Class Action Suits in India: Role of Litigation Funding

As societies develop and evolve, the frequency of disputes has correspondingly increased, and individuals have become more cognizant of their rights and the available legal remedies. With the increasing globalization of economies, corporations and other entities have expanded their reach and infringements of legal rights have become more prevalent. In such circumstances, class action lawsuits provide a means for individuals to aggregate their claims and seek redress collectively. In essence, a class action suit is when a lawsuit is brought forth by a Plaintiff for the ultimate benefit of a larger group of affected people. Such an action is often taken against a corporation or an organisation for damages and harm caused by them. Kundan Shahi (in pic), Founder, and Tanya Prasad, Chief Investment Officer, LegalPay, explain how class action suits add a dimension to the legal process that is best viewed from a sociological perspective on the relationship between the legal system and social change with respect to class action. This dimension is inclusive of the nature and social organisation of the class, the involvement of major social institutions as parties to the suit.

The role of litigation funding with respect to class action suits is becoming increasingly important not just as an economic instrument but also an instrument for social change. This article explores the critical role of litigation funding in this context.

Origin of Class Action Suit

The origins of modern-day class action suits may be traced to Anglo-Saxon and Norse traditions during the medieval era. Often termed as “group litigation”, these cases usually involved towns, villages, and other hamlets bringing their complaints against the monarch. This practice ceased after 1850 due to the vast change in economic and political landscape of England and the enactment of several statutes to deal with issues of certain organisation bringing claims to the courts.

Class action suits were first implemented in the American Jurisprudence in 1820, pursuant to West v Randal, which was one of the earliest class action suits in the US. Subsequently, in 1842 the Supreme Court legislated the Federal Equity Rules (precursor to the Federal Rules of Civil Procedure). Ultimately, the Supreme Court amended the rules to recognise representative suits where the parties were too many in number to be conveniently brought before the Court. The USA also enacted the Class Action Fairness Act of 2005 (CAFA) to expand federal subject matter jurisdiction over large class actions and mass actions.

Class Action Suits in India

To give a picture, the Indian climate is enveloped by an air of missed opportunities and a sense of lost chances when it comes to class action suits, but class action lawsuits, commonly called representative actions in the Indian field have been gaining prominence in India in recent years. Although provisions pertaining to class action suits have existed under the Indian Code of Civil Procedure (CPC) since 1908, this concept was introduced in various other legislations such as- the Companies Act 2013, the Consumer Protection Act 2019 and Competition Act 2002. The provisions of  Code of Civil Procedure have been expanded with respect to scope of class action in India beyond its prior limitation to public interest litigation and representative suits which only targeted  a narrower  perspective to   promote public interest whereas the upcoming concept of class actions in the Indian legal field addresses concerns of a ‘class’.

Many instances show the probability of how successful class action suits could have been developed in the Indian jurisprudence if there was no absence of an effective class actions regime/remedy under the Indian Law. The absence of an effective class actions regime in India has been recognized long back during the Bhopal Gas Leak tragedy from the factory of Union Carbide Corporation in 1984. Class action litigations were filed against this mass tort in the United States against the parent company of Union Carbon Carbide, but these cases were transferred to India on the ground of forum non-convenience. The settlement reached as a result of the class action was later utilized towards compensation and rehabilitation of the victims. It is interesting to note that Marc Galanter acting as an expert witness testifying on behalf of the Indian government commented that the absence of a class action procedure in India, would make expeditious litigation very challenging. During that time, India did not have provisions of class action suit, however, in present times, now class action suits are backed by provisions under various Indian Statutes like the Consumer Protection Act, 2019 Therefore, in the current day, it is possible to file a class action suit against Lieutenant Governor for the leak of styrene gas in Vizag, or to provide compensation and rehabilitation caused to the floods in Uttarakhand in 2013.

Though the concept of class action suits in India is relatively new the present developments indicate that class action lawsuits are progressively becoming indispensable and are being examined as a potential instrument in India. In 2015, the NCLT in Jignesh Shah vs. National Stock Exchange of India Ltd ordered the National Stock Exchange to pay damages to the investors in a class action suit filed by investors for manipulation of market. There are various statutes in the Indian Legal System which expressly give recognition to class action suits. For instance: Order I Rule 8 of the Indian Code of Civil Procedure, 1908 provides for representative suits wherein a group of plaintiffs having the ‘same interest’ can collectively bring a claim before the civil courts, and the outcome of the suit shall be binding on all the parties. Under the Code, except for actions that cannot be filed in the civil courts at all, such as securities litigation, it appears that there are no restrictions on the subject matter of class action lawsuits that can be launched under Rule 8. Following this, Section 35 of the Consumer Protection Act of 2019 explicitly recognized consumer class actions, allowing registered consumer organization’s and one or more consumers (where they share a common interest or complaint) to bring a class action on behalf of the group.

Another notable development with respect to class action suits happened in the securities Market. The Satyam Scandal brought a reformatory change expanding the scope of class action lawsuits, thus it can be said class litigation in the Companies Act, 2013 (hereafter “2013 Act”) is a product of the Satyam debacle wherein over 3 lakh shareholders of Satyam computer services collectively sued the company for the drastic plunge in share prices induced due to fabrication of company’s accounts and fraudulent transactions. The promoters under the SEBI Act 1992, the SEBI (Prohibition of Fraud and Unfair Trade Practices) Regulations 2003, and the SEBI (Prohibition of Insider Trading) Regulations 1992, important managerial personnel were subject to penalties since there was no provision of collective suit under the Act, the India shareholders approached the National Development and Reform Commission  but their claims were rejected. The appeal before the Supreme Court also stood rejected due to absence of law compensating shareholders. On the contrary, the holders of American Depository Receipts (ADR) were able to claim approximately 675 crores from the company through the class action device quite prevalent in America. It has been argued that the representative suits under Order 1 Rule 8 is broad enough to encompass and provides adequate remedy to numerous parties to file a representative suit-probably the Satyam suit was not filed before the civil courts to save time.

The 2009 and 2011 Companies Bill also contained provisions for class action suits, however, they did not see the light of the day. But The Companies Act, 2013 introduced the concept of class action under Section 245, detailed in Chapter XVI – Prevention of Oppression and Mismanagement. The primary intention behind this section was investor protection, and to provide members with additional rights against abuse of powers by the company in case the affairs of the company are being conducted in a manner prejudicial to the interests of the company.

An example of a class action suit in India is the one filed against Nestle India in 2015, alleging that the company’s Maggi noodles contained unsafe levels of lead and MSG. The lawsuit was filed on behalf of consumers who had purchased the product, and ultimately resulted in Nestle being ordered to pay a fine of $96,000.

More recently, in 2020, the National Green Tribunal (NGT) allowed a class action suit to be filed against LG Polymers, following a gas leak at the company’s plant in Visakhapatnam that killed several people and injured many others. The NGT allowed the suit to be filed on behalf of all the people affected by the gas leak, rather than requiring each individual to file a separate claim. Hence, it can be seen that, Class actions appears to have a promising future for a country like India which is the world’s largest representative democracy and a home of abundant human resource.

Role of Litigation Funding

Often a conversation about class action lawsuits is associated with an opinion that class actions can be pursued more rigorously if funding is available to the distraught claimants/petitioners, which in common parlance means third party litigation funding. Surrounded by an environment which shows an increasing inclination towards class actions emphasizes the dire need to understand the concept of third-party litigation funding. A third party provides financial support to a plaintiff in exchange for a share of the settlement in a practice known as third party litigation funding. It is a win-win for all the stakeholders- the investors putting the money in get a good return while the claimants get quicker access to justice, and requisite finance for their case.

The cost of litigation may be divided broadly into four parts:

1. Litigation Costs

Litigation costs are related with the managing of cases and  communication between class members. Sometimes there are overlapping class actions against the same defendant for the same injury and at the same time. As attorneys want to coordinate between these actions, they incur coordination costs that may be very high.

•  Agency Costs

 Agency costs are associated with the behavior between the class counsel and the class members. It creates a principal-agent problem since the desires of the principal, represented by class members, and the ones of the agent, the class counsel, are not aligned. Avoiding this problem increases the costs supported by the plaintiffs with the litigation.

• Adverse Selection and Opt-outs

Sometimes it happens that the class counsel has an incentive to increase the size of the class. “More class members, typically means more hours of work or a great total recovery…”, This creates a problem of adverse selection. For the reasons, weak claims are more likely to opt into than strong claims due to the fact that in the case of strong claims individual litigation will benefit the counsel. Defendants anticipating this situation may offer a lower settlement amount to the class. “There is a transfer of wealth from those with strong claims to those with weak claims. In the extreme it may be the case that this adverse selection sets off a “death spiral”: the defendant offers a lower amount than the strong claims believe they are entitled to, leading the strong claims to opt out of the class, leading the defendant to offer a lower settlement amount, causing more strong claims to exit the class, leading the defendant to offer still less, and so on.”

• Blackmail Settlements

To finalize, the last cost created by class action litigation and enumerated is related with the possibility to turn the action from a way of protect plaintiffs to a way of extracting huge compensations from vulnerable defendants. It is a case that usually gets worse by the allowance of punitive damages,

However, a remedy to these costs can be provided by third party litigation funding which   has gained significant traction in recent times, especially in class action suits where the plaintiffs who may be a large group, may not have the resources to pursue litigation.  Slowly rising upon the ladders of success, stories like Erin Brockovich, a Julia Roberts-starring motion picture based on the true account of a legal assistant who assisted in filing a class action lawsuit against Pacific Gas and Electric Company for tainting a tiny California town’s water supply. with toxic chemicals throws light on the impact that a successful class action can have on a community. Very simply put, litigation funding means financing litigation by third parties (unrelated to the dispute) in return for a pre-agreed portion of the monetary relief in case the legal dispute is in favor of the litigant. The capital is raised from a consortium of investors. Such funding is non-recourse in nature, i.e., the financier is eligible for a monetary benefit only in cases where the order/decree/award (as the case may be) has been passed in favor of the funded party.

The advantages of third-party funding are many. Firstly, it provides access to justice by fostering a level-playing field between parties having unequal power or resources (financial or legal) to pursue their cases, and the freedom from fear of incurring substantial financial losses. It also increases the efficiency of proceedings by providing aid in terms of research and preparing evidence.  Further, third-party funding promotes accountability by allowing defendants to be accountable for their actions, and especially in the case of class actions, it creates a deterrent effect for tortfeasors or wrongdoers. It can also help enhance settlement negotiations by providing plaintiffs with the financial resources needed to hold out for a fair settlement. This can be especially useful in cases where defendants may be trying to drag out the litigation process or are unwilling to settle for a fair amount. The claims in class actions can be very heavy, and it is difficult to ensure steady flow of funds, and this is where marrying class action suits with third-party litigation is a good idea. When third-party litigation is provided to class action suits, it further empowers the group/class to pursue their claims and unjustifiable legal injury caused to them.

Conclusion

Despite the fact that class action lawsuits are a relatively new idea in India the current state of affairs suggests that class action lawsuits are increasingly necessary and being considered as a potential tool in India. However, the success of class action lawsuits in India will depend on how successfully these issues are resolved and the growth of institutional capacity to handle such complex cases. Class actions are becoming more and more necessary and in demand in areas including consumer protection, business law, and environmental regulations. India is a growing economy where third-party funding and class action lawsuits can not only be looked at as a means to serve the public interest and to provide relief to the claimants but the various monetary benefits associated with funding cannot be overlooked which can makes it a growing avenue for investors.

Recently, the Delhi Arbitration Weekend addressed the growing demand and emphasized on the importance as well as the rising benefits associated with Third Party Litigation funding making the Indian market a new resort. While more attorneys are engaging in this field but it’s equally important to assess the lacunas and fallacies associated with class action in the Indian jurisprudence, Its remarkable to witness that The Indian legal system by introducing the concept of class action has been attempting to refine its own legislation of restorative and redistributive justice in the past few decades which is not only strengthening the legal system but has made administration of justice comparatively easier as class action suits are now being considered the new normal. In conclusion, the waters are being tested it is inevitable that an increasing number of consumers, stockholders, and groups of harmed or aggrieved parties would approach Indian courts under the theory of class action and look forward to third party funding for their claims.

Also See: Landmark Judgements