreement”.

In India, there is a specific prohibition on lawyers funding their clients’ legal proceedings, and on charging them fees on a contingency basis. The Bar Council of India Rules prohibit advocates from charging their clients a fee which is contingent on the result of the litigation, or to be paid a percentage or share of the claims awarded by the Court. Part VI, Chapter II, Section II, Rule 20 of the Bar Council of India Rules (Standard of Professional Conduct and Etiquette) states – “An advocate shall not stipulate for a fee contingent on the results of litigation or agree to share the proceeds thereof”.

This specific issue came up for consideration in 1954 before the Supreme Court in the case of In Re: Mr. ‘G’, A Senior Advocate (supra). Mr. G entered into an agreement with a client, whereby the client undertook to pay him 50% of any recoveries made in the legal proceedings in respect of which he was engaged. The Supreme Court, to whom the matter was referred from the Bombay High Court to enable the Apex Court to take appropriate action on Mr. G as it deemed appropriate, relied on the 1937 American Bar Association principle of Professional Ethics, said “The lawyer should not purchase any interest in the subject-matter of the litigation which he is conducting“.

The Court was of the view that the said conduct amounted to professional misconduct under the Bar Council Act, 1926. Holding lawyers to a higher standard than other professionals, the Court stated, “the court, in dealing with cases of professional misconduct, is not concerned with ordinary legal rights, but with the special and rigid rules of professional conduct expected of and applied to a specially privileged class of persons who, because of their privileged status, are subject to certain disabilities which do not attach to other men and which do not attach even to them in a non-professional character … he (a legal practitioner) is bound to conduct himself in a manner befitting the high and honourable profession to whose privileges he has so long been admitted; and if he departs from the high standards which that profession has set for itself and demands of him in professional matters, he is liable to disciplinary action”.

The above principle was cited with approval in the matter of Shri ‘M’, An Advocate of The Supreme Court of India [AIR 1957 SC 14]. Most recently, in December 2017, in the case of B. Sunitha vs. State of Telengana [2017 SCC OnLine SC 1412], the Supreme Court held that a lawyer’s fee based on the percentage of the decretal amount is against public policy and amounts to professional misconduct.

Way forward…

India obdurately refuses to allow lawyers to charge contingency or success-based fees, or to undertake value-billing, while it is simultaneously opening its doors to foreign lawyers, who are not bound by similar/ same restrictions. Yet, somehow, we live under the belief that we will not only be able to create a level playing field, but also truly compete with foreign lawyers and law firms. We aspire to make India into an arbitral destination, in the face of jurisdictions that are already well-established centres of arbitration and which continue to bend the barriers, while we continue to constrict our own success by rules of ethics which are long-recognised relics of the past.

The reticence to TPF may come in part from the fear of the commercialization of litigation, of impropriety in legal proceedings, and the level of control that a funder could exercise over them. In 1963, in Re Trepca Ltd. (supra), Lord Denning observed that a financier may be tempted by “his own personal gain, to inflame the damages, to suppress evidence, or even to suborn witnesses…,” but also correctly stated that “…these fears may be exaggerated”.

It cannot be ignored that TPF could aid access to justice for parties who would not otherwise be able to afford it. If India truly wishes to be a serious contender in international arbitrations, she must make it expedient for litigants to have access to funds.

The Hon’ble Supreme Court in the case of Union Of India vs. M/S. Singh Builders Syndicate [(2009) 4 SCC 523] had observed  – “It is necessary to find an urgent solution……. to save arbitration from the arbitration cost”. Perhaps third party funding is the answer.

Payal Chawla is the founder of JusContractus, a Delhi based full service law firm, with primary focus on arbitrations. Ms. Aastha Bhardwaj is an advocate at JusContractus. The authors recognise the assistance of Ms. Neha Tanwar, Advocate. For feedback, contact payalchawla@juscontractus.com. This article is for informational purposes only, and is not intended to provide, and should not be relied on for legal advice. Readers are advised to seek independent legal advice in relation to their peculiar facts and circumstances.