Champerty As Consideration For A Contract: Efficacious Or Illegal?

Champerty is a derivative of the doctrine of "Maintenance". The doctrine of "Maintenance" prohibits continuance of litigation by a stranger to such litigation for no cause whatsoever. Champerty is thus essentially maintenance but in consideration for a share in the proceeds from a successful litigation.

The doctrine of Champerty was evolved as a counter-measure to the corruption and abuse of the public justice system by individuals with significant bargaining power, who would unduly inflame damages, suppress evidence, and even suborn witnesses.^[2]

However, the aforementioned rationale became outmoded, as it was applicable only to the tortious nature of champerty and failed to take into consideration the fact that champertous arrangements have been and can be used as an effective means for third-parties to provide financial assistance to those who are genuinely unable to continue litigations.

In this article, we will take a deep dive into how the concept of champerty evolved from being a method of exercising undue influence and abuse of the public justice system to being used for genuine and legal considerations.

English Law

The English Law initially saw acts of champerty as nothing but immoral and as a means of abuse of the legal system for personal gains as it was often believed that such contracts were borne out of coercion. English Law therefore clamped down on these coercive practices to prevent the abuse and corruption of the public justice system.

While the intentions behind the strict approach were reasonable, it, however, failed to consider that poor litigants, who depended on these arrangements, were left helpless, due to the ever-increasing costs of accessing the justice system. It was with the objective to help such people that the Criminal Law Act of 1967 (1967 Act) was enacted, "to do away with certain obsolete crimes together with the torts of maintenance and champerty."^[3] Schedule 4 of the Act categorizes Champerty and all the provisions concerning the same as "obsolete crimes." Further, Section 14 of the 1967 Act, only declares contracts of champerty which are contrary to public policy or other laws invalid and unenforceable thereby not straying from its traditional roots of obviating abuse of the justice system.

Commenting on the obsolete nature of the tortious liability of champerty and the genuine advantages Denning LJ of the Queen's Bench, observed as follows:

"Much maintenance is considered justifiable today which would in 1914 have been considered obnoxious. Most of the actions in our courts are supported by some association or other, or by the State itself. Comparatively a few litigants bring suits, or defend them at their own expense. Most claims by workmen against their employers are paid for by a trade union. Most defences of motorists are paid for by insurance companies. This is perfectly justifiable and is accepted by everyone as lawful, provided always that the one who supports the litigation, if it fails, pays the costs of the other side."^[4]

Further, Danckwerts LJ, in the context of the public policy, observed as follows;

"the law of maintenance depends upon the question of public policy, and public policy is not a fixed and immutable matter. It is a conception which, if it has any sense at all, must be alterable by the passage of time."^[5]

Thereafter, in the cases of Giles v. Thompson^[6], as well as R (Factortame) v. Secretary of State for Transport emphasised that the question of whether a champertous agreement results in corruption of justice is a question whose answer can only be given after reference to the facts and circumstances surrounding such agreement.^[7]

The gradually emerging liberal inclination of the English Courts led to the erosion of the archaic doctrine of champerty and recognition of the fact that third-party funding of litigation may be legitimized in cases where the funding transactions are bona-fide and do not result in corruption of public justice and integrity of judicial proceedings.

The Indian Experience

While the Indian legal system and its English counterpart shared a conceptually similar doctrine of champerty, the approaches adopted were different. Since the times of the Privy Council, the prevalence of arrangements, that may be considered champertous and their 'per se' legality, were conditionally acknowledged.

These agreements were scrutinized with due regard to the surrounding facts and circumstances and their validity was conditioned upon their compliance with the prevalent public policy. This public policy-centric examination of champertous arrangements along with the surrounding facts and circumstances was where the similarities between the approaches of the two legal systems ended.

The task of elucidating the doctrine of champerty came about as early as 1876, before the Privy Council in the High Court of Bengal, in the case of Ram Coomar Coondoo and Anr. v. Chunder Canto Mookerjee. In this case it was observed that the approach of the English Courts cannot simply be grafted onto the Indian Courts, due to the diversity in not just of opinion but also particular demographic customs, practices etc. It was also observed that "a fair agreement to supply funds to carry on a suit in consideration of having a share of the property, if recovered, ought not to be regarded as being, per se, opposed to public policy".^[8]

In another case before the High Court of Madras, Valluri Ramanamma v. Marina Viranna, it was held as follows;

"It has long been held that in India agreements to finance litigation in consideration of having a share of the property if recovered are not per se opposed to public policy. They may be so if the object of the agreement is an improper one, such as abetting or encouraging unrighteous suits, or gambling in litigation; or their enforcement against a party may be contrary to the principles of equity and good conscience, as unconscionable and extortionate bargains."^[9]

Further affirmation of the aforesaid was given by the Supreme Court in the case of In Re: 'G', A Senior Advocate of The Supreme Court as well.^[10] The above mentioned, and many other cases lead to the acceptance of champertous contracts as being legal in India, unless inequitable, unconscionable or extortionate.

The Courts also imparted clarity to the question of what would constitute an extortionate, inequitable or unconscionable champertous agreement, by undertaking a closer examination of the attending facts and circumstances particularly those relating to how the financer in a champertous arrangement stands to benefit.

This exercise was first undertaken by the Privy Council, in the Lahore High Court, in the case of Ram Sarup v. The Court of Wards, which highlighted three points, (i) that one should merely not look at the value of the property claimed but at the commercial value of the claim as well; (ii) that the proportion of benefit to the claimant and financer should be taken into account before declaring an agreement as unfair; and (iii) that if the financier must risk losing his money he may well be allowed some chance of exceptional advantage.^[11]

What ensued as a result of the above was that courts would scrutinize the provisions of financing agreements, particularly those that deal with the consideration to be given to the financier out of the proceeds of a litigation. The proportion to be retained by a claimant became an important matter to be considered when judging the fairness of a bargain made.^[12]

In Harilal Nathalal Talati vs Bhailal Pranlal Shah^[13] a Division Bench of the Bombay High Court while dealing with an agreement, were a person agreed to give half share of the property to the financier, held that " the agreement was extortionate and unconscionable and opposed to public policy."

The Andhra Pradesh High Court in Nuthaki Venkataswami vs Kalia Nagi Reddy^[14], dealing with a similar issue held that: "All agreement which provided that the financier should get 3/4th of share cannot be held to be a fair and reasonable gain".

Similarly, the Allahabad High Court in Babu Ram vs. Ram Charan Lal & Ors.^[15], while dealing with an agreement provided for the financier to obtain 50% of the decretal amount held that "the suit was opposed to public policy"

The Andhra Pradesh High Court in Khaja Moiunuddin Khan & Others vs S. P. Ranga Rao^[16] and Others while considering an agreement which provided for the payment of 40% to the of all the proceeds of such sale in addition to the money agreed to be advanced under agreement as an unconscionable bargain and the agreement being extortionate in nature.

While there's a plethora of case laws concerning the doctrine of champerty in India, there is no specific legislation in place to conclusively determine the status of a champertous contract, unlike the English legal system.

Given that, public policy plays a major part in determining the validity of champertous contracts, recourse is, more often than not, taken to Section 23 of the Indian Contract Act, 1872, the relevant part of which reads as follows;

"The consideration or object of an agreement is lawful, unless……..the Court regards it as immoral, or opposed to public policy."^[17]

Reference also ought to be made to Order XXXIII: Suits by Indigent Persons of the CPC. Rule 1 of Order XXXIII stipulates that a person being indigent may be permitted to institute a plaint without payment of the applicable court fee. Additionally, Rule 5(g) stipulates that the permission to sue may be rejected in the event "where any other person has entered into an agreement with him to finance the litigation."^[18]

In addition to the above, Andhra Pradesh^[19], Tamil Nadu^[20], Maharashtra^[21] and Madhya Pradesh^[22] have amended Order XXV of the CPC to cover matters which are champertous or where the case is being financed by a person not a party to the suit.

Essentially, what culminates as a result of the aforesaid is a tacit legislative recognition of the validity of third-party financing agreements with prospective litigants.

The validity of the aforesaid notion was recognized by the Supreme Court, in the case of Bar Council of India v. A.K. Balaji, where it was held that "there appears to be no restriction on third parties (non-lawyers) funding the litigation and getting repaid after the outcome of the litigation…….Third-Party Litigation Funding/Legal Financing agreements are not prohibited." It was further clarified that such restriction only applied to lawyers funding the litigation.^[23]

Conclusion

As it stands contracts contemplating third-party funding of litigation are 'per se' legal, as can be seen from the jurisprudence evolved by the Courts of India. However, a determination of the validity of a third-party funding arrangement is an exercise undertaken by the Courts after examining whether or not the agreement is unconscionable, inequitable or extortionate; and by giving due regard to the prevalent facts and circumstances surrounding the agreement. Although such an exercise is required, it becomes time-consuming. Third-party funding arrangements are experiencing an upsurge and determining the validity of all such arrangements by the Courts would be an immensely burdensome exercise for the Courts. This leads to a necessary corollary that third-party funding arrangements, particularly in the context of ever-increasing costs involved in litigation, need to come within the purview of a regulation containing a mechanism that would not only be in line with the 'per se' legality of third party funding arrangements but also help lessen the Courts' burden to determine the validity of such arrangements.