Third Party Litigation Funidng

In this article, Madhurika Khatri discusses Third Party Litigation in India.

Introduction

The Boom in litigation costs has led to emergence of Third Party Litigation Funding (hereinafter referred as “TPLF”) by the affluent businessmen, who view these expenses as an investment opportunity. Third Party Litigation Funding involves the funding of litigation activities by entities other than the parties themselves, their counsel, or other entities with a pre-existing contractual relationship with one of the parties, such as an indemnitor or a liability insurer[1] in exchange for a portion of settlement or judgment proceeds from the case. With a strong grip over suits in Australia, Europe, USA and Canada, it can be undisputedly termed as the most recent and significant development in the field of civil litigation.

Weighing its Pros and Cons

The critics of Third Party Litigation Funding argue that it can increase the volume of abusive and frivolous litigation. This can happen because these companies view disputes as a mere investment opportunity which makes them more willing to fund cases that are weak on the merits but have a higher chance of a large award. These companies can further restrict the control of plaintiff and lawyer over the dispute by exerting its terms over strategic decisions in order to protect their investment. Chances are also high that funder can prolong the litigation by preventing parties to accept a reasonable offer in hope of receiving better offer in the future. It can also impact the attorney-client relationship and diminish the professional independence of attorney. Attorneys may place wishes of funder over client as their fees are coming from funder’s pocket.

The proponents believe that it can increase access to justice by allowing the under resourced .parties to pursue or defend the claim and thereby creates a level playing field. It also allows litigants and their lawyers are able to proceed without undertaking any risks related to the suit. Third party financing promotes judicial efficiency Third-party financing further contributes towards judicial efficiency because settlements are more likely when both parties know that the other has the resources to take the case to know that to trial if necessary. Funding advocates counter critics by stressing that funders wanting to stay in business for the long run will not risk their investment by putting their money in frivolous or abusive litigation.

Overall it cannot be denied that Third Party Litigation Funding has more scope for increasing access to justice than abuse and all its negative aspects can be easily tamed through regularization by statues and regulations.

Welcoming Third Party Litigation Funding in India

In India, inaccessibility of the poor to lawyers, an almost absent pro-bono culture, the complexity of the system, the inordinate delays, the lack of adequate legal training, corruption and a failure to implement the law, are some of the many problems that the legal system is riddled with.  According to 2012 year-end report of the National Crime Records Bureau, Ministry of Home Affairs has held 66.2% of various types of prison inmates to constitute ‘under trials’. These Statistics speak volumes for the lack of access to Legal Aid. According to Mr. Alexander Jacob, Ex-Director General of Prisons and Correctional Services, Kerala, at least 20 percent of Prison inmates are not guilty and behind bars due to lack of access to Legal Aid.[2] In the current scenario, Third Party Litigation Funding can play a major role in increasing access to justice to the poor and ensuring that the no one is denied justice because of lack of qualitative legal aid.

It is important to note that Third Party Litigation Funding has been expressly recognized by Maharashtra, Gujarat, Madhya Pradesh, Uttar Pradesh, Andhra Pradesh, Orissa and Tamil Nadu after bringing in an amendment in Order XXV Rule 1 of the Code of Civil Procedure Code, 1908. It 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.[3] Even a constitutional bench of the Supreme Court has noted that a champerty contract is not per se illegal, except in cases where an advocate involved.[4] The same position has also be reiterated by different High Courts.[5] Thus, it can be concluded that there is no bar to Third Party Litigation Funding in India and therefore it can be easily employed in the country to increase access to justice.

However, in order to make sure that Third Party Litigation Funding investors, while tipping the scale of justice for profit, do not exploit any poor or violates principles of equity, good conscience and fair play; it is important that TPLF is regulated by statutes or regulations. For framing rules and regulation for TPLF in India, a legislature can take into account the legal models prevalent in different countries.

Third Party Litigation Funding around the world

  1. Australia

In Australia, there is no formal regulatory framework applying to litigation funders. Litigation funding is controlled largely by supervision of the Court, the Trade Practices Act 1974, the Federal Court of Australia Act 1976 and other State consumer protection legislation.[6]

Third Party Litigation Funding, in its modern form, originated in Australia in the 1990s after the abolition of laws restraining champerty and maintenance. The practice of champerty and maintenance were once tort and crime under all Australian Jurisdiction. Subsequently, laws on maintenance and champerty have become obsolete as crimes and tort under common law,[7] and legislation in the Australian Capital Territory, New South Wales, South Australia and Victoria have expressly abolished maintenance and champerty as a crime and as a tort.[8]

Since then, the litigation funding market in Australia has flourished, assisted by favorable court decisions which have recognized the benefit of litigation funding. One of the most notable of these is the High Court of Australia decision in 2006 in Campbells Cash and Carry Pty Limited v. Fostif Pty Ltd[9] (Fostif). There, the High Court found that a litigation funding arrangement was not an abuse of process or contrary to public policy and, indeed, noted the access to justice benefits that can flow from litigation funding.

Since the Fostif decision, active legislative intervention in the Australian litigation funding market has largely been confined to responses to significant court decisions. Two examples of such decisions are the cases of Brookfield Multiplex Limited v. International Litigation Partners Ltd[10] and International Litigation Partners Ltd v. Chameleon Mining NL[11] (Chameleon), where the Full Federal Court and the NSW Court of Appeal, respectively, found that a funding agreement for a class action suit was a ‘managed investment scheme’ and required a litigation funder to have an Australian Financial Services License. For a short period, both decisions caused the Australian funded class action market to grind to a halt.

Whilst the Chameleon decision was subsequently overturned in the High Court in 2012, the Australian Government subsequently enacted amendments to the Corporations Act to exclude class actions from the definition of a managed investment scheme and to exempt funders of single or multi-party litigation from holding a financial services license, provided they have in place appropriate processes for managing conflicts of interest. This latter requirement is currently the only substantive regulatory imposed on litigation funders operating in Australia.[12]

Productivity Commission was requested by Assistant Treasurer of Australia to undertake an inquiry into Australia’s system of civil dispute resolution, with a focus on constraining costs and promoting access to justice and equality before the law. After 15 month inquiry, Productivity commission released its report named “Access to Justice Arrangements”[13] in September 2014, where it expressed the view that having regard to various consumer protection and public policy objectives, formal regulation of litigation funding was warranted. It recommended that the Australian government establish a license for third party litigation funding companies designed to ensure that they hold adequate capital relative to their financial obligations and properly inform clients of relevant obligations and systems for managing risks and conflicts of interest.

On 29 April 2016, the Federal Government released its formal response[14] to the recommendations given by the Productivity Commission but it did not mention a word about Productivity Commission’s recommendation on the regulation of third party litigation funding.

2.The United Kingdom and Europe

Third Party Litigation Funding market in United Kingdom is rapidly expanding with global assets under management by litigation funds active in the UK is over £1.5 billion, with the growth of 743% from 2009. Historically, Third Party Litigation Funding was prohibited under the Statute of Westminster 1275, which regulated champerty, subsistence, maintenance and barratry, on public policy grounds. Subsequently, The Criminal Law Act 1967 abolished both the crimes and torts of maintenance, champerty and barratry on the grounds that the risks could be addressed in other ways. Although English law no longer prohibits litigation funding, it recognizes that in some circumstances it can be contrary to the public interest and illegal.

In November 2008, Lord Justice Jackson was tasked with conducting an

independent review of costs and funding in civil litigation in England and Wales. His final report[15] of December 2009 recommended self-regulation of the litigation funding industry, by way of a voluntary code of conduct for then and proposed full statutory regulation of Third Party Litigation Funding in case of expansion of the practice in the UK market. There has been substantial growth both in the size of existing industry participants and in the number of litigation funders active in the UK since 2009 and as a result, self-regulation of litigation funding in no more adequate.

In the meanwhile, Third Party Litigation Funding in England and Wales are regulated by Association of Litigation Funders[16] which is a private company limited by guarantee, owned and directed by its member firms. It administers a self-regulating Code of Conduct[17]and actively engages with government, legislators, regulators and other policymakers to shape the regulatory environment for litigation funding in England & Wales. ALF’s Code of Conduct includes, among other provisions, a capital adequacy requirement, a prohibition against interference with the lawyer-client relationship and conditions under which a funder may withdraw from funding agreements. If a complaint is found against the members for violating the code then a maximum penalty of £500 is payable to the association and repeated violation can lead to termination of membership.[18] However, termination of membership does not prohibit funders from continuing to fund claims.

On the regulatory front, the European Union is not authorized to regulate third-party litigation funding generally, that responsibility lies with individual member states. The European Commission has nevertheless issued a non-binding recommendation in June 2013 which provides two set of principles on third party funding in antitrust class actions that can usefully guide national courts of member states.[19] Recently, Supreme Court of Ireland has delivered a judgment in Persona Digital Telephony Ltd and another v. The Minister for Public Enterprise[20] and others on 23 May 2017, where it has ruled against litigation funding arrangements and barred it.

3.United States of America

No single preferred approach has developed for the regulation of third-party litigation funding in the United States. Rather, a patchwork collection of state law exists in three substantive areas:

  • Laws directly regulating funders;

At least two states have enacted laws imposing restrictions on funders: Maine and Ohio. In Maine, funders must register with state authorities, disclose the fees and interest rates charged, and represent that the funder will not make any decision respecting the course of litigation.[21]Ohio passed an almost identical provision in 2008.[22] The Ohio law reverses a 2003 Ohio Supreme Court decision that struck down a third-party financing agreement as champertous.[23]

  • The archaic doctrines of maintenance, champerty, and barratry;

In Nevada[24] and Minnesota[25], this doctrine is still applicable while New York[26], Texas[27] and Florida[28] has the relaxed prohibition on maintenance, champerty and barratry. In contrast with these states, Massachusetts[29] and South Carolina[30] has abolished this doctrine altogether.

(3) Rules regulating attorney conduct and the application of attorney-client privilege i.e.          American Bar Association Model Rule of Professional Conduct (“Model Rule”)

Conclusion

Third Party Litigation Funding can act as the panacea to almost all the problems our civil litigation system is facing. The need of the hour is for government to encourage and promote Third Party Litigation Funding and formulate rules to regulate the practice for the protection of claimants, lawyers as well as investors.

[1] American Bar Association Commission on Ethics 20/20 Informational Report to the House of Delegates <https://www.americanbar.org/content/dam/aba/administrative/ethics_2020/20111212_ethics_20_20_alf_white_paper_final_hod_informational_report.authcheckdam.pdf> last assessed on 15th November, 2017.

[2] National Consultation on Improving Criminal Legal Aid in India, Human Right Law Network <http://www.hrln. org /hrln/criminal-justice/reports/1473-national-consultation-on-improving-criminal-legal-aid-in-india.html> last assessed on 15th November, 2017.

[3] Order XXV Rule 1 of the Code of Civil Procedure Code, 1908.

[4] In the matter of G, A Senior Advocate, (1955) 1 SCR 490; Rattan Chand Hira Chand v. Askar Nawaz Jung (Dead) by Legal Representatives and Ors, (1991) 3 SCC 67.

[5] Dr. V.A. Babu (Died) Legal v. State of Kerala represented by District and Ors, 1995 SCC (5) 457; Lala Ram Sarup v. The Court of Wards, (1940) 42 BomLR 307.

[6] Position Paper on Regulation of third party litigation funding in Australia, Law Council of Australia (June 2011).

[7] Clyne v. NSW Bar Association (1960) 104 CLR 186, 203; Brew v. Whitlock (1967) VR 449, 450.

[8] Civil Law (Wrongs) Act 2002, s 221; Maintenance, Champerty and Barratry Abolition Act 1993 (NSW) s.3, 4, 6; Criminal Law Consolidation Act 1935 (SA) Schedule 11 s. 1(3), 3; Wrongs Act 1958 (Vic) s.32 and Crimes Act 1958 (Vic) s.322A.

[9] (2006) 229 CLR 386.

[10] (2009) 260 ALR 643.

[11] (2012) HCA 45.

[12] The court steps in: recent development in the regulation of litigation funding in Australia, Vannin Capital PCC< https://www.lexology.com/library/detail.aspx?g=ec12dc90-e8ab-45a7-9bfb-af534e4558fb > last accessed on 15th November, 2017.

[13] Productivity Commission Inquiry Report (Overview), Access to Justice Arrangement (September 2014) <https://www.pc.gov.au/inquiries/completed/access-justice/report/access-justice-overview.pdf> last accessed on 15th November, 2017.

[14] Response to the Productivity Commission’s Report into access to justice arrangements, Attorney General of Australia (29 Aril, 2016) < https://www.attorneygeneral.gov.au/Mediareleases/Pages/2016/SecondQuarter/29-April-2016-Response-to-the-Productivity-Commissions-Report-into-access-to-justice-arrangements.aspx> last accessed on 15th November, 2017.

[15] Review of Civil Litigation Cost: Final Report, J. Rupert Jackson<https://www.judiciary.gov.uk/wp-content/uploads/JCO/Documents/Reports/jackson-final-report-140110.pdf> last accessed on 15th November, 2017.

[16]Association of Litigation Funders, Who We Are < http://associationoflitigationfunders.com/about-us> last accessed on 15th November, 2017.

[17] Association of Litigation Funders, How We Work (Code of Conduct) <http://associationoflitigation funders.com/about-us> last accessed on 15th November, 2017.

[18] Association of Litigation Funders, Code of Conduct for Litigation Funders< http://associationof litigationfunders.com/wp-content/uploads/2014/02/Code-of-conduct-Jan-2014-Final-PDFv2-2.pdf > last accessed on 15th November, 2017.

[19] European Commission, Recommendation on Common Principles for Injunctive and Compensatory Collective Mechanisms in the Member States Concerning Violations of Rights under Union Law, 2013 O.J. (L201) 6 (June 11, 2013)

[20](2016) IESCDET 106.

[21] Me. Rev. Stat. Ann. tit. 9-A §§ 12-104, 12-106.

[22] Ohio Rev. Code Ann. § 1349.55.

[23] Rancman v. Interim Settlement Funding Corp., 789 N.E.2d 217.

[24] Schwartz v. Eliades, 939 P.2d 1034, 1036 (Nev. 1997).

[25] Johnson v. Wright, 682 N.W.2d 671, 677 (Minn. Ct. App. 2004).

[26] Merrill Lynch v. Love Funding, 918 N.E.2d 889.

[27] Anglo-Dutch Petroleum Inter. v. Haskell, 193 S.W.3d 87(Tex. App. 2006).

[28] Kraft v. Mason, 668 So.2d 679.

[29] Saladini v. Righellis, 687 N.E.2d 1224, 1226.

[30] Osprey Inc. v. Cabana Ltd. Partnership, 532 S.E.2d 269.

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