Litigation Funding

The term ‘commercial legal finance’ or ‘litigation finance’ is not specifically defined under Indian law. This practice is more developed in the Western world, such as the United Kingdom and the United States. In fact, legal finance is in its infancy in India and is not yet well developed. However, in simple terms, ‘legal finance’ means third-party funding of litigation matters: in other words, a third party unrelated to the litigation provides funds to cover the legal fees. Such financing can be extended to a party in need in case of a judicial dispute. The financier will receive an agreed portion of the monetary relief that the claimant may get should the legal dispute be decided in its favour.

Commercial legal finance enables businesses to protect their commercial interests, such as intellectual property and trade secrets. On the other hand, consumer finance provides assistance to individuals who have been personally wronged and caters to their individual interests, such as discrimination and fraud.

A commercial litigation funder invests capital to cover legal fees in exchange for an interest in a successful future recovery from the lawsuit; while in consumer funding, consumers receive funding in the form of cash pay-outs or loans to cover legal costs and other expenses while their case is pending.

However, neither commercial legal finance nor consumer litigation finance is common in India.

Few litigation financers are active in the Indian market. Recently, a start-up introduced the concept of third-party financing in the form of an alternative asset class that has a short investment cycle. Currently, two forms of legal financing solutions are available: interim finance and litigation finance. While interim finance is a short-term loan given to an entity going through insolvency to support it with capital to remain operational, litigation finance involves the raising of capital from a consortium of investors in exchange for a portion of the legal settlement to be paid in case of a successful litigation.

Litigation finance is in its infancy in India and there is no particular area of law which is preferred at present.

Currently, Indian litigation finance start-up LegalPay seems to be the only well-known formal player that offers third-party litigation funding in the country.

There is no specific concept of litigation funding in India. However, debts and actionable claims are normally assigned in financing transactions, such as assignment of debts and actionable claims from banks to asset reconstruction firms. Further, in A K Balaji, third-party funding was duly recognised by the Supreme Court, which held as follows:

In 1955, in Re: Mr 'G', a Senior Advocate, the Supreme Court held that:

• the rigid English law rules of champerty and maintenance do not apply in India; and
• "A contract where one party agrees to fund litigation for certain benefits would be legally unobjectionable if no 'lawyer' was involved and it was between third parties."

In 1876, in Ram Coomar Coondoo v Chunder Canto Mookerjee, the Privy Council permitted third-party funding on the grounds of promoting access to justice, but held that:

There is no legal finance regime in India. In fact, there is no specific law on legal finance; instead, agreements such as the assignment of debts and actionable claims are governed by the Contract Act, 1872.

Also, please see question 2.1.

Depending on the nature of the claim, the dispute and the debts, the courts/authorities responsible for enforcing the applicable law and regulations are numerous and diverse. For instance:

• in case of an acknowledged debt, the authority responsible for enforcing the applicable law is the National Company Law Tribunal; and
• if the dispute arising from the agreement specifies resolution by way of arbitration, the courts responsible for enforcing the applicable law are the arbitral tribunal, the district courts, the high courts or the Supreme Court, as the case may be.

There are no such organisations or professional associations for legal finance in India at this stage.

As legal finance is currently evolving, there are divergent views among supporters and critics on the desirability of this practice in India. Despite implicit recognition by Indian courts, there is no express legislation regulating third-party financing of litigation. Under Order XXV of the Civil Procedure Code, 1908, some states (Maharashtra, Madhya Pradesh, Gujarat and Karnataka) have acknowledged the concept within their territories and have stated the circumstances in which financiers may be impleaded as parties to the dispute and can be induced to furnish security on behalf of the plaintiff.

Third party legal finance also received a favourable reference in the report of the High-Level Committee on the Institutionalisation of the Arbitration Mechanism in India (2017).

No. Please see questions 1.4, 2.1 and 2.2.

The Bar Council of India (BCI) prohibits lawyers from charging contingency fees to their clients. Under Rule 20 of the Bar Council of India Rules, 1961, “an advocate shall not stipulate for a fee contingent on the results of litigation or agree to share the proceeds thereof”.

As such, contingency fee agreements are believed to adversely affect the advocate’s ability to act objectively and in a detached manner as an officer of the court and thus to hinder the administration of justice. It is due to such ethical considerations that contingency fee arrangements are not allowed in India.

Please see question 3.1.

Yes, damages can be quantified as pre-liquidated damages under the Contract Act. If the pre-liquidated damages are reasonable, the courts may allow the same without requiring the claiming party to prove the actual loss. The law of damages in India is codified in Sections 73 and 74 of the Contract Act. Section 73 deals with damages arising from breach of a contractual obligation resulting in losses to the other party. Under this section, damages that are awarded to the aggrieved party are in the nature of unliquidated damages upon assessment of the loss and injury suffered; they do not compensate for indirect or remote losses arising out of such breach. Section 74 deals with liquidated damages where the contract stipulates the quantum of damages in case of a breach of contract.

The sources of funding in India include:

• insurance;
• corporate financing;
• portfolio funding; and
• sale of claims.

Please see questions 1.1 and 2.1.

Currently, there is no regulation in India that expressly bars a non-legal person from being an owner or a shareholder of a law firm. The current BCI rules apply to individual lawyers and only individual qualified advocates can practise law in India. A non-lawyer shareholder can be responsible for the administrative work of running the firm, but cannot appear before a court or tribunal.

Currently, there is no precedent on this in India.

Currently, there is no precedent on this in India.

Class actions are permitted in India. The procedure for class action suits is mentioned under Order I, Rule 8 of the Code of Civil Procedure. Apart from civil proceedings, class action or group action suits are also recognised under Section 12 of the Consumer Protection Act, 1986 and the Companies Act, 2013.

Class action suits or representative claims which provide a high likelihood of exemplary damages that attract funders have not gained third-party traction in India. There is no specific legislation on the funding of class actions by third parties. There is also no specific law barring the funding of class actions.

Currently, there is no reported precedent on this in India.

Before deciding to fund a claim, finance parties will assess factors such as:

• the merits of the claim;
• the litigation budget;
• market volatility;
• due diligence;
• reliability; and
• transparency.

Investors should also assess whether there are any counterclaims in the litigation that is proposed to be transferred.

Litigants will consider questions such as the following:

• How much money has the funder made?
• How much capital is available?
• How reliable are the sources of that capital?
• Does the funder have relevant expertise on its team?
• Does the funder conduct all of its diligence in-house?

The process for concluding legal finance agreement is same as that for any other agreement pertaining to movable property. The parties must pay the relevant stamp duty. However, if the litigation funding agreement or legal finance agreement creates any right or interest in immovable property, the agreement may have to be registered with Companies House in India.

The standard terms of legal finance agreements address issues such as the following:

• the duties of the party;
• the duties of the funder;
• the distribution of proceeds following a successful claim;
• representations by the party;
• representations by the funder;
• assignment of claims to the funder as security;
• termination;
• settlement proposals by the court or opponent;
• confidentiality and disclosure; and
• data transfers by the funder to third parties.

Currently, there is no precedent on this in India.

As a legal finance agreement – just like any other agreement – is governed by the Contract Act, it can be terminated for breach.

There is no explicit law governing litigation finance in India.

No. Third-party funding is still an evolving area in India.

No. Third-party funding is still an evolving area in India.

Under Indian law, certain legal claims can be assigned in favour of a third party. Section 130 of the Transfer of Property Act deals with the assignment of actionable claims. In general terms, an ‘actionable claim’ is a debt or claim for which a person can approach a court of law for recovery of its debt or claim. An actionable claim can be transferred only by the execution of an instrument in writing. Once executed, the rights and remedies of the transferor – whether by way of damages or otherwise – will vest in the transferee. Also, the transferee of an actionable claim may sue or institute proceedings in its own name without obtaining the transferor’s consent to such proceedings and without making it a party thereto.

In Iron and Hardware (India) Co v Shamlal & Bros, the court held as follows:

Under Indian law, a funder cannot purchase a specific claim if any company is under insolvency. It must bid to revive the whole company, which is referred to as a ‘corporate debtor’ under Indian law.

Some examples of actionable claims include:

• claims for rent arrears; and
• the right to claim maintenance.

However, not all claims are actionable claims; for example, the right to sue is a right, but it is not an actionable claim. The Indian courts have further held that a judgment debt or decree is not an actionable claim.

There is no jurisprudence in India on third-party funders insisting on a choice of counsel. However, since the engagement of counsel is left to party autonomy, and in the absence of any legislation prohibiting the engagement of counsel of choice by the third-party funder, third-party funders may elect to insist upon their choice of counsel, provided that such counsel has no interest for or against the parties to the dispute.

All proceedings in India are essentially open court proceedings and may thus be attended by any person, irrespective of whether they are a party to the suit. Very few proceedings are held in camera, such as those involving family disputes or divorce. Therefore, there is nothing barring financers or funders from attending proceedings or hearings. If the funder or financer is impleaded as a party to the suit, it must participate in the proceedings and settlement proceedings, on account of being a third-party funder under Order XXV of the Civil Procedure Code.

The funder can have veto rights in respect to settlements, which may arise:

• from the terms of the funding agreement entered into between the parties; or
• on the basis of an understanding between the parties to the funding agreement.

The funder may engage in interactions with the lawyers during the preparation of the matter, including for the hearing.

There is no specific law governing legal finance or litigation funding in India.

The concept of attorney-client privilege is applicable in India. Professional communications between attorneys and their clients are governed by Section 126 of the Evidence Act, 1870.

Yes, if any legal finance agreement is generated by an attorney, he or she is bound not to disclose the same to a third party.

The law is silent on fee splitting.

The rigid English rules of champerty and maintenance do not apply in India, as pointed out by the Privy Council in Ram Coomar Coondoo v Chunder Canto Mookerjee in 1876.

Please also see question 2.1.

While there are no specific types of suits for which third-party funding is not possible, the disputes that attract legal finance generally include:

• commercial contract disputes;
• international commercial arbitration;
• class action suits;
• tortious claims such as medical malpractice and personal injury claims;
• antitrust proceedings;
• insolvency proceedings; and
• other like claims that have a calculated chance of resulting in a substantial monetary award.

Most claims under contract are subject to a limitation period of three years, while some land-related disputes have a limitation period of 12 or 30 years. Tortious actions generally have a limitation period of either one or three years.

The Indian courts have the power to strike out unnecessary, scandalous, frivolous or vexatious pleadings. Any pleadings which are likely to cause embarrassment or to delay the fair trial of the action, or which are otherwise an abuse of the process of law, will also be struck out pre-trial.

Order 11 of the Civil Procedure Code permits the discovery of evidence. The types of discovery that are permitted include:

• interrogatories;
• requests for the production of documents and inspection;
• requests for admissions;
• depositions; and
• physical and mental examinations.

Yes, interlocutory appeals are permitted during proceedings at first instance.

Depending on the nature of the decision and the dispute, the parties can appeal decisions and orders of the courts of first instance. The timeframe for filing an appeal will depend on:

• the nature of the order/decision; and
• the court passing the decree/order.

Under the Limitation Act, 1963, the timeframe for filing an appeal is 90 days.

Orders and judgments are enforced by way of execution. Under Sections 51 to 54 of the Civil Procedure Code, a decree holder can choose its mode of execution of the decree. A decree can be enforced by:

• delivery of any property specifically decreed;
• attachment and sale or sale without attachment of the property;
• arrest and detention;
• appointment of a receiver;
• partition; and
• any such manner which the nature of the relief requires.

The timeframe for enforcement depends on the nature of the relief.

There is no such concept of an automatic stay on enforcement pending appeal. A stay is usually granted on appeal after analysing the specific facts of the case. Usually, an appeal from the first instance is granted.

Yes. The award of costs is at the discretion of the courts. The Civil Procedure Code provides for:

• general costs;
• miscellaneous costs; and
• compensatory costs for false and vexatious claim or defences.

The costs of funding might not be recoverable by the winning party if they are not reasonable.

The court has the power to secure costs for litigation by asking the funder to become a party to the suit and deposit the costs in the court.

Yes. Under Order XXV of the Civil Procedure Code, the court can order security for costs. However, before an order for security for costs is made, the defendant must satisfy the court of two legal requirements:

• There will be obstacles or an enforcement burden in relation to a subsequent order for costs in the context of the particular foreign claimant or country concerned; and
• Having regard to all circumstances in the case, it would be just to make an order for security for costs.

Security for costs will not be ordered if it can be shown that an adverse costs order could be met.

Litigation insurance is not prevalent in India.

Please see question 10.6.

The main types of insurance in India include:

• health insurance;
• motor insurance;
• home insurance;
• fire insurance; and
• travel insurance.

Third-party legal finance is in its infancy in India and is thus still evolving.

No.

Recommendations that can help to ensure the smooth functioning of third-party funding in India include the following:

• Transparency: The existence of any litigation funding agreement should be promptly disclosed. Claimants should disclose all material facts and events that may influence the third party’s decision to fund the claim.
• Conflict management: In case of a conflict of interest, the interests of the claimant must prevail. The funder must not be allowed to withdraw its funding at any point during the litigation, unless there is a breach of trust or fraud on the part of the claimant.
• Confidentiality: The confidentiality of the information pertaining to litigation should be ensured.

Co-Authored by Hetram Bishnoi.