~ This post has been authored by Atika Chaturvedi.
International commercial disputes with moderate to high complexity can be quite expensive, benefiting lawyers but placing a financial burden on the parties involved. Alternative fee arrangements (“AFAs”) offer a way to handle these costs without jeopardizing financial stability. However, in India, courts have been hesitant to embrace newer funding methods like third-party funding and AFAs due to traditional rules like maintenance and champerty. These outdated principles also impact contingency fee arrangements for lawyers, fearing they might undermine judicial integrity. Although these rules were originally designed to prevent abuse and maintain ethical standards, they now limit access to justice and fair dispute resolution. Given the increase in complex commercial disputes and arbitrations in India, it is time to revisit these old restrictions to better align with the needs for fairness and efficiency in today’s legal landscape.
Crucially, the Indian legal system is currently grappling with the unclear status of foreign arbitration practitioners operating in India, which makes the role of AFAs even more significant. Given this context and recent judicial and regulatory changes in India, we examine how AFAs could be effectively introduced and utilized in international commercial arbitrations taking place in the country.
Contingent Fee Agreement: Explained
AFAs can vary, with two common types being: (1) the Conditional Fee Arrangement, where a lawyer may receive a success fee and an additional uplift fee, which is often an agreed percentage over and above a base fee; and (2) the Contingent Fee Arrangement, where the lawyer’s payment is dependent on the successful outcome of the case.
These AFAs are standard in countries like the United States and Canada but have traditionally been banned in India. Under the Indian Advocates Act of 1961 and the Bar Council of India (“BCI”) Rules, these practices are restricted. Rule 20 of the BCI Rules forbids advocates from setting fees based on the outcome of a case or from sharing in the litigation proceeds. Similarly, Rule 21 prohibits advocates from engaging in or receiving any interest in an actionable claim. These rules, set by the BCI—a statutory body created by the Indian Parliament—limit the application of AFAs in India, constraining the flexibility of legal fee arrangements.
The viability of AFAs has repeatedly been challenged in Indian courts. The Indian Supreme Court first addressed the issue of conditional fee arrangements in 1954 in the case of Re: Mr. ‘G’, A Senior Advocate of The Court v. Unknown. The Court ruled against performance-based fees for lawyers, arguing that such arrangements do not align with the legal profession’s standards of “independence, honesty, and objectivity.” Since then, the courts have deemed AFAs contrary to public policy under Section 23 of the Indian Contract Act (“ICA”), which stipulates that an agreement’s consideration or purpose is unlawful if it involves fraud. The rationale is that AFAs could compromise a lawyer’s impartiality and professionalism, potentially leading them to adopt unethical practices to achieve a favourable outcome due to their financial stake in the case’s success.
Contentions Proposing Contingent Fee Arrangements in International Commercial Arbitration
In the case of BCI v. A.K. Balaji (“AK Balaji“), the Indian Supreme Court addressed the applicability of the Advocates Act and related restrictions on foreign lawyers participating in international commercial arbitrations. However, the Court did not definitively outline the restrictions that would apply to foreign lawyers in these contexts, instead allowing the BCI to establish specific rules. The AK Balaji judgment did, however, recognize the distinction between litigation and non-litigation Alternative Dispute Resolution (“ADR”) methods like arbitration, acknowledging the flexibility inherent in arbitration as a dispute resolution process. Until explicit regulations are issued, it remains unclear whether the restrictions imposed on Indian practitioners will also apply to foreign firms or lawyers involved in international commercial arbitrations seated in India.
Recent legislative reforms have significantly reshaped the regulatory framework for foreign lawyers and practitioners in international commercial arbitration, fostering a more inclusive environment. The Bar Council of India’s 2022 Rules for Registration of Foreign Lawyers and Foreign Law Firms mark a key development by allowing foreign legal practitioners to participate in non-litigation ADR, particularly international arbitration seated in India. While detailed guidelines are still pending, there is optimism that India might adopt practices from other common law jurisdictions, such as Singapore, to allow AFAs for international commercial arbitrations in India.
A recent Bombay High Court (“BHC”) ruling illustrates a shift in attitude towards AFAs. In Jayaswal Ashoka Infrastructures Private Limited v. Pansare Lawad Sallagar, the BHC evaluated the validity of a Conditional Fee Arrangement (“CFA”) in arbitration. The case involved a CFA between an arbitration consultancy and a construction company, where the latter agreed to pay a percentage of its awarded amount to the firm.
The BHC clarified that the plaintiff, an Indian lawyer, acted as a ‘counsel’ rather than an ‘advocate’ in arbitration proceedings, highlighting that appearing before an arbitrator differs from appearing in court. This distinction reaffirms the ruling in Re: K.L. Gauba v. Unknown, which deems CFAs unethical or contrary to public policy under Section 23 of the ICA only when entered into by “advocates.” According to Section 2(1)(a) of the Advocates Act, an advocate is someone listed on the roll under the Act. Therefore, CFAs might be allowed in arbitration where lawyers act as “counsel,” including in international arbitration where foreign practitioners are not strictly considered ‘advocates’ under Indian law.
The Way Forward
India can draw significant lessons from Singapore and Hong Kong’s modern legal reforms, especially their adoption of CFAs in international arbitration. By integrating a similar regulatory approach and aligning with global arbitration trends, India could enhance its appeal as a leading venue for international disputes.
Singapore, which once had a legal framework similar to India’s, recently updated its laws under the Legal Profession (Amendment) Act 2022 to allow CFAs in both international and domestic arbitration. This change permits Singapore-qualified lawyers to use CFAs in arbitration cases and related court proceedings, moving away from the previous ban on CFAs in domestic litigation. If India adopts a comparable system, permitting CFAs in a controlled manner for international commercial arbitration, it could significantly boost its attractiveness as an arbitration hub. This reform is increasingly pertinent due to the entry of foreign firms with a higher financial capacity, which could be encouraged by such arrangements to participate in Indian arbitrations, thus reducing barriers to entry.
The need for change is heightened by the entry of foreign firms and practitioners with greater financial resources, who are likely to engage in AFAs in India-seated arbitrations. Allowing CFAs would encourage these practitioners to share risks and be more willing to take on Indian cases, reducing entry barriers.
The proposal aims to permit AFAs specifically for international commercial arbitrations involving sophisticated parties, similar to Singapore’s controlled framework, while still adhering to existing restrictions on champerty and maintenance in domestic arbitrations under the Advocates Act. This approach recognizes the complexity of international disputes and ensures funding remains regulated. Recent Indian court rulings supporting third-party funding reflect a growing acceptance of such practices in commercial cases.
Concluding Remarks
Combining third-party funding with AFAs could elevate India to the level of leading arbitration hubs, offering greater opportunities for clients and lawyers. Third-party funding can democratize access to justice, especially for smaller businesses and individuals who lack financial resources for complex disputes. This is crucial in India, where many commercial entities face financial constraints. By providing a safety net in high-stakes cases, such funding could attract more investment and boost India’s arbitration landscape, as seen in jurisdictions like Singapore, Australia, and the UK.