UNRAVELLING THE LAW, BENEFITS & LOOPHOLES OF “CHAMPERTY AGREEMENTS”: A COMPARATIVE STUDY- Part I

Harsh Patidar & Monish Raghuwanshi [1]


PART- I

Abstract


India’s development as one of the main five economies on the planet made it quite possibly the favoured countries for wooing foreign investment lately. Nonetheless, hassles and interruptions brought by the COVID-19 pandemic could bring about another influx of matters related to litigation. The COVID-19 has hit hard the economy, due to which parties to litigation matters may get themselves incapable to bear the significant expenses of litigation or arbitration. Nevertheless, India is a cost-preferred jurisdiction for litigation and arbitration. Accordingly, bringing back the emphasis on the resource class being TPF (third-party funding). This article is divided into two parts. In this part, the authors have dealt with an introduction to TPF, the third-party funding in the Indian context, and the TPF under various other jurisdictions such as Singapore, Australia, etc.

Introduction


Third-party funding[2] refers to an agreement by a third party to the dispute to provide a party, funds or other material support in order to finance part or all of the cost of the proceedings, either individually or as part of a specific range of cases. Such support or financing is either provided in exchange for remuneration or reimbursement that is wholly or partially dependent on the outcome of the dispute or provided through a grant or in return for a premium payment. Such an agreement between the litigant and the third-party funder is profoundly known as the Champerty agreement and the remuneration or share in the proceeds is maintenance.[3] Champerty is defined[4] as “a bargain between a plaintiff or defendant in a suit and a third person, campum partire, to divide between them the land or other matter sued for in the event of the litigant being successful in the suit, whereupon the champertor is to carry on the party's suit or action at his own expense; the purchasing of an interest in the thing in dispute, with the object of maintaining and taking part in the litigation”.[5]


This concept of champerty first came in the United Kingdom where it was regarded as a tool for access to justice for poor litigants who are unable to bear the exorbitant costs of litigation. However, this process was widely abused as a stranger without any substantial interest in the litigation was “officious intermeddling” in litigation, which often resulted in the oppression of the person against whom the action is brought.[6] This form of gambling and trafficking by the stranger to litigation attracted tortious and criminal liability. But, gradually rising costs of litigation increased the demand for third-party funding which led to the abolition of the common law offense of champerty[7] making it an accepted practice in litigation proceedings. However, such an agreement should not per se be opposed to public policy and should be in furtherance of justice and to resist oppression.


Arbitration in the current scenario is being extensively used for the settlement of commercial disputes all over the world. With such a rise in the arena of arbitration, the cost involved therein is in upsurge which mandates the need for third-party funding in the arbitration proceedings. However, the question that comes flagging here is whether this principle of champerty in litigation is applicable to arbitration proceedings or not?


Third-Party Funding in THE Indian Context


The arbitration is in the embryonic stage in India and the institutionalization and stride taken by the Indian Courts have led to an upsurge in the arbitration commercial settlement claims. Due to the Covid-19, lots of businesses are in disruption in India and the costs of the dispute settlement mechanisms from litigation to arbitration are on a hike. The funding of arbitration costs by a third party may ease such economic distress of the businesses and commercial organizations. However, the position of third-party funding is not clear and there is an absence of statute regarding the validation or prohibition in this regard. Indian Courts have not explicitly disregarded the concept of third-party funding to a party in litigation or arbitration proceeding. The judicial precedents of the Privy Council and Supreme Court on many occasions have dealt with this issue.


Earlier, in 1825, in the case of Ram Gholam Singh v. Keerut Singh[8], the Sudder court declared “a contract to give half of a large estate for a comparatively small advance as unfair and called the transaction as savoured strongly of gambling”. Later, in the case of Tara Soonduree Chowdhrain v. The Court of Wards[9], a champerty agreement was held void on the grounds of being contrary to the public policy. Later, the courts started recognising a champerty and maintenance agreement in India.


On the question of the applicability of English law, making champerty and maintenance an offence in India, Sir R. Couch, C.J. in the English case of Pechell v. Watson[10] observed that “the English Common Law, and the Statutes as to maintenance and champerty, are not applicable, and are considered as having no force in India”. In furtherance to this, the Privy Council in the case of Chedambara Chetty v. Renga Krishna Mithu Vira Puchaiya Naickar[11] held that “the law in India is not the same as it is in England. The Statute of Champerty being part of the Statute Law of England, has, of course, no effect in the mofussil of India; and the Courts of India do admit the validity of many transactions of that nature, which would not be recognized or treated as valid by the Courts of England”.[12] However the Courts will administer according to the principles of justice, equity and good conscience and will take into account the question that “whether the transaction is merely the acquisition of an interest in the subject of litigation bona fide entered into, or whether it is an unfair or illegitimate transaction got up for the purpose merely of spoil, or of litigation, disturbing the peace of families, and carried on from a corrupt and improper motive”.


The validity of a third-party funding agreement depends on the Indian Contract Act, 1872[13] under which such an agreement should not violate the doctrine of public policy. This doctrine of public policy is based on the maxim “ex turpi causa non oritur actio” which means that an agreement against public policy would be void without any effect.[14] The Privy Council on the question of the applicability of the doctrine of public policy in the champerty and maintenance agreement, in the case of Ram Coomar Coondoo and Anr v. Chunder Canto Mookerjee[15], observed that “a fair agreement to supply funds to carry on a suit in consideration of having a share of the property, if recovered, may not be opposed to public policy. But agreements of this kind ought to be carefully watched, and when found to be extortionate, and unconscionable, so as to be inequitable against the party; or to be made, not with the bona fide object of assisting a claim believed to be just, and of obtaining a reasonable recompense therefor, but for improper objects, as for the purpose of gambling in litigation, or of injuring or oppressing others by abetting and encouraging unrighteous suits, so as to be contrary to public policy, the effect ought not to be given to them”.[16]


The Supreme Court of India in In Re: G, A Senior Advocate of the Supreme Court[17], further cleared its position on the validity of champerty and maintenance observing that “it can be accepted at once that a contract of this kind would be legally unobjectionable if no lawyer was involved. The rigid English rules of champerty and maintenance do not apply in India, so if this agreement had been between what we might term third parties, it would have been legally enforceable and good. It follows that there is nothing morally wrong, nothing to shock the conscience, nothing against public policy and public morals in such a transaction per se, that is to say when a legal practitioner is not concerned”.[18]


Now it is a well-settled law that a champerty and maintenance agreement is valid in India.[19] However, this should not be opposed to public policy under the Indian Contract Act, 1872. The interpretation of public policy is wide and non-exhaustive. The question that lies here is whether a champerty agreement is void in India if an advocate is the third party.


The Supreme Court in Bar Council of India v. AK Balaji[20] dealt with this question of law and went on to hold that “funding of litigation by an advocate is impermissible. However, there appears to be no restriction on third parties (non-lawyers) funding the litigation and getting repaid after the outcome of the litigation”.


The concept of third-party funding is a recognised practice in litigation. The development in the adoption of the practice of third-party funding in arbitration proceedings is in a nascent stage in India. There is no fundamental difference in the litigation and arbitration proceedings as both resort to the settlement of disputes and work in furtherance of the principle of justice, equity and good conscience.[21] In this regard, the English Court in Bevan Ashford vs. Geoff Yeandle Ltd. observed that “The law of champerty has its origins in, and must still be based upon, perceptions of the requirements of public policy. I find it quite impossible to discern any difference between court proceedings on the one hand and arbitration proceedings on the other that would cause contingency fee agreements to offend public policy in the former case but not in the latter...If it is contrary to public policy to traffic in causes of action without a sufficient interest to sustain the transaction, what does it matter if the cause of action is to be prosecuted in court or in an arbitration?”.[22]

Therefore, the validity of a third-party funding agreement in the arbitration proceeding in India would fundamentally depend on the doctrine of public policy under the Indian Contract Act, 1872.


A Comparative Study: EVINCING DIASPORA OF TPF IN OTHER COUNTRIES


A. Position in Australia


In Australia, TPF is allowed. However, the situation is becoming knotty with a galore of juridical and law-making advancements in the year in review, affecting the arrangements of TPF and the advancements regarding TPF of representative proceedings, with TPF being kept under a certain level of regulation and control. Despite legislation, the status under the jurisdiction of Australia is that the formal tenets of the law of contract, in pursuance of which a contract might be considered as antithetical to public policy or illegal, are not disconcerted. This indicates that a TPF in the contract can be set at naught by the courts in Australia if it were not in consonance with common law public policy provisions and considerations.[23] There exists no legal regulatory framework that is applicable to litigation funding. The funding by the litigants is regulated and controlled under the administration of the Court, the Trade Practices Act 1974, the Federal Court of Australia Act 1976 and various other State consumer protection laws and regulations. In common law, there exist no legal limitations for TPF in the litigation sphere and mechanisms other than the Rules of the Court and the Court’s acknowledgment of whether the proceedings result in abuse of procedure pertaining to third party funding.


Notably, in the judgments of the High Court in the Fostif case[24] and Trendlen case,[25] there appears to be relevant satellite litigation in third party funding issues comprising of frivolous litigation over the legality of the funding mechanisms. Many legal scholars have contended that the absence of a legal setup and framework for TPF at the State level might proliferate ambiguity, notwithstanding the stance of the High Court on TPF in litigation. Indisputably, there has been a clarion call to set up a legal framework as well as a monetary framework for the regulation of third-party funding, to safeguard the interests of the litigants and to ensure the existence of third-party litigation funding.


Talking about the limitations on the charges and additional amount in the form of interest funders can claim that no law extant in Australia imposes any restrictions on the costs that a funder could ask from the party. The court in the Fostif case ruled that “contract law considerations such as illegality, unconscionability and public policy may still arise in relation to a litigation funding agreement but there is no objective standard against which the fairness of the agreement may be measured.


Accordingly, whether a particular clause in a litigation funding agreement may contravene public policy will be answered having regard to the circumstances of each particular case”.[26] A priori, the courts in Australia can nullify a TPF in litigation funding agreement in circumstances where the interest owned by the funders’ amounts to an equitable subterfuge in the perception that it indulged captivating a barter by resorting to clandestinely benefiting of a person’s incompetency to adjudge for him, on grounds of inability, requirement, lack of awareness, etc.


B. Position in the UK


In the United Kingdom, Section 58B of the Courts and Legal Services Act, 1990 allows TPF agreements between legal service contributors and litigants and allows TPF in litigation, whereby the third party could get a portion in the form of a share of the “damages”. Section 58B (1) of the Act reads as follows: “A litigation funding agreement which satisfies all of the conditions applicable to it by virtue of this section shall not be unenforceable by reason only of it being a litigation funding agreement”. Further, Section 58B (2) defines litigation funding agreement as: “(a) a person agrees to fund the provision of advocacy or litigation services to another person, and (b) the litigant agrees to pay a sum to the funder in specified circumstances”. Thus, third-party funding is legally regulated. Additionally, the report of the legal department (1996) had anointed “maintenance” and “champerty” as “the procurement, by direct or indirect financial assistance, of another person to institute, or carry on or defend civil proceedings without lawful justification. Champerty is a particular form of maintenance, where the maintainer’s agreement with the litigant gives them a share in the proceeds or subject matter of the action; action referred to as a division of the spoils”.


The woes of the courts date back to the medieval time frame and the main dispute of the shielding of the sanctity of the justice delivered to the public. A bastion of TPF in litigation can distort the judicial procedure; they can whip up dubious or frivolous legal assertions to conceal evidence or even witnesses, or artificially alter the amount of any damages that can be remedied. In these ways, a crusader can try to guarantee a triumph in the court of law as a way of hounding or exhorting pressure on their adversaries. The judiciary in England has shown a casual attitude toward third-party funding set up, taking exigencies of funding problems into consideration, and proclaiming that access to justice for litigants is of paramount importance.


In the year 2009, Lord Justice Jackson was questioned by the Master of the Roster, “to review the rules and principles governing the costs of civil litigation and to make recommendations in order to promote access to justice at proportionate cost”. In the conclusive report presented by him, he patronaged TPF as supplementing an amplification and sometimes the only way of TPF in litigation, assisting ingress to justice: “I accept that third party funding is still nascent in England and Wales and that in the first instance what is required is a satisfactory voluntary code, to which all litigation funders subscribe. At the present time, parties who use third party funding are generally commercial or similar enterprises with access to full legal advice. In the future, however, if the use of third- party funding expands, then full statutory regulation may well be required. In 2010, the Civil Justice Council, an advisory non-departmental public authority funded by the Ministry of Justice came with a consultation paper titled, A Self-regulatory Code for Third-Party Funding”.


C. Position in Singapore


At present, third-party funding is prohibited in Singapore. The present prohibitions extend to funding for international arbitration proceedings. As a common law nation, Singapore’s laws on third-party funding have their existence in English law. Singapore law disallows third-party funding in two ways: “Firstly, Singapore law generally treats third-party funding agreements as contrary to public policy or illegal – and for that reason, unenforceable. This policy is informed by the common law doctrines of maintenance and champerty. In brief, maintenance is the giving of assistance or encouragement to a litigant by a person who has neither an interest in the proceedings nor any other motive recognised by law as justifying his or her interference. Champerty is a subset of maintenance – it is the maintenance of an action in exchange for a promise to give the maintainer a share in the fruits of the proceedings. Typical third-party funding agreements fall foul of both doctrines and are therefore generally unenforceable under Singapore law”; and secondly, “Singapore law regards maintenance and champerty as torts at common law. An affected party could (at least in theory) sue the party (or parties) in tort if the affected party has suffered special damage as a result of the relevant tortious arrangement”.


The embargo on third-party funding under Singapore law is far fetching. The Singapore Court of Appeal has delineated that “the principles behind the doctrine of champerty apply to all types of legal disputes and claims, including arbitration proceedings”.[27] There are various statutory and common law exceptions to it: Firstly, the Singapore Companies Act allows the liquidator belonging to an insolvent entity to sell to the third party who will provide funding.[28] Secondly, a TPF agreement would not be repealed if that same agreement is ancillary to the circumstance where the property interest gets transferred. Additionally, the factum that the funder may be benefited from a third-party funding agreement does not mean that the funding set up falls foul of the principle of champerty and maintenance.[29]


Further, Singapore has decided to follow the “light touch” approach to govern and regulate third-party funding agreements. For instance, the Law Ministry of Singapore has made its target as important to “precedence to party autonomy and flexibility, with disclosure as the foundational principle, taking light touch mindset into consideration for the sake of regulation which had been accepted in jurisdictions where TPF is allowed”. It is undeniable that in order to be victorious, monitoring shall be commensurate with the real stakes in existence. However, scanty monitoring of a high-stake company could result in market misconduct, immoderate monitoring of a high-stake company or an entity stultifies growth. Since funding is “non-recourse”, it is self-regulating in nature: funders would lose their cash cows if they fund frivolous and vexatious claims.


To be cont.

[1] Harsh Patidar is a III Year, B.A. LL.B. (Hons.) student at National Law Institute University, Bhopal, harshpatidar.ug@nliu.ac.in Monish Raghuwanshi is a II Year, B.A. LL.B. (Hons.) student at National Law Institute University, Bhopal, monishraghuwanshi.ug@nliu.ac.in [2] INTERNATIONAL COUNCIL FOR COMMERCIAL ARBITRATION, REPORT NO. 4, QUEEN MARY TASK FORCE ON THIRD-PARTY FUNDING IN INTERNATIONAL ARBITRATION, 50, (2018). [3] Winnie Lo v HKSAR, (2012) 15 HKCFAR 16. [4] JOWITT'S DICTIONARY OF ENGLISH LAW, (Daniel Greenberg, Jowitts, 5th ed. 2019). [5] Damodar Kilikar & Ors. v. Oosman Abdul Gani & Anr., 1961 KLJ 356. [6] Legislative Council Panel on Administration of Justice and Legal Services, Abolition of the common law offence of champerty, March 25, 2014, https://www.doj.gov.hk/en/legco/pdf/ajls20140325e2.pdf (Last visited on Mar. 28, 2021). [7] Criminal Law Act, 1967, § 13, No. 58, Acts of Parliament, 1967 (UK). [8] Ram Gholam Singh v. Keerut Singh, 4 Sel. Rep. 12. [9] Tara Soonduree Chowdhrain v. The Court of Wards, 13 B.L.R. 495. [10] Pechell v. Watson, 8 M.& W. 691. [11] Chedambara Chetty v. Renga Krishna Mithu Vira Puchaiya Naickar, L.R. 1 Ind. Ap. 241. [12] Id. ¶ 15. [13] Indian Contract Act, 1872, No. 9, Acts of Parliament, 1872 (India). [14] Kamarbai and Ors. v. Badrinarayan & Anr., AIR 1977 Bom 228. [15] Ram Coomar Coondoo and Anr v. Chunder Canto Mookerjee, (1876) ILR 2 CAL 233. [16] Id. ¶ 38. [17] In Re: G, A Senior Advocate of the Supreme Court, 1955 1 SCR 490. [18] Id. ¶ 11. [19] DAMODAR KILIKAR, supra note 5. [20] Bar Council of India v. AK Balaji, 2018 SCC OnLine SC 214. [21] Kshama Loya Modani and Vyapak Desai, Asia no longer third to Third Party Funding-Meets the Financing world of Arbitration, KAULA LUMPUR REGIONAL CENTRE FOR ARBITRATION (Dec. 2017), https://nishithdesai.com/fileadmin/user_upload/pdfs/NDA%20In%20The%20Media/News%20Articles/180129_A_Asia-No-Longer-Third-To-Third-Party-Funding.pdf (Last visited on Mar. 28, 2021). [22] Bevan Ashford v. Geoff Yeandle Ltd., [1998] 3 W.L.R. 172. [23] Clyne v. NSW Bar Association, [1960] 104 CLR 186. [24] Campbells Cash and Carry Pty Ltd v. Fostif Pty Ltd, [2006] 229 CLR 386. [25] Mobil Oil Australia Pty Ltd v. Trendlen Pty Ltd, [2006] HCA 42. [26] CAMPBELLS, supra note 24. [27] Otech Pakistan Pvt Ltd v. Clough Engineering Ltd and Anr., [2007] 1 SLR(R) 989. [28] Re Vanguard Energy Pte Ltd, [2015] 4 SLR 597. [29] Lim Lie Hoa and another v. Ong Rebecca Jane, [1997] 1 SLR(R) 775.

82 views0 comments

Recent Posts

See All

Arbitrating Climate Change in India

Primer on the important legislations related to the environment and how it could be practical to adopt arbitration to resolve such disputes.