Third-Party Funding in Arbitration: An Indian Perspective

Third-party funding (hereinafter ‘TPF’) as the name itself suggests refers to a practice wherein an entity funds the procedural costs that are incurred by one of the parties under a funding agreement in a dispute in exchange for a share in the monetary award, if successful. 

The capital provided by the funder is used to pay for, among other things, the costs of the party’s legal representation. It is also likely to be used for advances made towards the fees of the arbitral tribunal. Third-party funding should however be distinguished from contingency fee arrangements and insurance available against the claims.

The genesis for the introduction of the same lies in enabling individuals who may not have the requisite resources or be able to afford the exorbitant costs involved in dispute resolution to still be able to access justice. The United Kingdom was one of the first common law jurisdictions wherein the aforementioned principle of funding disputes was mooted and operationalized. 

The same is also evidenced by judgments of the Court for instance, the England and Wales High Court in the case of Gulf Azov Shipping Co Ltd & Ors v Idisi & Ors held that “public policy now recognises that it is desirable, to facilitate access to justice, that third parties should provide assistance designed to ensure that those who are involved in the litigation have the benefit of legal representation”.

Since then, over the past few years, TPF has been gaining traction in various jurisdictions like the USA, Singapore and Hong Kong for instance. This concept is especially being used by corporations to finance disputes. The benefits of TPF especially for corporates are two-fold i.e. not only does it help companies that are currently faced with financial and liquidity issues that may not allow them to handle the added burden of financing disputes, but also solvent companies that can share risk and maintain liquidity at the same time.

India’s tryst with TPF

It is imperative to point out that like in most jurisdictions around the world which follow the common law system, the doctrines of champerty and maintenance banned third parties from financing proceedings in India as well. However, the Indian Courts have over time nullified these principles. One of the most notable developments was the Supreme Court of India’s judgement in the case of Mr G. Senior Advocate in 1954. 

The Court held that the rigid principles of champerty and maintenance are not applicable in India, and any agreement for third-party funding of a proceeding is not against public policy and shall be permitted. The Law Commission of India in its report in 2017 had proposed that third-party funding should be permitted in India. The only stipulated condition is that advocates representing the parties must not be funding the proceedings as the Bar Council of India has specifically barred advocates from accepting a fee based on the outcome of a particular proceeding.

More pertinently, India per se does not have any regulations or laws in place that explicitly either regulate or prohibit TPF. A perusal of the Arbitration and Conciliation (Amendment) Act 2015 and its 2019 amendment would clarify this stance. However, a perusal of the Code of Civil Procedure, 1908 would demonstrate that TPF is recognized implicitly. 

Specific attention is drawn to Order XXV Rule 1 of the code (as amended by Maharashtra, Gujarat, Madhya Pradesh and Uttar Pradesh) which provides that the courts have the power to secure costs for litigation by asking the financier to become a party and depositing the costs in court.

Furthermore, the noted judgment by the Hon’ble Supreme Court in Bar Council of India v. AK Balaji would also quell any doubts regarding the same wherein it has been observed that ‘there appears to be no restriction on third parties (non-lawyers) from funding the litigation and getting repaid after the outcome of the litigation’. Accordingly, there is no blanket restriction on financing parties to a dispute, as long as the funder is not bound by Indian Bar Council Rules.

However, in terms of jurisprudence and legal framework regarding TPF in India, it is only recently that the Delhi High Court vide its judgment in Tomorrow Sales Agency v/s SBS Holdings Inc, has provided some much-needed clarity on this issue.

In the above-mentioned case, the Division Bench of the Delhi High Court in the exercise of its appellate jurisdiction has set aside the decision of the Single Bench to the extent that it directed the Third Party Funder i.e. the Appellant to disclose its assets, furnish security for the amount awarded, and restrained it from alienating or encumbering its assets. 

The observation of the Single Bench that the TPFs were essential for access to justice in arbitration proceedings, and thus, could not be mulcted with liability was also set aside based on the fact that they did not undertake the liability and were merely aware of their exposure.

The Division Bench while setting aside the order of the Single Judge held that there was no question of enforcing an arbitral award against a non-signatory (Appellant) who is not a party to the Arbitral proceedings. 

The Division Bench vide its judgment has also provided some guidance on the disclosure obligations of a Third Party Funder. While dismissing the arguments put forth by the Respondent that since third parties fund litigation so that if the Claimants succeed in their claims they could derive the benefits, they should also be held liable to pay the costs where such claims fail. It was further held that a third party may be bound by an Arbitral award only if it has been bound to arbitrate and is a party to the arbitration proceedings. 

The Division Bench has also shed some light on the importance of TPF as it observed that in the absence of TPF, a person having a valid claim would be unable to pursue the same for recovery of amounts that may be legitimately due.  

The Way Forward

While this is a significant step towards the commencement of the recognition of TPF by the courts in India, there are a few pertinent questions and issues that are raised that need to be addressed. First of which is that there may be the possibility of the funder being directly involved in the choice, appointment and fees of the legal representatives, thereby making the legal representatives directly accountable to the funder for the conduct of the arbitration. 

A necessary corollary is the fact of whether disclosure of TPF by a party should be made discretionary or mandatory and also the extent of the funding being provided. Another significant issue that comes up is confidentiality as to invest, the third party would want to inquire and look into the dispute and review the progress of arbitration, which may involve access to confidential information of the other party. 

This would necessarily attract objections by the opposite party and may even lead to them insisting on an undertaking to be given about the confidentiality of the arbitration. Last but not least, any conflicts of interest would also have to be disclosed vis-à-vis not only the arbitrator and the third-party funder but also the legal representatives of the parties. 

These issues must be looked into both by the legislature as well as the courts, to quell any misgivings and hurdles which may arise concerning the growth and adoption of TPF by India, especially when India has the ambition to become a hub for International Arbitration.

Footnotes

[1]Russell on Arbitration, 24^th Edition

[2]Russell on Arbitration, 24^th Edition

This article has been contributed by Advik Rijul Jha.