INTRODUCTION

Third-Party Funding (TPF) is a concept that involves a third party providing financial support to someone involved in a legal dispute. This third party, who is not directly connected to the dispute, invests in the legal proceedings with the expectation of receiving a portion of the proceeds if the funded party is successful in resolving the dispute. This practice is similar to the traditional concept of Champerty, which has been followed in Indian litigation. 

Champerty refers to a long-standing practice in Indian legal proceedings where a third party invests in a legal case in exchange for a share in the future proceeds of that case. The third party is not a beneficiary or directly involved in the dispute but makes a calculated investment based on the potential outcome of the legal proceedings. 

Third-Party Funding can be applied in various types of cases, including international arbitrations, commercial contracts, tort claims, and class action suits. It provides an opportunity for individuals or entities who may not have the financial resources to pursue a legal claim on their own to obtain the necessary funding from a third party. In return, the third party takes on the financial risk and expects a share of any financial recovery that the funded party may receive in the future. 

History and current legal status of TPF in India:- 

Historically, Third-Party Funding (TPF) has been considered illegal under English law because it was seen as going against public policy. However, in India, there was no explicit prohibition on TPF, unlike in English common law. The Privy Council, a former British judicial body, allowed maintenance and champerty agreements in India, except when an advocate (a lawyer) is the third party providing funding to the litigant. It was established that the English law of maintenance and champerty did not apply in India.  

The Supreme Court of India has repeatedly stated that the strict English rules regarding champerty and maintenance do not apply in India, except in cases involving advocate involvement, non-bona fide purposes, unfair agreements, or gambling in litigation. In a recent judgment, the Supreme Court clarified that third-party funding in litigation is legal in India as long as the funder is a non-lawyer. This is considered a positive development because it allows individuals or companies to receive financial support from third parties who are not lawyers, making it easier for them to pursue legal cases. 

The Arbitration and Conciliation Act of 1996 in India does not explicitly mention Third-Party Funding (TPF). However, recent amendments to the Act have introduced measures to ensure faster resolution of disputes. These measures include fast-track arbitration, strict adherence to deadlines, and shorter timeframes for issuing awards. 

Interestingly, TPF is officially recognized for civil suits in certain states through amendments to Order XXV Rules 1 and 3 of the Code of Civil Procedure of 1908. For example, states like Maharashtra, Gujarat, Madhya Pradesh, and Uttar Pradesh have provisions that recognize the right of a plaintiff to transfer their rights in the property being disputed to a financier in civil suits. 

Business and Legal Perspective 

From a business standpoint, Third-Party Funding (TPF) is seen as a potentially profitable investment when providing financial support to a plaintiff, appellant, or petitioner in a legal case. Investors consider the potential return on investment and the expected time it would take to receive those returns. 

However, it's important to note that there are also cases where parties are funded not with the intention of making profits but rather to support the cause itself. In such instances, the motive and action of the third party can be seen as a donation, as there is no expectation of receiving any proceeds or financial returns. 

From a legal perspective, Third-Party Funding (TPF) is encouraged because it helps level the playing field for both parties involved in a legal dispute. It ensures that they have equal access to justice, both legally and financially. This encouragement can be seen in various judgments of the Supreme Court over the years. 

The Supreme Court has interpreted the Constitution and applicable laws liberally to ensure that parties and citizens in general have access to legal aid and justice. The involvement of funders provides additional support, which encourages parties who may have been disheartened or discouraged to approach a court or other legal forum for justice. 

However, there are valid concerns related to the intervention of funders in legal proceedings. These concerns include potential conflicts of interest, bias from arbitrators, lack of disclosure regarding the funding agreement, an increase in frivolous and vexatious claims, and the impact on attorney-client privilege. These concerns are the reasons behind supporting the traditional English rules that prohibit champerty and maintenance. 

To truly understand the implications of Third-Party Funding, especially in India, it is important to thoroughly examine these points of contention and concerns. This examination will provide a clearer understanding of the pros and cons of TPF and its impact on the legal system. 

Points of Contention 

An interesting point of discussion is the difference between the status of a litigant in court cases compared to arbitration. In court cases, there is a constitutional right to access justice, meaning that anyone can approach the court to resolve their disputes. However, in arbitration, if a party cannot afford the costs of arbitration, they effectively lose this right to access justice. 

In India, arbitration is limited to private claims without government involvement. In such cases, Third-Party Funding (TPF) can be introduced, allowing financially disadvantaged litigants to have a level playing field with financially stronger opponents. This means that an ordinary person going up against a corporate or wealthy entity can receive financial support through TPF, which gives them better access to legal representation and improves their chances of winning their claim. 

TPF has the potential to revolutionize the right to access justice by providing much-needed legal aid in private claims. It helps bridge the gap between financially unequal parties, ensuring that even those who are financially challenged have an opportunity to effectively pursue their claims and receive fair representation. 

With more parties choosing arbitration as an alternative to traditional litigation, the regulation of Third-Party Funding (TPF) has become a topic of renewed interest. In recent times, there has been an increase in the use of domestic and international arbitration by individuals and entities in India. However, the absence of a legal framework or guidelines for TPF in arbitration raises several additional issues. 

The lack of clear regulations regarding TPF in arbitration creates various related problems. This unregulated area of law could lead to parties involved in arbitration seeking recourse in courts, which defeats the primary purpose of choosing arbitration in the first place. 

To address this issue, a recent High-Level Committee Report was released to review the institutionalization of the arbitration mechanism in India. While the report briefly mentions TPF, it also recognizes that implementing a similar mechanism in India would boost the practice of arbitration in the country. 

Funders control in TPF 

It is important to establish a code of conduct that clearly defines the level of control that a Third-Party Funder (TPF) can exercise. Without such guidelines, funders may have the ability to exert influence over the litigant, potentially compromising their autonomy and breaching the confidentiality of the proceedings. Additionally, funders may use their leverage to discourage the settlement of claims. 

While the idea of "party autonomy" is often valued, it may not be suitable for the early stages of TPF in arbitration in India. This is because experienced funders might take advantage of litigants and lead them into unfair or unconscionable agreements. Therefore, it is beneficial to establish rules that clearly define the boundaries of the funder's role. 

Disclosure of Funder and TPF Agreement must be a Pre-requisite  

To ensure fairness and transparency in arbitration, it is important to disclose the involvement of a third-party funder. This disclosure serves several purposes, such as identifying any pre-existing relationships between the funder and the arbitrators, avoiding conflicts of interest with the parties involved in the arbitration, and addressing security of costs. 

Section 12 of the Arbitration and Conciliation Act of 1996 explicitly requires arbitrators to disclose any facts that may raise doubts about their independence or impartiality. Additionally, the fifth schedule of the Arbitration Act also considers the arbitrator's indirect interest. Therefore, it is necessary to disclose the presence of a funder and provide relevant details about the funding agreement. This disclosure helps ensure the independence and impartiality of the arbitrator. 

If a conflict of interest arises and is not properly disclosed, it could lead to the setting aside of the arbitration award by seeking intervention from the courts. This goes against the objective of arbitration, which aims to provide a swift and efficient resolution of disputes. 

The extent of disclosure of the TPF agreement can be determined by the parties involved, while still maintaining the confidentiality of their legal strategies and sensitive information from being disclosed to the opposing parties. 

Conclusion 

In Conclusion, Third-Party Funding (TPF) can be a helpful mechanism in the post-COVID-19 world, especially for small businesses and financially struggling litigants. It allows them to allocate their litigation expenses effectively, which can save their business from incurring losses or going bankrupt. At the same time, TPF ensures equal access to justice for all parties involved, while also being a profitable investment opportunity for funders. 

TPF is a positive change in arbitration because it helps address the financial imbalances between parties. Unlike some other countries, India has never prohibited maintenance and champertous agreements, which puts it in a favourable position. However, there is a need for reforms to align existing laws with international standards, establish a comprehensive legal structure for alternative dispute resolution, introduce provisions for transparent TPF agreements, ensure speedy and efficient resolution of cases, and enforce contracts effectively. 

By implementing these reforms, India can establish itself as an arbitration hub in Asia and potentially even on the international stage. This would attract more businesses and strengthen the country's position in resolving disputes through arbitration.