• LexADR


Updated: Oct 16, 2020

Pallavi Modi and Priyal Reddy, 5th Year, National Law Institute University, Bhopal


Commercial Arbitration as a means of dispute resolution has gained immense popularity in the recent years. Another up and coming device in the dispute resolution space is Third-Party Funding. Although there is jurisprudence and settled position about the legality of Third-Party Funding, but the intersectional domain of Third-Party Funding in Arbitration is still unexplored. A fairly new concept in codified law of nations, Third Party Funding has received a promising response from various actors in the legal fraternity. In the era of Covid-19 and a worldwide economic crisis situation, Third Party Funding in Arbitration is a conducive settlement mechanism. The present blog aims to establish the need for a specific legislation/ provision regulating Third Party Funding in India, while reckoning its already existing presence in practice and principles regarding the same established through judicial precedents. The authors opine that regulation through codification of Third-Party Funding will clear the air regarding its legality and serve as a valuable tool for uplifting debt-ridden entities.


Third-party funding ("TPF") refers to an agreement between a party to a dispute and a third party to provide to the former, funds or other material support in order to finance part or all of the cost of resolution proceedings, in exchange of remuneration that is wholly or partially dependent on the outcome. In recent years, TPF agreements have gained widespread popularity and legislative recognition across the world. In fact, TPF is rapidly expanding as an industry composed of speculative investors who invest in a legal claim for control of the case and/or a contingent recovery. In the Indian context, with the increasing instances of debt ridden companies, the need for promoting and regulating TPF has been acknowledged in practice and policy. In fact, agreements to fund dispute resolution from a third party have existed in the Indian legal system even before the advent of modern industry and allied issues. However they mostly existed in the unorganized market and between helpless litigants and exploitative investors. The arrangement would inevitably result in transfer of subject matter of the dispute itself to the investor. However, now the process is strongly emerging in the organized sector.


1. Developing India as a Hub for International Arbitration

With the enactment of the Arbitration and Conciliation (Amendment) Act, 2019, which aims at making India an international arbitration hub, it is extremely important to statutorily determine the position of TPF. The leading centres of international arbitration in Asia are the Hong Kong International Arbitration Centre and the Singapore International Arbitration Centre. Despite the fact that Singapore and Hong Kong by virtue of their common law jurisdiction had maintained a prohibition on TPF, have come up with a permissive law in the recent years. These legislations bring certainty about the legality of the concept and thus clears the air about TPF being a mere tool to aid impecunious parties. Moreover, there is an undeniable positive trend in popularity of these countries being chosen as the preferred centres for dispute resolution

2. Increasing Debt Oppressed Companies

Time is ripe for statutory recognition as unlike ever before, various large companies have started resorting to TPF for dispute resolution. As the number of debt oppressed companies and individuals associated with these companies increase, they would need a regulated procedure to get their claims funded. With the onset of Covid-19, the Indian Economy is in shackles, CRISIL Ratings analyzed the impact of the pandemic on corporate across 35 sectors, accounting for a total debt of Rs 23 lakh crore in its ratings roundup report for the second-half of this fiscal. Further Moody’s Investor Service states that over the next five years Indian Government’s debt could be as high as 81% of the country’s gross domestic product and at about 72% of estimated 2019 GDP, India's general government debt burden is 53% higher than the median countries. With increase in frustrated contracts due to the pandemic, there is ardent need to regulate debt financing. TPF will be a more viable option in such a scenario, not only to secure debt, but also to help big and small businesses alike.

3. Constitutionality of TPF

It is also noteworthy that the tool of TPF is both congruent and collaborative with one of the basic constitutional principles guiding the legal system in India- “Access to justice for all”. In the context of thousands of pending litigations and poor litigants, instances where claims do not get pursued or get abandoned are very high. Every person has the right to access legal remedies but not everybody has the means to enforce their rights[i]. In such a case, the state has the duty to protect the rights of its citizens as without the power to enforce, rights are seemingly futile. However it is not always possible for the state to fund the claims of all. As a result, the Indian Judiciary has shown a pro arbitration approach in the recent times as recourse to an affordable, quick, and satisfactory settlement of disputes from a credible forum[ii]. If there is no regulated arrangement of private funding to the rescue, lack of staying power is misused as the standard strategy to wear out the claimant. Hence, having an established mechanism of TPF recourse would have positive impact in terms of both initiating claims and continuing till claims are settled.


Although there is no specific statue dealing with TPF, but it has a long history of judicial recognition and analysis. Tracing the judicial approach from as far as back as in 1876, Privy Council in Ram Coomar Coondoo v. Chunder Canto Mookerjee[iii], recognized that champertous agreements[iv] though void in England by reason of being contrary to public policy are not per se prohibited in India. Such agreements are prohibited only when the transaction is ‘inequitable, extortionate and unconscionable and not made with the bona fide objects of assisting a claim’. The aforementioned liberal approach was further expounded by the Privy Council in Kunwar Ram Lal v. Nil Kanth [v]where it was held that the agreements to share the object of litigation, in consideration of supplying funds to carry it on are not against public policy. The same understanding was reiterated by the Supreme Court in ‘G, A Senior Advocate[vi]. Devising a strait-jacket formula for determination of an agreement being ‘against public policy’ is impossible. But, Courts have in certain cases laid down that what type of TPF agreements can be termed as against public policy. Like in Nuthaki Veukataswami v. Katta Nagireddy, the quantum of the share which the financier was entitled to was held to be an important consideration in determining the validity of TPF agreement. Also, the quantum of funding, portion of stake, the relationship of the funder to the parties involved in the litigation are some of the factors that court takes into consideration while determining whether the agreement is against public policy or not. In India, there is a clear bar on agreements such as Lawyer funded TPF’s, with a clear restriction being laid down in the Bar Council of India Rules[vii]. This clearly shows that a lot of power has been left in the judicial hands, which perpetrates problem of subjectivity while adjudicating issues of public policy. Public policy is more ethical and moral in nature than legal. Rather than keeping it as a parameter of judging the validity of TPF contracts, legislature, who is endowed with the public responsibility of maintaining economic wellness of the country, devoid of these century old moral traditions must find out some objective parameters and shape them into codified law, to get rid of this baffling situation.


With a rising commercial arbitration landscape in the country and the basic and underlying idea of access to justice for all, India has a welcoming environment for establishment and development of TPF as an integral part of the legal regime.

With the thought of developing India into an advanced centre of ADR and to compete with Singapore, India also needs to give statutory recognition to TPF agreements. Initially, Singapore also developed as a centre of international commercial dispute resolution only after the U.K. ADR landscape reached its saturation. In the absence of a law governing professional and ethical obligations of counsels and arbitrators dealing with cases involving TPF agreements, developing India as an advanced ADR centre seems to be a distant dream. Currently, there is no mention of TPF in the Code of Civil Procedure, 1908 (“CPC”), the Indian Contract Act, 1872 (“ICA”) or the Arbitration and Conciliation Act, 1996. Other countries that did not have a lex specialis law devised system to overcome this quandary. For example, France has a resolution to overcome issues among parties involved in TPF arrangements. The resolution encourages proper disclosure of TPF arrangements to arbitral tribunals. The only relevant guiding rule in the Indian context is in the Bar Council of India Rules (Rule 20), but that is also limited to the exceptional case wherein the advocate himself is funding litigation. The only favorable piece of Indian statute is the amendment made to the Civil Code of Procedure Code in states such as Maharashtra, Gujarat, Madhya Pradesh and Uttar Pradesh. Order XXV Rule 1 of the code (as amended) provides that the courts have the power to secure costs for litigation by asking the financier to become a party and depositing the costs in court. With the limited recognition of TPF under the CPC the onus further falls on the ICA and the Arbitration and Conciliation Act, 1996. With no constitutional roadblock and the recognition of champertous contracts as moral, the path is clear in the coding of a lex specialis recognizing TPF. With the lowered morale of the industry due to the Covid-19 pandemic and corresponding decline in demand of tertiary service such as dispute resolution, bolstering of financial aid mechanism like TPF is imperative. Codification and structured rules and procedure regarding TPF will certainly help in calming the nerves.

[i] Casserleigh v. Wood, 59 P. 1024, 1026 (Colo. App. 1900). [ii] P P Rao, Access to Justice and delay in disposal of cases, Indian Bar Review, vol-30, 2003, pp 208 5. 'cited in' http://en.wikipedia.org/wiki/Adversarial_system. [iii] Ram Coomar Coondoo v. Chunder Canto Mookerjee, (1877), I.L.R 2 Cal, 233(P.C.). [iv] Re Trepca Mines Ltd. (No.2) [1963] Ch. 199. [v] Kunwar Ram Lal v. Nil Kanth, (1893), L.R. 20 Ind. App. 112. [vi] G, A Senior Advocate, 1954 AIR 560. [vii] Rule 20, Bar Council of India’s Standards of Professional Conduct and Etiquette, Chapter II, Part VI, Bar Council of India Rules 1975 (read with Section 49(1)(c) of the Advocate’s Act 1961, read with the proviso thereto).

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