What is meant by third-party litigation funding?
Third-party litigation funding is an arrangement where a party which is unconnected/unrelated to a suit, agrees to take care of the costs of litigating the case in exchange for a percentage of the monetary amount that may be awarded through winning the litigation. The third party is usually a bank, hedge fund, insurance company, or even individuals. This agreement allows parties to actually put forward suits without worrying about the high litigation costs and encourages out-of-court settlements based on the merits of the case rather than the inability of a party to maintain the costs of a suit.
In what ways can a third party finance a dispute?
An agreement for third-party funding may be structured in a variety of ways depending on the nature of the matter. It may include a non-disclosure clause depending on the sensitivity of the matter. Any and all expenses regarding the costs of litigation can be covered, including legal counsel fees, court fees, costs for summoning expert witnesses, adverse order costs, and even venue costs. Any kind of dispute can be financed by a third party, especially commercial suits, both international and domestic, insolvency proceedings, or any kind of disputes, which have a higher probability of being awarded with a monetary award, in the event, the funded party wins the litigation.
Are there any laws governing third-party litigation funding?
There is no express law which regulates Third-party litigation funding, although, it is a recognised practice by the Courts in India. One of the earliest decisions on third-party funding was made by the Privy Council in the case of Ram Coomar Coondoo v. Chunder Canto Mookerjee (1876) SCC OnLine PC 19). The Judicial Committee of the Privy Council held that an agreement of champerty where a third party with no interest in the dispute could fund the litigation was acceptable in India. However, it was further held by the Privy Council that these agreements must be made with a bona fide object and should not be extortionate, otherwise, they would be in violation of public policy. In 2017, the Supreme Court in a recent case, titled Bar Council of India v. A.K. Balaji (2018) 5 SCC 379), held that there "appears to be no restriction on third parties (non-lawyers) funding the litigation and getting repaid after the outcome of the litigation". However, the Court "strongly suggested" that "advocates in India cannot fund litigation on behalf of their clients". This observation is obiter dictum. This judgment shows that the Supreme Court recognises this practice, but also provides that advocates cannot take the role of a third-party funder. Further, the Supreme Court directs attention to the Indian Contract Act, of 1872, where it provides the principle that must be followed, i.e., "each agreement must be examined independently to ensure that it does not intend to violate public policy and public morals".
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Originally published January 15, 2024
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