A Step to the fore in Arbitration- Third-Party Funding

Updated: Nov 15

Unnati Sinha[1]


Introduction


Third-Party Funding is a term that sounds foreign and is often seen as being illegitimate in India. However, pursuant to a few conditions, India's highest court has approved of the idea of third-party financing. Simply put, third-party arbitration funding ("TPAF") refers to the provision of funds to a plaintiff to pursue arbitration proceedings in return for a share of the award (if one is made in their favor). It is a subcategory of general TPF, which also provides cash for other legal actions and private matters. The clear advantage of TPAF is its usefulness as a mechanism to increase participation in arbitration for underprivileged parties or parties looking to mitigate risks. It is also being recognized as a successful source of funding for entrepreneurs. However, a potential drawback of TPAF is that funders could want to make money by supporting frivolous or unjustified lawsuits. Champerty, the commercial exploitation of the law, is forbidden under our common law. Champerty and TPAF are two sides of the same coin, with only legitimate interests standing between them. The idea of third-party funding agreements has made it possible for financially vulnerable claimants to successfully pursue their legitimate interests without jeopardising their companies' viability. This causes our regime to be somewhat out of harmony with TPAF, which would need to be fixed by explicit legislation.


This trend of TPF is spreading quickly across international jurisdictions for two primary reasons (1) it makes sure that legitimate rights are not compromised because of paucity of financial resources and levels the competitive landscape for both parties; and (2) it presents a beneficial platform for funders to make investments. The doctrine of champerty falls under the scheme of public policy but the concept of third-party funding is confined within the parameters of prohibition for public policy grounds, so from a business perspective, it makes sense for funders to favor funding petitioners' or claimants' claims because there is a greater chance of making a large profit there than with funding a defendant's or respondent's claims because the money will primarily be used to refute the claims made and there will be minimal to no profit embroiled.


The present article discusses the process of Third-Party funding in the light of Indian (international commercial arbitration and domestic arbitration) and Foreign jurisdictions, followed by some suggestions and recommendations.


Third-Party funding process in arbitration


TPF agreements are mainly executed by prospective funders when the claims presented have a strong chance of being accepted and, more crucially, when the claimant is struggling financially and the expense of litigation may not be something they are able to handle.


How funders undertake TPF


The funder will do extensive due diligence after receiving a TPF claim before approving. They will take the merits of the case and the scope of the requested damages into account before making a financing decision. A compelling claim and a quantifiable profit margin between the penalties sought and the expected legal expenses must be present for a chance to qualify for TPF. According to certain statistics published by the Report Of The Icca-Queen Mary Task Force in 2018, the funders reject over 90% of TPF applications. Moreover, it was discovered that the hit rate (number of sales of a product per customer who try to find out about the product) varied between 20 and 85 percent for various TPF funders in a 2021 survey conducted by MNLU Mumbai on TPF in India. It was also observed that parties that sponsored a greater number of lawsuits appeared to have a better success rate (pg 241-242).


Confidentiality and Disclosure rules


A TPF agreement between two parties is required to maintain some level of confidentiality, but at the same time, the essence of arbitration frequently calls for the disclosure of the third party leading up to the arbitration in the event that there is a conflict of interest between the third party and any other party taking part in the arbitration. In order to improve access to justice, the supported parties may also seek to reveal certain arbitration-related information to the third-party funder. However, doing so would be against the TPF agreement's and the arbitration's “secrecy rules”, which poses the challenge of striking a balance between disclosure and confidentiality duties as mentioned in 43A of the Arbitration and Conciliation (Amendment) Act, 2019 which obliges the parties and the Tribunal to maintain confidentiality of all arbitration proceedings. Though the said provision is yet to be notified, in a given circumstance, the possibility of the opposite party alleging breach of confidentiality on account of such TPF arrangement cannot be ruled out. It has been debated that disclosure rules should take secrecy interests into consideration and attempt to establish exemptions for them.


In certain instances, the TPF parties look for temporary solutions such as the imposition of "security of costs" to safeguard themselves in the event that they are granted costs but the other party is unable to reimburse them. Upon granting the application, the tribunal may order the party to put aside a specific amount of money as security prior to the end of the proceedings in order to prevent these circumstances. However, the mere fact that TPF exists does not prove that the party is broke or insolvent. In this situation, it is necessary to reveal the TPF agreement in order to protect the interests of the opposing party and the enforcement of a future judgement.

The Legality of Third-Party Funding Agreements in India


Despite the ban on champerty and maintenance in other nations, India has never legally or expressly prohibited third-party financing arrangements as was noted by the Calcutta high court in the case of Ram Coomar Coondoo v. Chander Canto Mookerjee(1876). In practice, under various state amendments (Maharashtra, Gujarat, Madhya Pradesh, Uttar Pradesh) to Section 25 and Order XXV Rules 1 and 3 of the Code of Civil Procedure, 1908, third-party financing arrangements do exist and are recognized by the law of civil litigation.


Although these contracts are not inherently void (unless assisted by legal counsel), as mentioned in the Bar Council of India rules and the Advocates Act, 1961. Their existence has been shown to merit judicial review under the Indian Contracts Act, 1872. It has been noted by the Supreme Court in Bar Council Of India v. A.K. Balaji, there is no absolute bar on foreign law firms/lawyers conducting arbitration in international commercial arbitration and the same would be subject to the rules and regulations of the concerned arbitration institution or the provisions of Section 32 and 33 of the Advocates Act.


According to the rulings (Nuthaki Venkataswami v. Katta Nagi Reddy (died) (1962)) of the Indian courts, it has been affirmed that a reasonable arrangement to provide finances to support a lawsuit in exchange for a portion of the property, if recovered, is not to be seen as going against public policy. Other terms of the agreement like litigants' and funder's respective privileges and obligations in funded proceedings, disclosure of personal information to the sponsor/funder, the sponsor's contribution to the evaluation of settlement proposals by courts or opponents, and the funder's liability for accumulated debts, etc. may also be considered by the Indian Courts.


It is important to note that the existence of such agreements must always be fully disclosed in court proceedings to avoid adverse rulings at the implementation or compliance stage. For instance, the independence of the arbitrator becomes important, when a funder is involved and such lack of independence may be cited as an important basis for challenging an arbitral award.


Foreign Jurisdictions


Australia is home to a sophisticated third-party litigation funding market. Australia was one of the first countries to eliminate crimes and illegalities related to champerty and maintenance. Singapore was the first Asian country to legalize third-party funding of arbitration. It passed the Civil Law (Amendment) Act 2017, abolishing maintenance and champerty. It recognizes that third-party funding arrangements may be justified for certain dispute resolution mechanisms as long as they do not violate public policy and establish the funder’s rights and its overflow. It also enacted the Civil Law (Third Party Funding) Regulations,2017 to govern third-party financing arrangements.


The Hong Kong Arbitration and Mediation Legislation Act (Third Party Funding) (Amendment) Act 2017, applies to domestic and international arbitration and prohibits "maintenance and champerty" However, three exceptions were carved out: (1) the third party affirms a valid stake in the performance of the litigation; (2) Both parties will satisfy the court that they are obligated to accept third party funds for reasons of access to justice and (3) proprietary classifications of processes such as bankruptcy.


Under section 59(1)(c) of the Arbitration Act,1996 of the UK the arbitrator has the power of apportioning legal costs and “other costs”. In the case of Essar Oilfields Services Ltd. v Norscot Rig Management Pvt. Ltd., decided by the High Court of England and Wales, the arbitrator's third-party costs were determined under section 59(1)(c) and were included in the category of “public or other expenses”. It was also debated in this case whether the category of “public or other expenses” should be included in the Arbitration and Conciliation Act, 1996 (UK) and whether disbursements to third-party funds are subject to Article 31(1) of the ICC Regulations which is concerned with “Decision as to the Costs of the Arbitration”. After the High Court concluded that the funds were received only for the purpose of prosecuting the lawsuit and were fair, the arbitrator formally awarded the third-party funding fees under the heading "Other Expenses”. It is important to note that a private organization, the Association of Litigation Funders, implemented the Code of Conduct for Third Party funding Arrangements in the UK on behalf of its members in 2011. According to the Code, funders must always have enough money on hand to satisfy their commitments to pay for all of the disputes they have promised to cover as well as to pay for all of their financing responsibilities for a minimum of 36 months. The declared objective of the ALF is to guarantee best practices and moral conduct among litigation funders, seeking to advance the use and use of litigation financing as an element of the sensible management of financial risk in dispute settlement, and actively influencing TPF legislation and regulation. Additionally, they have a strict grievance procedure that can be activated in the event of a member’s misconduct.


Conclusion


The emergence of third-party financing of disputes in India has to be investigated since promoting the success of such a system creates a new asset class where investors may potentially produce more liquidity in addition to outsized rewards. Concerns exist over how a complicated policy and notion will develop and grow in India. Second, there is a persistent danger of excessive regulation, where a rigid structure of interests will make it challenging to comply with such requirements. Because third-party financing is a very new and developing idea, flexibility in its operation is recommended.


There are no regulatory restrictions in India that prevent third-party financing from penetrating the commercial sector. India should handle third-party financing by adopting various approaches established by top arbitration countries (as mentioned in the preceding section), so long as the contracts are not against public policy or illegal in any other way.


The adoption of enabling legislation "has considerably aided in the expansion of these countries as arbitration centres." A recent modification to Singapore's Civil Law Act, for instance, makes third-party financing for arbitration and related processes acceptable. Comparative measures that are implemented and modified appropriately for the Indian environment will not only support India's progress toward international arbitration but also serve as a cornerstone for India to become a South Asian Hub.



 

[1] Unnati Sinha is a 3rd-year student pursuing B.B.A.L.L.B (Hons.). She can be reached at unnatisinha1412@gmail.com.

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