Contributed by Hammurabi & Solomon Partners
India aspires to become a prominent hub for Arbitration, seeking parity with other renowned international arbitration venues such as Singapore, Hong Kong, London, etc. Despite being among the fastest-growing nations globally, such aspirations are hurdled with a plethora of roadblocks. India's reputation among the global investment community has often been marked by ambiguity, leaving investors uncertain about committing their resources to the country.
In order to foster an international arbitration landscape, a plethora of issues have been grappled with by the judiciary as well as the legislature over the past decade, including but not limited to empowering the Indian parties to choose a foreign seat, legislative amendments in 2019 and 2021 which aimed to promote institutional arbitration and India as a hub of International Commercial Arbitration respectively. Consequently, in the Indian business community, arbitration as a dispute resolution mechanism has gained a significant surge. Recently, the Delhi International Arbitration Centre (“DIAC”) in its report has observed a substantial increase in listed cases reaching over 6000 cases for the year 2022, which is double that of 2021. However, while arbitration stands as a favored means of dispute resolution, it is accompanied by unavoidably high costs. The Supreme Court of India in the case of Union of India v. Singh Builders Syndicate flagged the exorbitant fees charged by arbitrators as an impediment to the growth of Arbitration in India. Therefore, the Supreme Court emphasized adopting a fixed schedule of fees and disclosure of fee structure before the appointment of the arbitrator.
Parties entering into agreements adopting arbitration as the preferred means of dispute resolution require substantial capital to fund the process, which acts as a barrier to access for many. Third-party funding (“TPF”) has the potential of coming to the aid of parties that avoid adopting arbitration primarily due to the cost-related nuances. In this backdrop, it is necessary to shed some light on the concept of Third-party funding (“TPF”) and its significance in the present arbitration regime. TPF, if judiciously implemented, holds the potential to address the issue of exorbitant fees and other associated costs in arbitration, thereby ensuring equal access to justice for all. TPF, also known as litigation funding, can be regarded as a pivotal instrument to foster access to justice, as it mitigates disparities among the parties in terms of financial resources. TPF is an arrangement through which a party to the dispute secures financial assistance pertaining to litigation costs and other related costs. The central idea behind this notion is to establish an equitable footing for all parties involved in the dispute and safeguard the legitimate rights of a party from being compromised due to a lack of finances. Not only does TPF assist the party involved in the dispute, but also provides the funders with an opportunity to make investments and earn huge profits.
However, TPF is yet to establish itself in the Indian Arbitration landscape, as there are no pre-existing laws governing TPF, and hence the concept lacks coherence. In the current paradigm where TPF is left beyond the ambit of legal regulations, it is necessary to analyze the judicial pronouncements by Indian Courts and the existing legal framework concerning the permissibility of TPF.
THIRD-PARTY FUNDING IN INDIA
In this section, the author endeavors to examine the evolution of the concept of third-party funding (TPF) and its legal validity by accentuating the observations by various Indian courts. The growth of TPF in India was sluggish owing to the illegality of the doctrine of champerty and maintenance, which were prevalent in English Law. The primary contentions against the aforesaid doctrines were founded on principles of upholding public policy and safeguarding justice. However, the Privy Council nullified the applicability of the doctrines in India through the judgment of Ram Coomar Coondoo v. Chunder Canto Mookerjee 1876SCCOnLinePC19, wherein the Privy Council emphasized the importance of overseeing third-party funding in legal suits, yet it affirmed that such agreements between parties would not contravene public policy.
Further, the Supreme Court of India in the case of In Re: Mr. 'G', a Senior Advocate 1954AIRSC560, observed that the doctrines of champerty and maintenance do not apply to Indian legal jurisprudence. The court also noted that agreements of the nature of TPF are valid and do not contravene public policy in any manner.
The High Court of Kerala in the year 1961, in the case of Damodar Kilikar and Ors v. Ossman Abdul Ghani AS No. 171 of 1956, 176 of 1956 (E), further highlighted that if legal practitioners are not parties to the arrangement, the agreement should not be deemed illegal or unenforceable solely due to champerty. This view was again reiterated by the Supreme Court of India in the matter of Bar Council of India v. A.K. Balaji, wherein the court observed that as long as lawyers do not financially support litigation or have a vested interest in their client's cases, there exists no explicit prohibition against third parties providing funding for the litigation process. Nevertheless, each TPF agreement must be subject to independent scrutiny to ensure its conformity with considerations of public policy.
Notably, the Bombay High Court made a significant stride with respect to TPF in the case of Jayaswal Ashoka Infrastructure (P) Ltd. v. Pansare Lawad Sallagar 2019SCCOnlineBom578. In this case, there existed a TPF arrangement between the plaintiff-firm and the defendant, wherein the former had financed the latter's arbitration proceedings. However, upon the defendant's success in the arbitration, they refused to honor their obligations as per the agreement on the account that the plaintiff-firm's partners had served as their legal representative in the arbitration proceedings, thus characterizing the agreement as a contingency fee arrangement, which, according to Section 23 of the Indian Contract Act, 1872, was deemed contrary to public policy. The Court upheld that that the partner, a duly qualified advocate, who has acted as counsel in the arbitration, cannot be equated with legal representation before a court. Consequently, the agreement was deemed legally valid.
Recently, the Delhi High Court in the case of Tomorrow Sales Agency v. SBS 2023SCCOnlineDel3191, rendered a verdict asserting that a third-party funder could not be held liable for covering the expenses associated with an adverse cost on the account that the third-party funder was not a party to the arbitration agreement. Notably, this case represents one of the first judgments issued by Indian courts concerning the legal standing of TPF in the context of arbitration, as opposed to TPF for litigation, which is already established in India subject to certain conditions. This verdict on TPF in arbitration has provided a sense of reassurance, as it recognizes the essential role of TPF in facilitating access to justice for arbitration disputes in India.
THIRD-PARTY FUNDING IN FOREIGN JURISDICTIONS
In the United Kingdom, the Court of Appeal, through the R v. Secretary of State for Transport case conclusively determined that appropriately regulated TPF agreements are not in violation of existing legal frameworks. Subsequently, in Arkin v. Borchard Lines, the Court of Appeal expressed a positive perspective on TPF agreements, recognizing their potential to improve access to justice. A significant milestone was reached in 2016 with the landmark judgment of Essar Oilfields Services Ltd. v. Norscot Rig Management Pvt. Ltd., in which the High Court affirmed that costs related to third-party funding can be awarded under the Arbitration Act and ICC Rules, provided they are incurred exclusively for the pursuit of legal proceedings and are reasonable in nature.
This position was reaffirmed in the recent case of Tenke Fungurume Mining S.A. v. Katanaga Contracting Services, wherein the English High Court upheld the decision of an ICC arbitral tribunal to grant costs associated with third-party funding to the prevailing party in an arbitration. In 2011, the Association of Litigation Funders (ALF) introduced a self-regulated code of conduct, which received endorsement from the Ministry of Justice in England and Wales.
Hong Kong has actively taken legislative measures to promote arbitration within its jurisdiction. The definition of TPF in Hong Kong is specified within the HKIAC Administered Arbitration Rules, 2018. It encompasses an agreement for financial support between the funded party and a third-party funder, wherein the financial benefit is contingent upon the successful outcome of the arbitration, in accordance with the terms set forth in the funding agreement. TPFs were extensively addressed in Cannonway Consultants Ltd. v. Kenworth Engineering Ltd, specifically nullifying the doctrine of champerty in arbitration proceedings.
In Singapore, Article 24(l) of the SIAC Investment Rules deals with the additional powers of the arbitral tribunal and states that the Tribunal shall have the power to conduct such enquiries as may appear to the Tribunal to be necessary or expedient, which shall include ordering the disclosure of the existence of any funding relationship with an External Funder and/or the identity of the External Funder and, where appropriate, details of the External Funder’s interest in the outcome of the proceedings, and/or whether or not the External Funder has committed to undertake adverse costs liability. The Rules, while expressly affirming the notion of TPF, states that the Tribunal may take into account the TPF agreements in appropriating the cost of arbitration, which includes tribunal’s fees (includes emergency arbitrator), expenses, SIAC administrative fees and expenses and cost of expert appointed if any
Notably, the 2021 ICC Rules of Arbitration explicitly addresses TPF with respect to arbitration proceedings. Article 11(7) of these Rules emphasizes the necessity of disclosing any TPF arrangements in arbitration, thereby promoting the use of TPF among arbitration practitioners.
The current state of arbitration in India is experiencing a pressing requirement for certainty around TPF Agreements, by way of an established framework around such funding. This framework should be developed through a comprehensive approach, drawing insights from well-established arbitration centers such as Singapore and Paris. It should encompass essential rules and features, including (i) mandatory declaration of the funder's identity, (ii) indemnity costs when determining awards, and (iii) a code of conduct to be adopted by parties, arbitrators, and funders.
Prominent third-party funders have been actively approaching clients in India to offer their funding services, particularly for cross-border arbitrations conducted outside of India. An unprecedented development occurred in the Indian infrastructure sector in 2019 when Hindustan Construction Company entered into an agreement with an investor consortium led by BlackRock, a U.S.-based financial institution. This agreement entailed the monetization of a designated pool of arbitration awards and claims for a substantial consideration of Rs. 1750 crores, with the establishment of a special purpose vehicle (SPV). Similar arrangements have also been executed by companies like Era Infra Engineering and Patel Engineering.
However, parties may face certain bottlenecks while entering into a TPF Agreement, as third-party funders require extensive due diligence to understand the merits of the dispute which may be marred by issues such as lack of proper documentation and delays in pre-arbitral and post-arbitral proceedings, which require time-consuming judicial intervention. As a result, third-party funders may be faced with delays in appropriation of the sums invested with returns.
Regardless of the above, TPF still carries significant potential benefits for the Indian market. This is particularly pertinent considering the notable surge in international arbitration cases involving Indian entities. However, the question of TPF's permissibility, the extent to which it should be allowed, and the necessity for regulatory measures remain a subject of ongoing debate. Lastly, in light of the significant legal reforms and policy adjustments taking place in India, it is anticipated that India will increasingly embrace third-party funding in alignment with the Indian legal framework.
Contributed by Hammurabi & Solomon Partners
The above article is authored by Mr. Aayushya Ankul, Senior Associate.