Dispute resolution, whether through litigation, arbitration, or mediation, often involves heavy costs—lawyers’ fees, administrative charges, and procedural expenses. For many individuals and businesses, these costs can create barriers to justice. This is where Third Party Funding (TPF) steps in as a financial solution. Under TPF, an external entity funds the legal costs of a dispute in return for a share of the monetary award or settlement if the case succeeds.
What is Third Party Funding?
In simple terms, third party funding is a mechanism where a party unrelated to the dispute invests in the legal proceedings. The funder covers litigation or arbitration expenses, and in exchange, receives an agreed percentage of the award if the funded party wins. If the claim fails, the funder bears the loss.
This arrangement helps claimants pursue strong legal claims without being restricted by financial limitations.
How Does Third Party Funding Work?
The process generally involves three steps:
Proceedings and Outcome – The dispute is pursued with the funder covering costs. If successful, the funder recovers their investment plus profit; if not, the claimant owes nothing.
Evaluation of Claim – The funder assesses the merits of the case, the chances of success, the enforceability of the award, and the estimated costs.
Funding Agreement – Once satisfied, the funder and the claimant enter into an agreement specifying the extent of funding and the share of proceeds.
Advantages of Third Party Funding
Access to Justice – It allows financially weaker parties to pursue meritorious claims.
Risk Mitigation – The claimant shares the financial risk with the funder.
Level Playing Field – Smaller businesses can litigate or arbitrate against financially stronger opponents.
Quality Check – Since funders invest only in strong cases, frivolous claims are discouraged.
Challenges and Concerns
While TPF brings many benefits, it also raises important concerns:
Regulatory Uncertainty – Lack of clear legal frameworks in many jurisdictions creates ambiguity.
Conflict of Interest – Funders may try to influence the strategy or settlement.
Confidentiality – Sharing case details with funders might risk sensitive information.
Profit Motive vs Justice – Critics argue that funders’ profit-driven approach may overshadow the claimant’s best interests.
The Legal Framework on TPF in India
Unlike some jurisdictions where TPF is well-established, India is still developing its stance. Importantly:
- No Prohibition in Law – Indian law does not expressly ban third party funding. In fact, certain states such as Maharashtra, Gujarat, and Madhya Pradesh recognize it under provisions of the Civil Procedure Code, 1908, which allows courts to secure costs when suits are funded by non-parties.
- Case Law Recognition – The Supreme Court in Bar Council of India v. A.K. Balaji (2018) held that while advocates cannot fund litigation, third parties who are not lawyers are permitted to do so.
- Arbitration Context – With India aspiring to become a global arbitration hub, TPF is gaining traction, especially in commercial disputes. However, unlike Singapore and Hong Kong, India does not yet have a comprehensive legislation regulating TPF in arbitration.
Global Perspective
- Singapore and Hong Kong – Both jurisdictions have enacted laws to regulate TPF in arbitration, ensuring transparency and ethical safeguards.
- UK and Australia – TPF is widely recognized and operates under self-regulatory codes.
- USA – Though diverse across states, TPF is well-entrenched in commercial disputes.
India can learn from these models to introduce clear rules that balance funders’ interests with justice and fairness.
The Road Ahead for India
With the Mediation Act, 2023 and continued reforms to arbitration law, India is making strides in alternative dispute resolution. Introducing structured regulation for third party funding could encourage investments, reduce case backlogs, and strengthen India’s position as an arbitration-friendly jurisdiction.
Third party funding is more than just a financial arrangement—it is a tool that democratizes access to justice by allowing claimants to pursue valid claims without fear of financial ruin. As India gradually embraces TPF, a clear legal framework will be essential to ensure transparency, protect parties, and strike the right balance between commercial viability and fairness in dispute resolution.
For readers who wish to further strengthen their understanding of related areas of law, Third Party Funding of Dispute Resolution by Kritika Krishnamurthy, Anuroop Omkar is an excellent companion resource. It provides deep insights into the functioning of law and governance, complementing the study of dispute resolution mechanisms.
