Regulating Third-Party Funding: A Welcome Decision by Delhi High Court
[Samreedhi is a student at Jindal Global Law School.]
International commercial arbitration as a dispute resolution mechanism has increased in recent years. In its pursuit to develop a pro-institutional arbitration framework and become an arbitration hub, India is advancing specific economy-stimulating instruments and tactics for an efficient arbitration system. In a recent decision of the Delhi High Court in Tomorrow Sales Agency Private Limited v. SBS Holdings, INC. and Others, the Division Bench opined that non-signatory third-party funding (TPF) the arbitral proceedings cannot be liable for the adverse cost amounts merely because it funded one of the parties involved in the dispute in the arbitration proceedings. Doing so endorsed that TPF ensured fair and equal access to justice.
In this post, the author first discusses the findings of the court in Tomorrow’s case and thereafter provides an overview of the current position of law related to third party funding. In the final section, the author argues in favour of formulating a legislative guide on litigation financing and TPF in India.
Tomorrow's Case: An Overview
In the present case, Tomorrow Sales Agency Private Limited (TSA) entered into a “Bespoke Funding Agreement” to provide financial assistance to Transpole Logistics Private Limited (Transpole) for their claims against SBS Holdings (SBS). However, the arbitral tribunal awarded damages worth INR 250 crores in favour of SBS, which Transpole failed to pay. Subsequently, SBS filed for interim relief under Section 9 of the Arbitration and Conciliation Act 1996 (Arbitration Act) to recover the award costs from TSA, claiming that TSA funded the arbitral proceedings with a profit-making motive and that it is a "real party" to the proceedings.
Accepting the arguments put forth by SBS, the single judge bench at the Delhi High Court held that TSA had a vested interest in the outcome of the arbitration and was liable to bear the costs of the claimants in light of their agreement. Aggrieved by the decision, TSA appealed under Section 37 of the Arbitration Act before the Division Bench. The court gave a tripartite reasoned decision and held that the recovery petition by SBS is not maintainable. It refused to recognize a direct action against a funder as they are not a “real party” to the arbitral proceedings or award. It also opined that TSA was not obligated to pay costs as the award was enforceable against Transpole. Finally, the bench propounded that the funding agreement must include a clause that makes the funder liable for all adverse costs.
Growth of TPF: An Indian Perspective
While the Arbitration Act remains silent on the issue of TPF, the Indian courts have acknowledged its significance and the economic benefits offered to parties with insufficient funds to allocate toward legal expenses. The Apex Court noted that there is no prohibition for any third party to fund a litigation process unless they are advocates or have any vested interest in the matter. In the absence of an express legislative provision encouraging TPF in arbitral processes, it was held that each agreement must be examined independently to ensure that they are not in contravention of the public policy standards. Similarly, the Calcutta High Court observed that TPF does not violate public policy considerations. However, such financial agreements are subject to scrutiny. They may be declared void if they provide disproportionate returns to the funder, making them unconscionable, inequitable, extortionate, unrighteous, injurious, and contrary to public policy.
Moreover, Gujarat, Maharashtra, and Madhya Pradesh have included state amendments to allow third-party financiers to a litigation proceeding. Additionally, the 2017 Report published by the High-Level Committee to review the institutionalization of arbitration mechanisms in India recommended the inclusion of lucid legislation outlining the principles related to TPF in India, akin to the policies adopted in Hong Kong, Singapore, and Paris. The legislative structure shall bring clarity and recognition to the TPF and pave the way for foreign investments in the country as an attractive hub for international commercial arbitration.
Third-party Funding Legislative Guide: Need of the Hour
The Supreme Court has categorically elucidated that the rigid English principles of champerty and maintenance are not applicable in India and that TPF transactions are not against public policy per se. The Indian courts have repeatedly expressed the need for a code of conduct or legislative guide on TPF. The lack of regulations governing such funding exposes the funder to additional risk, and the ambiguity associated with the Arbitration Act, deters them from engaging in such contracts. Additionally, the exponential increase in the popularity of arbitration as a dispute resolution mechanism has prompted a surge in the overall costs, thereby compelling claimants with legitimated claims to resort to external financing. Hence, the author proposes a skeletal legislative framework to regulate litigation financing in the Indian market that could potentially prevent its abuse by unscrupulous third-party funders.
The author recommends that the TPF legislative guide be modelled on the lines of those followed in Hong Kong, the UK, and other jurisdictions where the scheme is permitted. The key considerations are as follows:
Akin to the Hong Kong Code, which mandates the funded party to disclose the identity of the funder at the time of commencement of the arbitration to ensure transparency of arbitral proceedings, the Indian laws must implement mandatory disclosure of the TPF agreement. Such disclosures are relevant to allow the opposing party to contest the financing arrangement and preclude its enforcement on reasonable grounds.
Confidentiality of privileged information
Although arbitration is founded upon the cornerstones of confidentiality, it shall be waived to allow information related to the dispute to be communicated to the third-party funder, and, in turn, the funder shall not be permitted to breach the confidentiality of the parties.
Security of costs
The legislation shall provide guidelines that outline the liability of the funder for adverse costs. In accordance with the underlying ratio of the present case, the funding agreement must comprise a clause that extends the liability of adverse costs to the funder. The absence of such a clause would imply that the duty to pay cannot be transferred to the funder. Section 9 of the Arbitration Act enforces the award only against the parties to the dispute and not third-party funders.
The funding agreement shall elucidate the quantum of interest of the funder. In other words, if the arbitral award is favourable to the funding party, the guide shall clarify the proportion of the amount given to the investors that would be deemed excessive, extortionate, and unconscionable.
The landmark judgement by the UK High Court has remarked that the arbitrator can grant third-party funding costs only if they are reasonable and required to pursue the arbitral proceedings. The funding agreement shall state the role of the funder in the agreement as a dormant third party such that they shall not influence or control the funding party or their legal representative or the arbitration proceedings, save in cases permitted by law or the arbitral tribunal.
The Delhi High Court’s stance on TPF is a welcome decision in light of India’s pro-arbitration policy. While most common law jurisdictions worldwide have invoked the principles of champerty and maintenance as an embargo on TPF, the Indian courts had the foresight to allow it on account of fairness, justice, and equity and offer a level-playing field for enforcing legitimate rights and claims. It has ensured access to justice by allowing parties with meritorious claims but inadequate financial resources to overcome the difficulties of exorbitant costs involved in arbitration proceedings, thereby safeguarding the rights of the funder by not holding them liable for disproportionate consequences unless they were specifically included in the financing agreement. However, although TPF is not explicitly forbidden in India, the skepticism surrounding it and the dearth of ancillary factors does not make it feasible under the current arbitration regime. Thus, a legislative guide that expressly states the provisions governing TPF would not only regulate the TPF market but also resolve the conundrum surrounding TPF laws in India, thereby promoting an influx of foreign trade and establishing India as a global centre for arbitration.