Disclosure in Balance: Third-Party Funding and Security for Costs

[Shreya is a student at National Law School of India University Bengaluru.]

The emergence of third-party funding (TPF) in Indian arbitration has exposed a critical gap in the legal framework governing the extent of liability of a third-party funder in arbitration. The funding received from TPF is often what provides complete financial support to claimants, who are dependent on TPF. This leads to the risk of the successful party being unable to enforce an adverse costs award, or even the final arbitral award.

In this context, tribunals have often granted applications for security for costs (SfC) against parties receiving TPF for an arbitration. In India, although not mentioned explicitly in the Arbitration and Conciliation Act 1996 (ACA), it has been argued that SfC can be granted as an interim measure under Sections 9 and 17. In Tomorrow Sales Agency Limited (TSA) v. SBS Holdings (Tomorrow Sales), the Delhi High Court held that SfC applications cannot be granted against a third-party funder, as the jurisdiction of the tribunal cannot extent to a third-party. 

However, the fact of the existence of a TPF arrangement is still relevant in considering whether an SfC order needs to be made against the party to the arbitration. At present, there is no binding obligation on parties to disclose an existing TPF arrangement. The court in the above case noted that “certain rules are required to be formulated for transparency and disclosure in respect of funding arrangements in arbitration proceedings”. (emphasis supplied)

While existing literature advocates for disclosure of TPF arrangements to ensure the impartiality of the tribunal under §12 (see here and here), this article argues that disclosing details of a TPF arrangement is also essential for adjudicating SfC applications. It suggests an appropriate mechanism for disclosure that accounts for concerns of confidentiality and privilege. 

Extent of Disclosure

This section argues that the relevance of a TPF arrangement to an SfC application extends beyond the existence of such an arrangement or the identity of the funder. Arguments for mandatory disclosure generally remain limited to the former, due to the risk of an ‘arbitral hit and run’. However, tribunals have categorically held that the mere existence of a TPF arrangement is not sufficient to warrant an order for SfC. The inference that the existence of a funding agreement automatically indicates an inability to satisfy a costs award and therefore warrants an SfC order is flawed, as it does not necessarily mean that the claimant is impecunious. 

For an SfC application, the applicant must show that there is a real risk of non-compliance with a future award for costs by the party to the arbitration proceeding. For this, the existence of a TPF arrangement is only one among the indicative list of factors which might be construed as indicating a party’s inability to fund the costs of an arbitration proceeding. This is where funding-related facts that can be ascertained from the terms of the funding agreement become relevant.

For example, the liability of a third-party funder to undertake adverse cost liability would be a relevant consideration. In most TPF arrangements, as in Tomorrow Sales, the liability of the funder to pay the costs of the arbitration are invoked only if the claim is successful. If the claim is unsuccessful, the rights and obligations of the funder terminate immediately. SfC orders serve as a mechanism to this risk against opposite parties.   

Another example is if the agreement between the funder and the claimant can be terminated with ease by the funder. This adds to the risk of an ‘arbitral hit and run’ as the funder can exit the arbitration at any point, leaving the claimant unable to finance the costs of the rest of the proceeding. The extent of reliance placed by the claimant, that is, whether the claimant would be able to fund the costs of the arbitration independently, is also a relevant factor. 

Therefore, while existing jurisprudence supports the disclosure of the existence and identity of a third-party funder to prevent conflicts of interest, assessing an SfC application may also necessitate access to certain substantive terms of the funding agreement itself. However, it is essential that this necessity is balanced while avoiding prejudicing the funded party. The next section suggests a mechanism for disclosure that accounts for these concerns.  

Form of Disclosure

Unlike disclosure of the existence and identity of a TPF arrangement, a funded party cannot be obliged to mandatorily disclose the terms of the funding agreement. This is primarily due to considerations of confidentiality and privilege. TPF agreements will, in most cases, contain crucial and sensitive data regarding litigation strategy, as the incentive for the funder is the success of the claim. Litigation funders conduct a rigorous case assessment process, wherein the funded party’s counsel generally disclose the legal merits, quantum of damages, and tactical aspects of the case in the TPF agreement. 

Thus, the TPFA and its ancillary agreements could potentially reflect important legal, financial, and tactical aspects of the case. Compelling disclosure of the TPFA would risk exposing the funded party’s litigation strategy or privileged information to the opposing party, granting them an unfair advantage. This can be interpreted as violating §18 of the ACA, or a breach of natural justice principles of a fair trial, even if it does not explicitly fall within the legal framework of confidentiality and privilege in India.

However, disclosure of funding-related facts can be facilitated in the form of targeted document production requests, which provide a mechanism of procedural safeguards. It is well-settled that the Tribunal’s power to order disclosure is an aspect of the Tribunal’s broader procedural and evidence-taking authority. Discovery, inspection and production of documents by a party at the request of the opposite party is a matter of procedure and has been read into §19 of the ACA. Thus, the document production request will be subjected to general standards used in evaluating document production requests. Usually, courts in India use general principles contained in Order XI of the Civil Procedure Code, the IBA Rules on Taking of Evidence, or the Prague Rules on Conduct of Efficient Proceedings. Broadly, these standards can be classified into tests of relevance and specificity. 

If disclosure of the TPFA is solely for the purpose of assessing an SfC application, the document is relevant and material for the adjudication of another procedural claim filed in front of the Tribunal, and not to determine a ‘matter in controversy’ in relation to the merits of the dispute, which is traditionally the test for relevance in document production. This, however, is not a hinderance. In Oil and Natural Gas Corporation Limited v. Discovery Enterprises, the Supreme Court held that a tribunal must decide on a discovery application that is in pursuance to a procedural claim before ruling on the procedural claim. A failure to do so would be a “fundamental error of law” and “against the principles of natural justice”. Thus, a party must show that disclosure of the funding agreement is relevant and material to their application for SfC, before such information is made available. 

Regarding the standard of specificity, the Delhi High Court in Thyssen Krupp Werkstoffe Gmbh v. Steel Authority of India Limited held that an application for document production must not be “vague being in the nature of a roving or fishing enquiry”. Further, the standard has been broadly defined as specific enough if it contains a description of each requested document that is sufficient to identify the same. In the context of TPF agreements, this standard can be narrowed further, in light of the concerns of confidentiality and privilege. Privileged and confidential information, that is the legal advice that may reasonable be expected to confer a tactical advantage, can be redacted from the TPFA. The business advice that is relevant to the claims on SfC can be produced. A corollary of the same is that the application itself is particular and only specific information is requested and disclosed. For example, in Guaracachi America Inc and Rurelec Plc v Plurinational State of Bolivia, the Tribunal took note of a statement by the claimant that the funding agreement would not cover payment of a costs award. 

Thus, disclosure of terms of the funding agreement can be controlled, purpose-specific, and consistent with concerns of privilege and confidentiality. Subjecting disclosure applications to the procedure of document production ensures that the Tribunal makes a careful assessment of the relevance, specificity and accessibility of the document, which ensures the balance between the necessity of disclosure and prejudice to the funded party. 

Conclusion

With the emergence of TPF in arbitration, SfC applications become more relevant in arbitrations involving funded claimants. Tribunals are increasingly faced with the challenge of determining whether and to what extent TPF arrangements should be disclosed. This paper has argued that while the terms of the TPF agreement may be material to deciding an SfC application, particularly in assessing financial risk and funder liability, such disclosure cannot be automatic or overly broad. A blanket obligation to disclose would risk exposing sensitive information, potentially undermining party confidentiality, legal privilege, and strategic autonomy in arbitration.

Instead, the middle path lies in the use of document production mechanisms already embedded in the Indian arbitral framework. By subjecting requests for disclosure to established standards of relevance, specificity, and necessity while allowing for redactions and safeguards, tribunals can maintain procedural fairness without compromising the legitimate interests of funded parties.