This article is written by Ramanuj Mukherjee, CEO, and Kashish Khattar, Team LawSikho.
The fight between David and Goliath has always been the media’s favourite portrayal of a class-action lawsuit. Almost every hot-selling John Grisham Novel has a lawyer fighting for the common people who are up against a big corporation in the wrong and justice is served in the same year when people file the lawsuit!
It’s good Grisham found inspiration in the American judicial system and not ours.
However, let us try to understand how class-action suits and its jurisprudence have shaped up in the largest democracy of the world (that’s India), and if it seems to have any future that is worth paying any attention to.
So far, class action has not fared very well here at all. But the future could be very different.
Why is class action important at all?
Normally, in law, you can only file a suit or bring any action if you have locus standi. Locus standi means your right to take up a cause of action before the court.
Let’s say you and I have a heated argument and you end up saying some defamatory things about me in public. I now have a cause of action against you and I could go to court and ask for compensation.
However, that is my right. Let’s say Shahrukh was standing there listening to the whole defamatory statement. Can he go file a case against you? Absolutely not. He has no locus here, although a cause of action exists.
So one person normally cannot file a case on behalf of others. But class action is an exception to this rule.
In the case of class action, when an entire class of public is affected, we can’t expect each person to file a separate case. That’s not realistic. If that is required, the process will be inefficient and many people won’t get justice because they do not have resources to approach the court. So law allows a self-appointed representative to file a case against the alleged perpetrators on behalf of the entire class.
Good examples of such class action can be found in consumer law and company law in India. The Civil Procedure Code also has a provision for representative suits.
Class actions can be a powerful way to provide access to justice to the people of India. In countries like the USA, it has emerged as a mechanism of choice for redressal of the problems that affect a large number of people.
If you are excited about what can be achieved in India with class action though, you would probably have to wait for a while because the class action regime is yet to be picked up in any meaningful way in India.
It is not like the country has not seen many circumstances that scream for filing high-potential class-action lawsuits. But nobody prefers to go and litigate through the class action route due to insurmountable hurdles. There are some problems inherent in the system that make class action litigations very hard to pursue.
What are the class-action suits?
Class action suits originated in the United States in 1842 where Equity Rule 48 gave the people the right to file such suits. It was later amended in 1966 to give rise to Rule 23 in Federal Rules of Civil Procedure which has shaped the class action jurisprudence in America.
A class action is typically filed when a large number of people have suffered the same or a similar kind of injury. A class action allows people to come together, aggregate claims, expert evidence and the legal fee together. Class action helps the plaintiff in recovering costs which may or may not be equal to the extent of injury that has been caused. A class-action suit goes on to prove that some practices or actions of a certain individual or corporation or a class of respondents were illegal or caused an unjustifiable legal injury and therefore payment of compensation is in order. Class action suits ensure that a sense of justice prevails.
What types of class actions are allowed in India?
Code of Civil Procedure, 1908 (“CPC”)
The CPC provides for representation suits in Order I, Rule 8 of the Code. It states that several persons can come together to file a claim when they have a common grievance or interest.
A suit can be filed on behalf of the various people having the same interest in the suit. Apart from a common interest or similar grievance, they should be looking for similar relief. These kinds of suits are treated the same as any other suits. Their use has been rare due to various circumstances explained later in the article.
Companies Act, 2013
The Satyam debacle, often seen as India’s Enron moment, highlighted that shareholders did not have recourse for a class action litigation under the Indian law. The Indian shareholders had no recourse given under any Indian law while the American investors filed a class action and won a hefty claim for themselves. Hence, amendments were in the cards.
Class action suits are extensively dealt with through Section 245 which was notified on 1 June 2016 and the now amended National Company Law Tribunal (“NCLT”) Rules of 2016.
Needless to say, these cases can be filed at the NCLT under Section 245 permits the members and depositors to file a case against the company, directors, auditors or advisors in case the actions taken by them are against the interests of the company.
The thresholds have been defined recently in 2019 where 100 members or those holding at least 5% of the stock can file a claim as a class.
Section 245 is an extensive read with the procedure and reliefs given. “Interests of the company” can cover a very wide range of things and eventually the judges’ interpretation in these cases will define what could be included in this definition.
Interestingly, Section 245 does not extend to banking companies.
Competition Act, 2002 (“Competition law”)
A class of people can litigate on the adverse effects on the market under the competition law of the country. Think of an association of traders who think there is an adverse effect or a player is under a dominant position and go to court. This can be a potent tool. For instance, food vendors or restaurants can come together to take Zomato or Swiggy to the court for predatory pricing under this provision.
Under Section 53(N) of the Competition law, a group of people who have been injured due to a breach in the said law can file an application in front of the National Company Law Appellate Tribunal (which handles competition concerns on an appellate level now) and seek compensation.
Consumer Protection Acts
Under the Consumer Protection Act, 1986, any consumer could file a complaint about all the interested consumers before the Consumer Dispute Redressal Commission.
Section 12 of this law allows the consumers, a voluntary consumer association, and one or more consumers where they have the same interest. The complaint should be regarding goods or services valued upwards of INR 1 cr.
India has now gone on to overhaul its whole consumer law. The Consumer Protection Act, 2019 has recently come into force. Section 17 of this 2019 Act is concerning where the Central Consumer Protection Authority now has the power to initiate class actions suit on behalf of the consumers.
A preliminary subjective inquiry would be done by the Central Consumer Protection Authority before initiating a class. This is different from the previous procedure where the consumers can come together and file their grievances in front of the consumer court.
Public Interest Litigation
Public Interest Litigation, Indian judiciary’s invention to grant relief especially for the marginalised community, which have seen massive popularity over the last 40 years, also provides a possible avenue for a class action.
Over the years, the court has gone on to expand the ambit of PIL and now includes rights regarding education; discrimination; neglected children or dependant parents; non-payment of wages; police actions; atrocities against women; harassment; environment; riot victims; and family pensions.
A PIL cannot be filed against a private party alone, but this is often done by making the government a party while adding the private party as another respondent.
Reasons for non-interest
There is a myriad of reasons for non-interest in the filing class action cases in India.
Litigation Finance & Contingency Fee
In the USA, almost all class action is financed through third-party funding. In India, third party funding is yet to take root.
The finance problem for these cases has always been a concern. Stamp duty and court fee legislations in every state, such as the one in Delhi requires for the plaintiff to pay up 4% of the total claims upfront. This would make most class action suits unviable.
This cost could be humongous when we think of a class-action suit involving damages suffered by saying millions of individuals in pollution of a groundwater poisoning incident.
Carrying out litigation against deep-pocketed respondents could take years and investment of a huge legal fee to be paid to lawyers and others working on the matter. Who will provide this money upfront without any assurance of a return?
Imagine that a big multinational has discharged poisonous chemicals into the soil, causing health problems for all people in the nearby villages. How can those villagers sue the multinational for the medical costs and other compensation? The amount in the US could run into millions of dollars. It should be no less in India.
But to file a class action representative suit, will they have to pay for a massive court fee upfront? If they do not have the resources, what is the alternative?
The contingency fee issues with regards to India can be seen as one of the biggest problems when it comes to class actions. The class actions are an industry in itself in the United States because the attorneys have skin in the game that is not the case in India. The Bar Council of India strictly prohibits these kinds of arrangements.
As has been stated by Section 245, the class action lawsuit is not applicable to banking companies. Banks have a major role to play in an economy and a shareholder is not allowed to file a class action against a bank. Customers can file an action if they go through the consumer law but not the shareholders of the banking company under the company law.
Furthermore, Section 20(A) of the SEBI Act, 1992 can create problems as you can’t file a case before a civil court through the representative suits route. The said section debars the jurisdiction of the civil court from any matter which is under the regulatory purview of the SEBI. This was one of the reasons as to why NCLT was given the responsibility to handle class actions when it came to securities and company law. However, to date, NCLT has not dealt with any class action so far.
Investor Awareness and Protection Fund does have provision for assistance in class actions but it being a government-controlled fund brings a plethora of problems of its own. This fund cannot be expected to file such a suit where the government has inherent interests in the company (as a shareholder or otherwise) and the political angle that comes with the necessity of permission from the government cannot be ignored.
Courts blocked the writ petition route
The absence of writ petitions by different shareholders in the Satyam scandal could be a good example. Indian courts have not been very encouraging of a class action against private corporations through the writ petition route. Midas Touch Investors filed a writ before the Supreme Court but was dismissed on the ground that their applications were ambiguous. This seems to be the only reported case of such recourse.
What can be done about it?
Third-party funding (“TPF”)
Third-party funding is the deployment of non-recourse funding by third parties to pay up legal fees and other related costs to pursue litigation which can help the party win huge claims, out of which the funders arrange to take a return on their investment as per contractual terms. With TPF investors already showing interest in funding restructuring claims, it can be said the dawn of the TPF arrangement is finally upon us in India. Third-Party Funding has been held to be a legal arrangement in Indian laws and could solve the financing of large class action claims against big businesses. However, there is no central law and regulation for TPF and there are some critical cases pending before courts that assail the legality of third party funding.
We need faster courts
Looking at the legal pendency of cases and the overburdened NCLT have to devise a way of handling cases in a much more expedient way when it comes to class-action suits. Where it can be argued that a class action filing can hurt a brand’s image, will the company look forward to a long-drawn trial or go for private arbitration matters as has been seen as a trend in the West?
If class actions will take many years to be resolved and decades to go through many appeals, that would make it very hard to invest money in class action suits, which would make it a very unsustainable economic proposition.
Alternatives arrangements for a contingency fee
Conditional fee arrangements or damages based agreements have been the creation of the Common Law system. These agreements spell out the conditions as to how the lawyer would get paid is dependent on the result of the case. They are highly regulated through the very well known Jackson reforms. However, in India, charging contingency fee by lawyers is banned. This needs to change in the public interest so that class action suits actually become a viable option in India.
This is a critical step in the interest of access to justice which Bar Council of India have so far opposed, although class action suits becoming popular in India could help to increase the volume of work for lawyers a great deal, creating massive employment opportunities for young lawyers. This is no pipe dream, given the experience in advanced economies like the USA.
Awarding of costs
Awarding of costs has been a rare occurrence when it comes to litigation in India. The loser pays principle can keep wrongdoing by large corporations in check. However, the Indian courts typically award low costs and Section 245(8) in order to protect against frivolous litigation has made a cap of Rs 1 Lakh which is a ridiculously minuscule amount when a 100-member class would be formed to file a case. This itself is a major reason as to why filing these cases is financially not feasible.
The way forward: what is the future for class action suits in India?
As you can understand, we have laws in place to start filing class-action suits in India while the finance part is messed up and make class action suits financially unviable.
This can change if TPF becomes an acceptable norm in India.
There can be a lot of cases with justifiable claims that could be considered under a class action suit and give common people justice but the development of jurisprudence around it is absolutely necessary. Courts and legislature have to take a more friendly approach to the financial issues regarding TPF and class action suits for anything to change.
Further, these class actions are absolutely necessary to enforce corporate governance in the system, increase investor confidence and help manage the internal affairs better in a typical promoter run business. As India tries to achieve economic growth in the coming times, class action suits should be given a priority to show India Inc can match up and protect global standards of corporate governance.
Besides that, Indian investors have kept the stock market high even though foreign investors have been pulling out post-COVID. If we do not bolster their confidence by giving them access to justice when large corporations engage in wrongdoing, we would compromise their confidence in India’s economy, and betray our own people while foreign investors sue those companies in their home jurisdictions through class action!
Also, us lawyers also must take interest in this area of work that can generate massive upsides in the future, and add a new dimension to the practice of law and access to justice in India.
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