The concept of the modern-day version of third-party litigation funding is still new to India, although it has been practised informally in court litigation and is implied to be recognised as a permissible practice in Indian statute as well as case law. Litigation financing is, however, unregulated, and there are still some contradictory views about its permissibility, predominantly owing to misconceived assumptions that the principles of champerty and maintenance are applicable in India.

Recognition of Third-Party Funding in Statute

As mentioned, there is no Indian statute or regulation that deals with third-party funding in any manner. As such, it would be covered under the Indian Contract Act, 1872 much like any other agreement, and subject to other laws and regulations (such as the Foreign Exchange Management Act, 1999, and the Companies Act, 2013).

That said, third-party funding is recognised by two key statutes in relation to civil court litigation and arbitration, and is also recognised by India’s insolvency and bankruptcy statute.

• State amendments to the Code of Civil Procedure, 1908 (CPC) – the CPC governs the law relating to the procedure of the courts of civil justice in India. While the CPC is a law passed by the parliament of India at the central level, the Constitution allows states to enact amendments to the CPC applicable to their respective territories. Exercising this power, the States of Maharashtra, Madhya Pradesh and Gujarat enacted provisions in 1983, namely Order XXV Rule 3, empowering their courts to join third-party financiers as plaintiffs to a civil suit in certain circumstances and also furnish security for the payment of all costs incurred and likely to be incurred by any defendant. If the financier declines to be made a plaintiff, the court may view it as a defendant and pass similar orders on furnishing security (see 2.2 New Security for Costs).
• Arbitration and Conciliation Act, 1996 (“A&C Act”) – India’s A&C Act was enacted along the lines of the UNCITRAL Model Law on International Commercial Arbitration (1985). Part I of the A&C Act applies where the seat of arbitration is India. Part II applies to the enforcement of foreign awards made in a contracting party to the New York Convention, 1958 or the Geneva Convention, 1927. Amendments in 2015 to the A&C Act introduced the Fifth and Seventh Schedules, respectively providing for circumstances when there may be justifiable doubts as to an arbitrator’s impartiality and independence and when an arbitrator is ineligible for appointment. Both schedules were drawn from the Red and Orange Lists of the IBA Guidelines on Conflicts of Interest in International Arbitration 2014. The Seventh Schedule contains a smaller and more serious sub-set of situations contained in the Fifth Schedule. One such circumstance covered by both schedules is where “the arbitrator or a close family member of the arbitrator has a close relationship with a third party who may be liable to recourse on the part of the unsuccessful party in the dispute”, thus recognising that a party to an arbitration may be funded by a third party.
• Regulations issued under the Insolvency and Bankruptcy Code, 2016 (IBC) – in 2020, Regulation 37A was inserted to the Insolvency and Bankruptcy Board of India (Liquidation Process Regulations), allowing a liquidator to assign to third parties, certain statutory rights of action (such as avoidance transactions actions, and contingent claims) and create value for “not readily realisable assets” whose realisation may take an indefinite time on account of their peculiar nature or exceptional circumstances.

Recognition of Third-Party Funding in Case Law

• Courts in cases even prior to India’s independence, have ruled that the common law doctrines of maintenance and champerty did not apply in India. In Ram Coomar Coondoo v Chunder Cato Mookerjee 1876 SCC OnLine PC 19, the Privy Council (which was the highest court of appeal prior to the constitution of the Supreme Court of India), observed that a fair agreement to fund a suit in consideration for a share in the property (if recovered) would not be opposed to public policy. This decision was followed in subsequent decisions, including Ram Sarup v Court of Wards 1939 SCC OnLine PC 55. There, the Privy Council said that given the uncertainties of litigation, a funder “may well be allowed some chance of exceptional advantage.”
• In 2015 the Supreme Court in Bar Council of India v A.K. Balaji (2018) 5 SCC 379 noted: “There appears to be no restriction on third parties (non-lawyers) funding the litigation and getting repaid after the outcome of the litigation.” The Court was hearing an appeal against decisions of the Madras and Bombay High Courts on whether foreign law firms/lawyers were permitted to practise law in India. The Court made the observation on third-party funding when identifying different ethical standards applicable to the legal profession in India in comparison to other jurisdictions, in particular that while lawyers are prohibited from funding litigation, there appears to be no such restriction on non-lawyers.
• Finally, in 2023, a two-judge bench of the Delhi High Court in Tomorrow Sales Agency Private Limited v SBS Holdings Inc. & Others 2023 SCC OnLine Del 3191 refused to order a funder to furnish security in enforcement of an arbitral award, ruling that the funder was neither a party to the arbitration agreement nor had orders passed against it. The Court said third-party funding plays a “vital role in ensuring access to justice”. (This judgment has been appealed to the Supreme Court, which will hear the matter in 2024.)
• Indeed, though the doctrines of maintenance and champerty do not apply in India, the funding agreement may still be unenforceable if it is contrary to public policy (see 1.5 Unlawful Terms).

Under Indian law, an “advocate” cannot be a funder, as such an arrangement is prohibited by the Bar Council of India Rules, 1961. The Advocates Act, 1961 defines an advocate as any advocate entered in the rolls of any State Bar Council under the provisions of the Advocates Act.

It is worth mentioning that in June 2023, the Indian government set up a committee to examine the working of India’s arbitration law and recommend reforms to the A&C Act. The committee’s terms of reference are broad and aim to develop India as a competitive arbitration jurisdiction. The committee may accordingly recommend rules to regulating third-party funding in arbitrations.

Litigation funding is unregulated in India. Accordingly, the general principles of contract law under the Indian Contract Act, 1872 (“Contract Act”) will apply which, inter alia, provides (in Section 23), that, a contract which is opposed to public policy will be void.

Accordingly, in Ram Coomar Coondoo v Chunder Cato Mookerjee 1876 SCC OnLine PC 19 the Privy Council ruled that an agreement that is extortionate and unconscionable so as to be inequitable against a party, or made for improper objects, such as gambling in litigation, or abetting and encouraging unrighteous suits, is contrary to public policy. Similarly, in Kamrunissa v Promod Kumar Gupta I.L.R. [1996] M.P. 393 the Madhya Pradesh High Court said that if a court found a particular third-party funding agreement opposed to the principle of equity and good conscience or unconscionable and extortionate in itself, then it would not be enforced. In the High Court’s words, “when such agreement is not made with a view to help persons to tide over their financial difficulties arising as a consequence of unequal litigation, but with a view to take advantage from the predicament of the persons involved in the litigation, the Court may refuse to accept it.”

At present, there do not exist any voluntary codes of conduct or similar instruments that aim to self-regulate third-party funding. In February 2021, major international funders such as Omni Bridgeway, Phoenix Advisors and Profile Investors, and major service providers such as FTI Consulting, Grant Thornton, and Singularity Legal formed the India Association for Litigation Finance (IALF). The IALF aims to be an association to foster regulation and promote the development of litigation finance in India.

The website of the IALF is available here.

There are no such rules or guidance specifically applicable to third-party funding. Under the Consumer Protection Act, 2019 a consumer may file a complaint before Consumer Disputes Redressal Commissions set up at the district, state, and national levels in respect of, inter alia, deficiency in services or an unfair contract. “Service” has been defined in the Act to mean a service of any description, including “financing”. “Unfair contract” has been defined in the Act to mean a contract between a service provider on one hand and a consumer on the other, having such terms which cause a significant change in the rights of the consumer, including imposing any unreasonable charge, obligation, or condition on the consumer, putting him at a disadvantage. The Consumer Disputes Redressal Commissions are vested with powers to remedy deficiencies of service, order the return of any price paid by the claimant, order compensation, etc.

However, because third-party funding is at present unregulated, it remains to be seen if a complaint against a third-party funder in respect of the funding arrangement would be sustainable under the Consumer Protection Act. In other words, as the industry is unregulated, it remains to be seen if it would qualify under “financing”, therefore making third-party funding a service, and third-party funders service providers.

To date, the terms of a litigation funding agreement have not been tested in a court of law. As mentioned in 1.2 Rules and Regulations on Litigation Funding, guidance would be taken from the Contract Act to ascertain whether any term is contrary to public policy and, therefore, void.

A court will consider if the transaction is merely the acquisition of an interest in the subject of litigation or if it is an unfair or illegitimate transaction for the purpose of merely sharing the spoils of litigation. For instance, in Nuthaki Venkataswami v Katta Nagireddy (died) & Others AIR 1962 AP 457, the Andhra Pradesh High Court refused to grant the specific performance of an agreement under which a funder attempted to obtain 3/4th share of a property decreed to the funded party. The Court observed that the proportion to be retained by the claimant is an important consideration when judging the fairness of a bargain. Accordingly, the Court ruled that the 3/4th share sought to be claimed by the funder was not a fair and reasonable bargain.

Another example is Ram Sarup where the Privy Council said that one must have regard not merely to the value of the property claimed but also to the commercial value of the claim, which the parties must estimate in advance of the result. The Privy Council additionally said: “where the parties have weighed the probabilities in a manner which has not operated unfairly, it is more reasonable to regard this as confirming their shrewd estimate of the chances, than to condemn the agreement outright as unfair, by reason only of the possibility that a great gain to the claimant would have had to be shared with the financier.” In that context, the Privy Council said the proportion of proceeds to be retained by a claimant, while not conclusive, is an “important matter” to be considered when judging the fairness of a bargain made when the result of litigation was uncertain or “problematical”.

There are at present no rules governing the disclosure of third-party funding arrangements.

However, arbitrators are under a duty to disclose certain grounds under the A&C Act which may render them ineligible for appointment (Seventh Schedule) or give rise to justifiable doubts as to their impartiality or independence (Fifth Schedule). One of these grounds is if the arbitrator or their close family member has a close relationship with a third party who may be liable to recourse on the part of the unsuccessful party in the dispute. This may therefore require a funded party to disclose the fact of funding, in order to enable the arbitrator to meet his/her duty of disclosure.

Both the CPC and the A&C Act envisage the payment of costs by a losing party. Section 35 of the CPC allows a court to award costs of and incident to all suits in its discretion. For “commercial disputes”, as defined in the Commercial Courts Act, 2015 the court hearing the commercial dispute has the discretion to determine:

• whether costs are payable by one party to another;
• the quantum of those costs; and
• when they are to be paid.

Costs are defined to mean reasonable costs relating to:

• the fees and expenses of the witnesses incurred;
• legal fees and expenses incurred; and
• any other expenses incurred in connection with the proceedings.

The general rule is that costs follow the event, ie, the unsuccessful party shall be ordered to pay the costs of the successful party.

But this does not foist costs on a third-party funder, instead being costs directly on the party to the litigation.

A similar provision to Section 35 of the CPC (ad amended by the Commercial Courts Act, 2015) is available in Section 31A of the A&C Act.

However, there is at present no provision specific to funding-related costs. Therefore, a funder’s ability to pay adverse costs is yet to be tested.

Whether a successful party may be awarded its funding costs may be an issue that an Indian court will ultimately rule on in Norscot Rig Management v Essar Oilfield Services Ltd. & Another, where Norscot, which emerged victorious in its arbitration against Essar and was awarded funding costs (along with other reliefs) has petitioned the Bombay High Court for the enforcement of its arbitral award.

Further, in May 2023, a two-judge bench of the Delhi High Court in Tomorrow Sales Agency Private Limited v SBS Holdings Inc. & Others 2023 SCC OnLine Del 3191 said that third-party funders could not be mulcted with liability that they have neither undertaken nor are aware of.

The Court said it was “neither desirable nor permissible” for the funder to be made to provide security in aid of enforcing the award in circumstances where the funder was not a party to the arbitration agreement or the arbitration proceedings, and did not have any directions issued against it in the arbitral award.

The two-judge bench set aside a single judge’s order directing, among others, an award debtor’s third-party funder to disclose it assets and refrain from creating any third-party interest in its immovable assets. In arriving at his decision, the single judge had relied on decisions of the England and Wales Court of Appeal in Arkin v Borchard Line Ltd & Others (2005) EWCA Civ 655 and Excalibur Ventures LLC v Texas Keystone Inc. and Ors. (2016) EWCA Civ 1144 where third-party funders were made liable for costs of the opposing party. In its judgment, the two-judge bench ruled that these two decisions of the English court related to the award of costs by trial courts and not an arbitral tribunal. The Court further noted that in the United Kingdom, Part 48 of the Civil Procedure Rules, 1998 provide for a court’s power to issue costs orders in favour or against non-parties to a proceeding. By contrast, the Court noted, there was no such applicable rule enabling the court (ie, at least the Delhi High Court) to award costs against third parties.

Generally, under Order XXV Rule 1 of the CPC, a court may, either of its own motion or on a defendant’s application, and at any stage of proceedings, order the plaintiff to give security for the payment of costs incurred and likely to be incurred by the defendant. Under Order XXV Rule 2, if the plaintiff fails to furnish such security within the time fixed, the court will make an order dismissing the suit. The plaintiff may, however, apply for an order to set aside the dismissal, provided he/she is able to prove that he/she was prevented by sufficient cause from furnishing the security. The court may accordingly set aside the dismissal on such terms as to security, costs, or otherwise as it thinks fit.

Specifically regarding third-party funding, the States of Maharashtra, Gujarat, and Madhya Pradesh have enacted amendments to the CPC providing for security for costs where there is a third-party funder. In particular, under Order XXV Rule 3 of these States, where a plaintiff has a funder, the court may order such funder to be made a plaintiff to the suit if he/she consents and may, either of its own motion or on an application filed by the defendant, order such funder to give security for the payment of all costs incurred and likely to be incurred by any defendant for the payment of all costs incurred and likely to be incurred by any defendant. If the funder fails to comply, the court is empowered to pass an order dismissing the suit to the extent it concerns the funder’s interest in the underlying property (ie, the funder’s interest in obtaining proceeds from the plaintiff’s victory in the suit) or declaring that the funder is debarred from claiming any right or interest in the property in suit.

In Tomorrow Sales, the Court said the fact that a party is funded by a third party is a relevant fact in considering whether an order for securing the other party needs to be made.

After the event insurance is not commonly used and most Indian insurance companies are currently unwilling to issue such insurance. Further, the enforceability of such insurance packages has not been tested by Indian courts.

The Bar Council Rules prohibit any outcome related fee structure or fee arrangement. Lawyers generally charge on an hourly or lump-sum basis.

In particular, Chapter II (Standard of Professional Conduct and Etiquette) of Part VI (Rules Governing Advocates) of the Bar Council Rules contain the following prohibitions.

• An advocate shall not stipulate a fee contingent on the results of the litigation or agree to share its proceeds (Rule 20).
• An advocate shall not act on the instructions of buy or traffic or stipulate for or agree to receive any share or interest in any actionable claim, subject to a few exceptions (Rule 21).
• An advocate shall not directly or indirectly bid for or purchase any property sold in the execution of a decree or order in a suit or appeal or other proceeding where he/she was professionally engaged, except if he/she is doing so for his/her client with necessary authorisations (Rule 22).
• Equally, an advocate shall not directly or indirectly bid in court auction or acquire by way of sale, gift, exchange, or other mode of transfer any property which is the subject matter of a suit, appeal, or other proceeding where he/she is professionally engaged (Rule 22A).
• An advocate shall not enter into arrangements whereby funds in his/her hands are converted into loans (Rule 31)
• An advocate shall not lend money to his/her client for the purpose of any action or legal proceedings where he/she is engaged by the client (Rule 32). However, he/she may make payment to the court for his/her client if he/she feels compelled by reason of a rule of the court to do so, without any arrangement with the client in respect of the same.

In Bar Council of India v A.K. Balaji (2018) 5 SCC 379, the Supreme Court noted that a conjoint reading of Rules 18, 20, 21, and 22 “strongly suggest” that advocates in India cannot fund litigation on behalf of their clients. In an earlier decision of Mr G, a Senior Advocate of the Supreme Court AIR 1954 SC 557, the Supreme Court found a senior advocate guilty of professional misconduct for entering into an agreement with a client pursuant to which the client agreed to share proceeds of a litigation where Mr G was professionally engaged. The Court said that the legal professionals were subject to “special and rigid rules of professional conduct” as a result of which such funding arrangements were not permissible (and, indeed, continue to be prohibited today).

To the extent that a funder receives fees that are outcome-related/based on success – they cannot be shared with lawyers in view of the prohibition rules detailed in 3.1 Alternative Fee Structures.

Rule 2 of Chapter III (Conditions for right to practice) of Part VI (Rules Governing Advocates) of the Bar Council Rules stipulates that an advocate shall not enter into a partnership or any other arrangement for sharing remuneration with any person or legal practitioner who is not an advocate. Therefore, a non-lawyer cannot own equity or equivalent in a law firm. In Bar Council of India v A.K. Balaji, the Supreme Court noted that partnerships with non-lawyers for conducting legal practice is not permitted in India.

Following the enactment of the Central Goods and Services Act, 2017 and various State Goods and Services Acts in the same year, India consolidated its indirect tax regime into one goods and services tax regime, which is divided between the central and state governments. Pursuant to Notification No 13/2017 of Central Tax (Rate), where an individual advocate including a senior advocate or a firm of advocates provides legal services, then GST is payable under the “reverse charge” mechanism by the recipient of the service, if the recipient of legal services is a business entity located in India. The service recipient must accordingly pay GST and receive input tax credit as applicable.

The Income Tax Act, 1961 (“IT Act”) obligates a payor to withhold tax at source from any payment made to a non-resident, if such payment is chargeable to tax in India, in the hands of the non-resident. Further, the requirement to withhold tax would arise only in relation to such sum, out of the total payment, which is chargeable to tax in India. Accordingly, it will have to be analysed whether the amount paid to the third-party funder will be chargeable to tax in India.

The third-party funder being a non-resident would generally be subject to tax in India, only if it establishes a taxable presence in India, ie, either in the form of a permanent establishment, in terms of the applicable tax treaty or in the form of a business connection, in terms of the IT Act, giving due regard to the factual matrix of the case at hand.