Is Third-Party Funding Allowed in India?

Third-party funding refers to financial support provided by an external party (not directly involved in the legal dispute) to a litigant, usually to cover legal costs and expenses. While this practice is commonplace in many jurisdictions, its legality and regulation vary across countries. In India, the concept of third-party funding has garnered attention in recent years, particularly in the context of commercial disputes and arbitration. However, the practice remains under scrutiny and is governed by specific regulations that aim to balance accessibility to justice with the need to prevent abuse.

Legal Status and Regulations in India:

Third-Party Funding in India:

The concept of third-party funding is not explicitly prohibited by Indian law. However, the Indian legal system has traditionally been conservative when it comes to external financial support in litigation. The Indian Contract Act, 1872, does not expressly deal with third-party funding, which means that the practice is not clearly defined in Indian statutes.

Recent Developments:

The Supreme Court of India has shown a more open approach towards third-party funding in recent years, particularly in the context of arbitration proceedings. In the case of Indian Oil Corporation Ltd. v. Amritsar Gas Service (1991), the Court expressed its approval of third-party funding in certain circumstances. The Law Commission of India in its report on commercial courts (2015) also recommended allowing third-party funding in legal proceedings to make justice more accessible, especially for those with limited financial resources.

Investment in Arbitration:

Third-party funding is more common in arbitration and commercial disputes rather than in traditional litigation. International arbitration institutions, like the Singapore International Arbitration Centre (SIAC) and the International Court of Arbitration (ICC), allow third-party funding. Indian arbitration laws, especially under the Arbitration and Conciliation Act, 1996, are also evolving to incorporate mechanisms for third-party funding, especially given the growing importance of arbitration in resolving commercial disputes.

Legal Restrictions:

While third-party funding is allowed to some extent, there are legal restrictions to ensure that the funding does not interfere with the independence of the judicial process. For example:

• Champerty and Maintenance: Under Indian law, third-party funding must not amount to champerty (where a person with no prior interest in the dispute funds it in exchange for a share of the proceeds) or maintenance (the act of providing financial support for litigation with the aim of obtaining an unjust benefit).
• Regulations: The Securities and Exchange Board of India (SEBI) has regulations in place regarding financial transactions, which may indirectly impact third-party funding when it comes to investment in legal proceedings.

Common Scenarios for Third-Party Funding:

• Commercial Disputes: Large commercial entities or investors may fund disputes or arbitrations to protect or recover business interests.
• Intellectual Property Cases: Third-party funding may be used to fight patent or trademark infringement cases where litigation costs can be high.
• Class-Action Lawsuits: Third parties may fund mass torts or class-action cases where the potential claimants cannot afford the legal costs.

Example:

Imagine a small business in India, ABC Enterprises, is involved in a long-running dispute over an intellectual property infringement case with a larger corporation. The costs of litigation are too high for ABC Enterprises, and they are unable to continue without external funding. A third-party financier, who specializes in litigation funding, agrees to cover the legal fees in exchange for a percentage of any compensation or settlement that ABC Enterprises might receive if they win the case. This type of funding enables ABC Enterprises to pursue the case without worrying about the immediate financial burden, potentially leading to a successful outcome.

Steps that ABC Enterprises should take:

• Verify the Legality: Ensure that the third-party financier's agreement is in compliance with Indian law and does not fall under champerty or maintenance.
• Formal Agreement: Sign a formal contract that clearly outlines the terms of funding, repayment, and percentage sharing of any award or settlement.
• Transparency: Maintain transparency with the court or arbitration panel about the third-party funding arrangement, as required by Indian legal practice.
• Regulatory Check: Make sure that the third-party financier is regulated under applicable laws, such as SEBI for investments and financial transactions.