Should India Join the Wave of Permitting Conditional Fee Agreements?

- Shivankar Sukul (Associate, Trilegal), Anmol Aggarwal (Co-Founder, The Concords) and Swagat Ahuja (Founder, The Concords)

Introduction

A conditional fee agreement (“CFA”) in the context of the legal profession is a fee payable only once the desired outcome of a legal proceeding is reached. It could be structured in many forms such as holding all the fee contingent upon the outcome (no payment if desired outcome is not reached), having a part payment contingent upon an outcome or payment being calculated as a percentage of damages received from the case. Such arrangement, although being a common occurrence in many jurisdictions, is still not permitted in India for advocates under the Advocates Act, 1961. The present article aims to juxtapose the manner in which such agreements have been recently permitted in Singapore (i.e., with certain limitations), and other jurisdictions to display how such an arrangement could be validated in the Indian law without triggering the reasons for the current reservations against such agreements.

Current State of Law

Part VI, Section 20, Rule 20 of the Bar Council of India Rules prohibits advocates from accepting fees on contingent basis. Owing to this, such arrangements fall foul section 23 Of the Indian Contract Act, 1872 which invalidates unlawful contracts . The reasoning behind such prohibition reiterated by courts routinely is preserving the sanctity of the legal profession. The Hon’ble Patna High Court in the case of Most. Munni Kuwar vs The State Of Bihar & Ors (“Munni Kuwar”)(while citing the Ganga Ram vs Devi Das (“Ganga Ram”) (1907)) held that “the practice of charging a fee contingent on the outcome of the case is strictly illegal in so far as legal profession in India is concerned. This has been the position in the Indian Legal System right from 1907 when the first case on the point of legality of contingency fee agreements was decided upto 2002 in which the Supreme Court conclusively held that contingency fee agreement entered into by advocates in India amounted to professional misconduct and called for severe disciplinary action against the concerned Advocate.”

Analysing the Legality of Contingent Agreements in Foreign Jurisdictions

In the United States (“US”), such agreements were only given recognition in the 19th Century due to the realisation that they form a necessary part of ensuring proper representation for aggrieved people. Similar is the case with other jurisdictions like in the United Kingdome (“UK”), the concept of CFA’s were legalised in the1990s, followed by Belgium, Germany, Netherlands, France, Italy and Spain among others.  Many jurisdictions have similarly brought in amendments to permit such agreements after assessing the considerations.

There are many reasons argued for permitting CFAs, i.e. First, it eliminates the hinderance related to financial inability of a litigant in seeking justice. Second, due to alignment of interests in CFA arrangements the advocate will have incentive to sincerely pursue the case, as his fee is dependent on the result. Third, such arrangements will also go a long way towards reducing frivolous litigations as legal practitioners will provide a fair and objective legal advice to their clients about pursuing a litigation.

Moreover, absent contingent fee agreements, a lawyer will face trouble in quoting a good fee for his services since the client must trust him enough to commit to the payment. In a contingent fee structure of payment however, it is easier for the client to trust the lawyer since he is, in a way, putting his money where his mouth is by placing a bet on the case.

In legal sense, banning the CFAs also hampers the freedom to contract of the parties, and it constitutes as an unnecessary interference between the contractual relations of the party. The argument of unethical practice is also not practically sound, as merely expecting a lawyer to work with nobility and devotion when he himself seeks nothing to gain from the outcome of the case is not based on actual evidence, and the reality is more likely to be quite the opposite. However, the argument of it being against public policy (for ethical reasons) is also not wrong completely. There is no need of a black and white approach in this, as a certain framework can be made under which the benefits of the CFAs can be reaped, while at the same time maintaining the nobility of the profession. Some of the jurisdictions like Singapore and Australia have made such frameworks.

Singapore - Singapore, legalised the CFAs in 2022 with a view of becoming at par with the leading Dispute Resolution regimes all over the world. However, it kept such agreements confined to a limited set of commercial court proceedings, domestic arbitrations and International Arbitrations among others. Such a step is necessary, especially when it comes to arbitration, as no one would choose the country as a seat of arbitration in which CFAs are banned over a country in which CFAs are legalised.

Illustration - Let us assume there is country “A” in which CFAs are completely banned, and a country “B” in which CFAs are legal. A party when choosing the seat of arbitration would always choose the country “B”, as it will benefit them in terms of flexibility of law, and will not hamper their freedom to contract in any way. Thus, A country striving for excellence in its dispute resolution system and seeking to deliver justice to all parties should avoid implementing a blanket prohibition on CFAs. Singapore has recognized this principle, and it is now time for India to adopt a similar approach, avoiding undue restrictions on its dispute resolution mechanisms.

Australia – Australia also began legalising the CFAs in certain limited types of suits through an amendment (Justice Legislation Miscellaneous Amendments Act 2020 (Vic)) to the Supreme Court Act 1986 (Act) to make provisions about costs in group proceedings. For example, it permits these arrangements only upon application to the court, which may grant approval if it deems it necessary to ensure fairness and justice. This provides for oversight by the courts to ensure that only legitimate requests for permitting contingent fee agreements are allowed.

The underlying rationale is that since all types of cases do not pose the same risk to reward in terms of policy reasons as to permitting CFAs, a case-to-case assessment can be utilised to ensure that the benefit is afforded where there is a legitimate benefit to permitting CFAs, all the while not offending the ethical reasons against such agreements in most cases. A similar approach can be used in India where the per capita income is especially low and therefore a high number of cases could use CFAs to give access to proper representation in court regardless of the income of the aggrieved.  

Georgia - In Georgia, CFAs are legal and it depends on the case to case basis, if such an arrangement could be allowed or not. For instance, a CFA is not allowed if the case is of criminal or family law nature. This approach however, when compared against the Australian approach can be argued to be inferior since there is a categorical basis of allowing CFAs, i.e., they are allowed only in some types of cases regardless of the facts and circumstances therein. This basis of assessment of whether to allow CFAs assumes that the cost to benefit analysis of permitting CFAs depends solely (or at least largely) on the type of case ( for example criminal law or family law). There might be a basis for excluding criminal cases since they usually are aimed at convicting the accused instead of achieving monetary compensation (less reason for a contingent fee agreement since the case in itself does not usually yield monetary compensation out of which the lawyer can be paid, so it does not help the poor since they must already be able to afford the lawyer regardless of the outcome). The same reason however cannot juxtaposed upon family law matters since they can involve significant monetary compensation out of which the lawyer can (possibly) be paid.

When compared, the Australian approach is wide enough to accommodate the considerations upon which the categorical permissiveness in Georgia is based, while making it possible to allow for accounting the specific facts of the case. (for example if the claim involves significant monetary compensation). Hence, the Australian (Victorian) approach can be preferred as a model to permit contingent fee agreements in India.

Conclusion

It's crucial to uphold the integrity of the legal profession, but as discussed earlier, CFAs are feasible in purely commercial disputes. This is also evident from the legislative changes brought in other common law nations such as UK, US, Singapore and Australia which have embraced such arrangements as far as they pertain to commercial disputes. This approach allows them to harness the benefits while mitigating potential risks. At this juncture, the ruling of Bombay HC in Jayaswal Ashoka Infrastructures Pvt. vs Pansare Lawad Sallagar is noteworthy where a contract which entitled a law firm to seek contingent fees based upon the result of an arbitration proceedings was held enforceable, on account of such prohibition not being applicable to arbitration proceedings. The authors believe that, this decision which is a right step in way of liberalising legal landscape related to commercial dispute resolution in India. As taking an open view towards CFAs in context of purely commercial disputes will go a long way in democratising the access to justice for litigants while ensuring ethical concerns voiced in earlier rulings of Munni Kuwar and Ganga Ram.