Civil Law and Third-Party Litigation Funding

1. Meaning of Third-Party Litigation Funding

Third-party litigation funding (TPLF) is an arrangement in which a person or entity that is not a party to the dispute provides financial resources to a claimant or, in some cases, a defendant to fund litigation or arbitration.

In return, the funder may receive:

• a percentage of the recovery;
• a multiple of the amount invested;
• a fixed return; or
• another agreed financial benefit.

The basic structure is:

Claimant → Litigation/Arbitration → Defendant
↑
Third-party funder provides financing

The funder generally does not have a direct substantive claim against the defendant merely because it finances the litigation.

2. Why Litigation Funding Exists

Litigation can be expensive because parties may have to pay for:

• lawyers;
• expert witnesses;
• court fees;
• arbitral tribunal fees;
• discovery/document production;
• investigations;
• forensic accounting;
• technology and e-discovery;
• travel; and
• enforcement proceedings.

A claimant may possess a strong legal claim but lack sufficient resources to pursue it.

Third-party funding can therefore improve access to justice by allowing a financially weaker party to litigate against a substantially better-funded opponent.

3. Parties Involved

A. Claimant

The person or company bringing the claim.

B. Defendant

The person or company defending the claim.

C. Funder

An independent person or organization financing the dispute.

D. Lawyers

The lawyers represent the claimant or defendant and ordinarily owe professional duties to their client rather than to the funder.

4. How Litigation Funding Works

A typical arrangement may operate as follows:

1. Claimant has a potentially valuable claim.
2. Claimant cannot or does not want to bear the entire litigation cost.
3. Funder conducts due diligence.
4. Funder evaluates:
   • merits;
   • quantum;
   • collectability;
   • legal costs;
   • duration;
   • enforcement prospects.
5. Funder enters into a funding agreement.
6. Funder pays agreed litigation expenses.
7. Litigation proceeds.
8. If the claimant succeeds, the funder receives the agreed return.
9. If the claim fails, the funder may bear the agreed investment loss, subject to the funding agreement and applicable law.

5. Difference Between Litigation Funding and Legal Fees

Third-party funding is different from an ordinary lawyer-client fee arrangement.

Lawyer's Contingency/Success Fee

The lawyer's remuneration may depend on the outcome, subject to applicable professional rules.

Third-Party Funding

An independent commercial funder finances the dispute and expects a financial return.

The funder normally has no ownership of the underlying legal claim merely because it financed the proceedings.

6. Champerty and Maintenance

Historically, common law developed doctrines of:

Maintenance

Improper assistance by a stranger in litigation in which that person has no legitimate interest.

Champerty

A particular form of maintenance in which the person supporting litigation receives a share of the proceeds.

These doctrines were historically intended to prevent:

• speculative litigation;
• abuse of judicial processes;
• corruption;
• improper interference; and
• trafficking in litigation.

Modern legal systems have substantially modified these rules.

7. Litigation Funding in England and Wales

England and Wales have developed a relatively sophisticated litigation-funding market.

Third-party funding is generally permitted subject to:

• the common law;
• statutory rules;
• professional regulation;
• procedural rules;
• costs rules; and
• judicial supervision.

However, litigation funding agreements can face enforceability issues if their structure falls within rules concerning champerty or maintenance.

The Supreme Court's decision in PACCAR Inc v Competition Appeal Tribunal significantly affected certain litigation funding arrangements, particularly agreements under which a funder's remuneration is calculated as a percentage of damages recovered.

8. Litigation Funding in India

India does not have a single comprehensive statute regulating all third-party litigation funding.

The legal position is influenced by:

• contract law;
• civil procedure;
• professional ethics;
• court rules;
• state-specific restrictions and judicial decisions; and
• arbitration law where the dispute is arbitral.

Indian law has historically considered maintenance and champerty, but Indian courts have generally distinguished unlawful arrangements from legitimate commercial transactions.

The issue remains particularly significant for commercial litigation and arbitration.

9. Litigation Funding and Access to Justice

One of the strongest arguments supporting TPLF is that it can allow a party without sufficient financial resources to pursue a legitimate claim.

It may particularly assist:

• small businesses;
• consumers;
• insolvency estates;
• minority shareholders;
• mass claims;
• competition claims;
• environmental claims;
• international arbitration claimants; and
• victims of complex commercial wrongdoing.

However, access to justice must be balanced against the possibility of commercially motivated litigation.

10. Funder's Control Over Litigation

A major legal issue is:

How much control should a funder have over the litigation?

The claimant generally remains the party with legal rights and obligations.

Potentially problematic funding arrangements may allow a funder to:

• dictate litigation strategy;
• select or replace lawyers;
• control settlement;
• demand unreasonable disclosure;
• interfere with privileged communications; or
• pressure the claimant to continue weak litigation.

Modern funding arrangements therefore increasingly address control, independence and conflicts of interest.

11. Settlement Decisions

Settlement creates a difficult conflict.

Suppose:

• claimant wants to settle for ₹100 crore;
• defendant offers ₹100 crore;
• funder believes the case could recover ₹300 crore.

Who decides?

The answer depends on:

• the funding agreement;
• applicable procedural rules;
• professional obligations;
• fiduciary principles; and
• court or tribunal supervision.

The funder should not automatically acquire unrestricted authority to settle merely because it financed the case.

12. Confidentiality and Privilege

Funding arrangements can involve disclosure of:

• legal opinions;
• litigation strategy;
• expert reports;
• financial information;
• merits assessments;
• settlement analysis.

This creates questions concerning:

• legal professional privilege;
• litigation privilege;
• confidentiality;
• disclosure obligations;
• conflicts of interest.

Sharing information with a funder does not necessarily produce the same legal consequences in every jurisdiction.

13. Disclosure of Litigation Funding

Some jurisdictions and courts increasingly require disclosure of funding arrangements.

The reasons include:

• identifying conflicts of interest;
• determining security for costs;
• understanding who has a financial interest in the outcome;
• preventing undisclosed control;
• assessing potential enforcement issues.

But disclosure requirements must be balanced against legitimate commercial confidentiality.

14. Security for Costs

A funded claimant may face an application for security for costs.

The defendant may argue:

If the claimant loses, the claimant may not have sufficient assets to pay my costs.

The court may therefore require security.

Funding can be relevant to determining:

• claimant's financial position;
• funder's willingness to cover adverse costs;
• likelihood of recovery;
• fairness between the parties.

A funder does not automatically eliminate the need for security.

15. Funder Liability for Adverse Costs

A central question is whether the funder can be ordered to pay the defendant's costs if the funded claim fails.

Different jurisdictions apply different rules.

Possible approaches include:

• no direct liability;
• liability limited to the amount funded;
• liability proportionate to the funder's involvement;
• costs liability where the funder effectively controlled the proceedings; or
• statutory/judicial rules governing non-party costs.

This issue is particularly important in large commercial claims.

16. Insolvency and Litigation Funding

TPLF is particularly useful in insolvency.

An insolvent company may have valuable causes of action but lack money to pursue them.

A litigation funder may finance the claim.

The proceeds can then potentially benefit:

• creditors;
• employees;
• shareholders, depending upon the legal structure; and
• the insolvency estate.

The funder's return must, however, comply with insolvency and court-supervision requirements.

17. Arbitration and Third-Party Funding

Third-party funding is increasingly common in international arbitration.

It raises questions concerning:

• disclosure;
• arbitrator conflicts;
• security for costs;
• confidentiality;
• privilege;
• settlement control;
• costs allocation;
• tribunal jurisdiction;
• enforcement.

Arbitration institutions and rules in several jurisdictions have developed specific approaches to funded proceedings.

18. Important Case Laws

1. Giles v Thompson [1994] 1 AC 142

This is an important English authority concerning maintenance and champerty.

Principle

The House of Lords considered the historical doctrines and emphasized that the question is not simply whether a person has financially supported litigation, but whether the arrangement constitutes improper interference with litigation.

Importance

It provides important background for understanding why modern litigation funding must be distinguished from abusive litigation support.

2. Trendtex Trading Corporation v Credit Suisse [1982] AC 679

This case concerned the historical law of champerty and maintenance.

Principle

The case illustrates the changing approach to commercial litigation arrangements and the relationship between financial involvement and improper participation in litigation.

Importance

It is useful in understanding the development of modern funding law in England.

3. Excalibur Ventures LLC v Texas Keystone Inc [2016] EWCA Civ 1146

This is one of the leading English cases on litigation funding and costs.

Facts

Excalibur pursued substantial commercial litigation with third-party funding.

The claim failed.

Decision

The courts considered costs consequences affecting not only the litigants but also the funders.

Principle

Third-party funders can face significant costs consequences where their involvement in litigation warrants it.

Importance

The case demonstrates that funding does not place funders completely outside the court's costs jurisdiction.

4. Arkin v Borchard Lines Ltd [2005] EWCA Civ 655

This is a leading authority on the potential liability of litigation funders for adverse costs.

Principle

The Court of Appeal considered circumstances in which a professional funder could be exposed to costs liability.

The case became associated with the idea that a funder's exposure might, in appropriate circumstances, be related to the amount of funding provided.

Importance

It remains an important reference point when considering the relationship between funding and adverse costs.

5. R (Factortame Ltd) v Secretary of State for Transport (No. 8) [2002] EWCA Civ 932

The litigation arising from the Factortame proceedings is significant for litigation funding and access to justice.

Principle

The proceedings demonstrated the practical importance of funding mechanisms in complex, large-scale litigation.

Importance

The case is frequently discussed in the development of modern collective and funded litigation.

6. PACCAR Inc v Competition Appeal Tribunal [2023] UKSC 28

This is one of the most important recent English decisions concerning litigation funding agreements.

Facts

The dispute concerned whether certain litigation funding agreements, particularly those under which funders were entitled to a percentage of damages recovered, fell within the statutory definition of damages-based agreements.

Decision

The Supreme Court held that the relevant funding agreements fell within the statutory definition.

Importance

The decision had major consequences for litigation funding in England and Wales because certain percentage-of-recovery funding agreements could become unenforceable if they did not comply with the statutory requirements applicable to damages-based agreements.

7. R (on the application of Church Commissioners for England) v Conwy County Borough Council [2019] EWCA Civ 1137

This authority is useful in considering the interaction between litigation arrangements, costs and third-party involvement.

Principle

The courts retain supervisory powers concerning litigation conduct and costs even where litigation involves arrangements with persons outside the immediate parties.

Importance

It demonstrates that litigation funding exists within a wider framework of procedural supervision.

8. Ram Coomar Coondoo v Chunder Canto Mookerjee (1876) 2 IA 186

This Privy Council decision is important for the Indian law of maintenance and champerty.

Principle

Indian law does not automatically treat every agreement involving financial assistance for litigation as unlawful champerty.

The court considered the circumstances and whether the agreement was contrary to public policy.

Importance

It is a foundational authority for understanding the Indian approach to litigation-financing arrangements.

9. Ouseph Poulo v Catholic Union Bank Ltd., AIR 1965 SC 166

The Supreme Court considered issues concerning agreements relating to litigation and public policy.

Principle

Agreements connected with litigation must be examined carefully to determine whether they amount to improper trafficking in litigation or otherwise violate public policy.

Importance

It contributes to the Indian jurisprudence on litigation-related financial arrangements.

19. Indian Legal Position on Champerty

Indian law historically developed somewhat differently from English law.

The courts have not adopted an absolute rule that every champertous agreement is void.

The important question is often whether the agreement is:

• fair;
• bona fide;
• not unconscionable;
• not opposed to public policy; and
• not designed to promote speculative or abusive litigation.

Therefore, commercial litigation funding should not automatically be equated with unlawful champerty.

20. Ethical Concerns

TPLF can create several ethical issues.

Conflict of Interest

The funder's financial interests may differ from the claimant's objectives.

Litigation Control

A funder may attempt to influence legal strategy.

Lawyer Independence

The lawyer must continue to act in accordance with professional duties to the client.

Confidentiality

Sensitive case information may be shared with the funder.

Settlement Pressure

The funder may prefer a settlement that maximizes its return rather than the claimant's overall interests.

Access to Justice vs Profit

A commercial funder may prioritize high-value claims, potentially leaving lower-value legitimate claims unfunded.

21. Advantages of Third-Party Funding

1. Access to Justice

Financially weaker claimants can pursue legitimate claims.

2. Risk Transfer

The claimant can transfer some litigation risk to the funder.

3. Cost Management

The claimant may preserve working capital.

4. Professional Assessment

Funders conduct detailed merits and financial analysis.

5. Insolvency Assistance

Valuable claims can be pursued despite lack of estate liquidity.

6. Competition Between Parties

Funding can reduce the imbalance between a financially weak claimant and a powerful defendant.

22. Disadvantages and Risks

1. Cost of Funding

Successful claimants may have to surrender a significant portion of the recovery.

2. Conflicts

The funder's financial objectives may conflict with the claimant's interests.

3. Control

The claimant may lose practical autonomy over litigation decisions.

4. Increased Litigation

Critics argue that funding can encourage speculative claims.

5. Confidentiality Problems

Sensitive information may be shared outside the traditional lawyer-client relationship.

6. Costs Exposure

The funder may face adverse costs consequences.

23. Litigation Funding Agreement

A carefully drafted funding agreement should address:

• amount of funding;
• scope of funded expenses;
• funder's return;
• termination rights;
• settlement;
• control of litigation;
• adverse costs;
• insurance;
• confidentiality;
• privilege;
• conflicts;
• disclosure;
• regulatory compliance;
• insolvency;
• enforcement;
• dispute resolution; and
• circumstances in which funding can be withdrawn.

The agreement should clearly distinguish financial participation from control of the legal proceedings.

24. Third-Party Funding and Access to Justice

The strongest civil-law justification for litigation funding is that legal rights have little practical value if a person cannot afford to enforce them.

A claimant may have a legally strong claim worth ₹100 crore but face litigation expenses of ₹10 crore.

Funding can make the claim practically enforceable.

However, courts must ensure that funding does not transform the judicial system into an instrument for speculative investment.

25. Practical Example

Suppose Company A has a ₹200 crore contractual claim against Company B.

A has a strong case but lacks sufficient funds for a five-year arbitration.

A enters into a funding agreement with Funder X.

X agrees to finance:

• lawyers' fees;
• tribunal expenses;
• expert fees; and
• enforcement costs.

If A wins, X receives an agreed return.

If A loses, X bears the financial risk according to the agreement.

The tribunal or court may nevertheless consider:

• whether funding must be disclosed;
• whether the funder creates a conflict;
• whether B is entitled to security for costs; and
• whether the funder's involvement affects costs.

26. Key Legal Principles

The principal principles are:

1. Funding does not ordinarily transfer ownership of the underlying claim.
2. The claimant remains responsible for the litigation unless the governing law provides otherwise.
3. Funder control should be carefully regulated.
4. Confidentiality and privilege must be protected.
5. Courts can impose costs consequences in appropriate cases.
6. Security for costs may be relevant to funded claims.
7. Funding agreements must comply with applicable public-policy and statutory requirements.
8. Commercial funding is not automatically unlawful merely because the funder expects a financial return.
9. Arbitration may have separate disclosure and conflict rules.
10. The ultimate objective should remain lawful and effective resolution of genuine disputes.

27. Conclusion

Third-party litigation funding is a modern mechanism for financing civil litigation and arbitration by transferring some financial risk from the litigant to an independent funder. It can substantially improve access to justice, especially in complex commercial, insolvency, competition, environmental and international disputes.

At the same time, it creates concerns regarding champerty, maintenance, funder control, conflicts of interest, confidentiality, security for costs and adverse costs.

The major cases—including Giles v Thompson, Trendtex Trading v Credit Suisse, Arkin v Borchard Lines, Excalibur Ventures v Texas Keystone, Factortame, and especially PACCAR Inc v Competition Appeal Tribunal—demonstrate the development of modern funding law in England. In India, Ram Coomar Coondoo v Chunder Canto Mookerjee is a foundational authority showing that litigation-financing arrangements are not automatically invalid merely because they involve a financial interest in litigation.

The central legal balance is therefore:

Access to justice + legitimate risk-sharing − improper control/speculation = lawful and responsible litigation funding.