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Third-Party Funding In Indian Arbitration: A New Way Forward And Need For Regulations




INTRODUCTION


Third-Party Funding ("TPF"), also known as litigation funding, is an arrangement wherein a party that engages in any litigation/arbitration proceedings obtains funds from a 'third- party funder' for funding its litigation/arbitration costs or for covering the losses [1] in return for a share of the award. The third-party funder can be a bank, hedge fund, insurance company, etc. [2] The third-party funders are not actually involved in the arbitration proceedings and their main intention is to maximize the participation of parties in arbitration for unprivileged parties and to mitigate their financial risks. TPF has been encouraged and accepted in several foreign countries as it provides a level playing field for the parties involved in litigation/arbitration proceedings. [3]


The author of this article intends to provide a bird's eye view regarding the evolution and law of the TPF in India. The author also intends to discuss the laws regarding TPF in foreign jurisdictions and the importance of implementing regulations regarding TPF in India.


EVOLUTION OF LAW REGARDING TPF IN INDIA


Though the concept of TPF is not alien to the Indian legal system, but there is no law governing or regulating TPF in India. In English law, 'Champtery' [4] and 'Maintenance' [5] is similar to the concept of TPF. 'Champtery' and 'Maintenance' was also considered as crime and a tort in English law. One of the oldest cases to deal with the issue of TPF was of the Privy Council in the case of Ram Coomar Coondoo v Chunder Canto Mookerjee, [6] wherein it was held that the law of 'Champtery', and 'Maintenance' are not applicable to Indian Jurisprudence. Therefore, it can be said that there was no bar on TPF in India. But the Council also issued a caveat stating that: "But agreements of this kind ought to be carefully watched, and when found to be extortionate and unconscionable, so as to be inequitable against the party; or to be made, not with the bona fide object of assisting a claim believed to be just, and of obtaining a reasonable recompense therefor, but for improper objects, as for the purpose of gambling in litigation, or of injuring or oppressing others by abetting and encouraging unrighteous suits, so as to be contrary to public policy, – effect ought not to be given to them.”


Similarly, in the case of Valluri Ramanamma v Marina Viranna, [7] the Privy Council held that: "It has long been held that in India agreements to finance litigation in consideration of having a share of the property if recovered, are not per se opposed to public policy. They may be so if the object of the agreement is an improper one, such as abetting or encouraging unrighteous suits, or gambling in litigation; or their enforcement against a party may be contrary to the principles of equity and good conscience, as unconscionable and extortionate bargains…".


The decision passed in the Ram Coomar Condo, [8] was also resonated by the Hon'ble Supreme Court in the case of “G”, A Senior Advocate, In re. [9] The Hon'ble Supreme Court in the case of Bar Council of India v AK Balaji[10] further clarified that: "In India, funding of litigation by advocates is not explicitly prohibited, but a conjoint reading of Rule 18 (fomenting litigation), Rule 20 (contingency fees), Rule 21 (share or interest in an actionable claim) and Rule 22 (participating in bids in execution, etc.) would strongly suggest that advocates in India cannot fund litigation on behalf of their clients. There appears to be no restriction on third parties (non-lawyers) funding the litigation and getting repaid after the outcome of the litigation."


It is observed that TPF agreements have been statutorily recognized for civil suits under state amendments of Maharashtra, Gujarat, Madhya Pradesh, and Uttar Pradesh of Order XXV Rules 1 and 3 of the Civil Procedure Code, 1908. [11] The above case laws and statutes depict that though third-party funding is not illegal, it is important that such agreements are monitored and judged through the threshold of 'public policy' as stated under section 23 of the Indian Contract Act, 1872. [12]


This has also been explained by the Hon'ble Rajasthan High Court in the case of Suganchand v. Balchand [13] observed that: "…but as observed by their Lordships of the Privy Council, such agreements should be watched very carefully and they should not be enforced, being opposed to public policy if they fall in one of the categories mentioned below:


(1) if they are extortionate and unconscionable so as to be inequitable against the party, or


(2) if they are made not with the bona fide object of assisting a claim believed to be just and obtaining a reasonable recompense therefor, but for improper objects as


(a) for the purpose of gambling in litigation, or


(b) of injuring or oppressing others by abetting and encouraging unrighteous suits."


The Srikrishna Committee Report constituted in the year 2017, had also emphasized the importance of recognizing TPF in India, but the subsequent amendments made to the Arbitration and Conciliation Act,1996 failed to consider the recommendations of the committee.


EVOLUTION OF LAW REGARDING TPF IN FOREIGN JURISDICTIONS


Several jurisdictions have made way for the applicability of TPF by introducing necessary laws, amendments, or judgments. In the year 2006, the Hon'ble High Court of Australia in the case of Campbell's Cash and Carry Pty Ltd v. Fostif Ltd., [14] had held that litigation funding was neither an abuse of process nor was it contrary to the concept of public policy. Singapore brought in the Civil Law Amendment Act in the year 2017,[15] wherein "Maintenance" and "Champtery" were abolished. [16] Further, this amendment also recognized that third-party funding for certain dispute resolution mechanisms does not violate public policy. In addition to this, Singapore also enacted the Civil Law (Third Party Funding) (Amendment) Act 2017 to regulate third-party funding arrangements. [17] In 2021, TPF was introduced to both arbitration and court proceedings. [18]


Similarly, Hong Kong permitted TPF by introducing the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill 2016. [19] The Supreme Court of Hong Kong in the case of Canonway Consultants Limited v. Kenworth Engineering Limited [20] excluded the doctrine of "Champtery" from the purview of arbitration and held that this doctrine should not extend to private consensual system like arbitration.


Unlike other popular seats of arbitration, the United Kingdom has not yet come up with any law or regulation to deal with TPF. Though the United Kingdom tried to exclude the doctrine of 'Maintenance' and 'Champtery' through the Criminal Law Amendment Act, 1967, [21] it created an exception under section 14(2) of the Amended Act, [22] which permitted the application of said doctrines with respect to contracts which might violate principles of public policy. But the application of these doctrines has diminished over the years. [23] The Court of Appeals in the case of Arkin v. Borchard Lines Ltd, [24] upheld the validity of TPF. The court considered commercial funders as people who provide help to those who seek access to justice who otherwise cannot afford. TPF was further promoted in the United Kingdom by The Civil Justice Council (Agency of the United Kingdom's Ministry of Justice) wherein it published the Code of Conduct for Litigation Funders in 2011. The Hon'ble England and Wales High Court in the case of Essar Oilfields Services Ltd. v Norscot Rig Management Pvt. Ltd., [25] held that the arbitrator's third-party costs fall under the category of 'public or other expenses' under section 59(1)(c) of the Arbitration Act, 1996 [26] as the third–party funds were received for the purpose of proceedings the lawsuit and were of reasonable nature.

ANALYSIS AND CONCLUSION


Recently, the Hon'ble High Court of Delhi in the case of Tomorrow Sales Agency Pvt. Ltd. v SBS Holdings Inc. and Ors. [27] has ruled that third-party funders should not be made liable to pay adverse awards especially when they are not a party to arbitration proceedings or arbitral awards. It was further highlighted by the court that: "Third-party funding is essential to ensure access to justice. In the absence of third-party funding, a person having a valid claim would be unable to pursue the same for recovery of amounts that may be legitimately due. In many cases, the claimants become impecunious on account of the very cause for which they seek redressal. The cost of pursuing claims in arbitration are significant; the same not only include fees paid to arbitrators and institution but also professional fees for legal counsels and experts and other attendant expenses. A person without the necessary means would have no recourse, in the absence of third-party funders. Third-party funders play a vital role in ensuring access to justice."


There is no doubt that third-party funding is the need of the hour, as a party who is in a situation of economic duress/distress can seek legal relief. With the recent observation by the Delhi High Court, there is a positive sign that smaller businesses or organizations can opt for TPF to fund their arbitration proceedings. One of the issues that parties might face while opting for TPF is regarding the disclosure regime, for ensuring that there is independence and impartiality of the arbitrators. This will also ensure that there is an equal treatment to parties along with procedural fairness.


This issue can be resolved by bringing in an amendment to section 42A of the Arbitration and Conciliation Act, 1996 [28] so as to bring third-party funders within the scope of parties within whom information can be shared. [29] Further, it must also be ensured that section 12 [30], fifth and seventh schedule of the Arbitration and Conciliation Act, 1996 is amended, wherein the interests of the arbitrator with third-party funder must be disclosed to ensure that either of the parties' interests in the arbitrations is not compromised. It must also be made mandatory for the funded party to disclose to the opposite party and the arbitrators that it shall be funded by a third party in arbitration proceedings.


The author would like to conclude by stating that even though the judgments encourage the TPF in India, they cannot always be relied upon to clarify important points of disputes regarding procedures and disclosures under TPF. Therefore, the legislature needs to proactively take steps to introduce laws and regulations regarding the same.


FOOTNOTES

[1] Sahani, Victoria, Third-Party Funding in Dispute Settlement in Africa, Proceedings of the Annual Meeting (American Society of International Law), Vol. 110 (2016), p. 90, <https://www.scconline.com/blog/post/2022/04/11/third-party-litigation-funding/>.

[2] Third-Party Funding in India, , p.5 <https://www.scconline.com/blog/post/2022/04/11/third-party-litigation-funding/>.

[3] Mayank Mishra, Mohit Chadha, Vaishnavi Rao and Swati Mittal, India: Third-Party Funding – Is India Ready?, <https://www.scconline.com/blog/post/2022/04/11/third-party-litigation-funding/>;Kalajdzic, Jasminka, Peter Cashman, and Alana Longmoore, Justice for Profit: A Comparative Analysis of Australian, Canadian and US Third-Party Litigation Funding, The American Journal of Comparative Law, Vol. 61, No. 1 (2013), p. 94,<https://www.scconline.com/blog/post/2022/04/11/third-party-litigation-funding/>.

[4] Maintenance means the involvement of unrelated third parties to a dispute in which neither are they direct beneficiaries nor do they have any locus.

[5] Champerty, considered as an aggravated form of maintenance, means an agreement which divides litigation proceeds between the litigator and an unrelated third party who helps enforce the claim.

[6] Ram Coomar Coondoo v Chunder Canto Mookerjee, 1876 SCC OnLine PC 19.

[7] Valluri Ramanamma v. Marina Viranna, 1931 SCC OnLine PC 17.

[8] Supra 6.

[9] ‘G’ a Senior Advocate of the Supreme Court, In re, (1955) 1 SCR 490 : AIR 1954 SC 557, Para 11.

[10] Bar Council of India v. A.K. Balaji, (2018) 5 SCC 379.

[11] The Civil Procedure Code 1908, O XXV Rule 1 and 3.

[12] The Indian Contract Act 1872, § 23.

[13] Suganchand v. Balchand, 1956 SCC OnLine Raj 127.

[14] Campbell's Cash and Carry Pty Ltd v. Fostif Ltd, [2006] HCA 41 (High Court of Australia).

[15] The Civil Law (Amendment) Act, 2017 (Singapore).

[16] In the case of Lao Holdings NV v. The Government of the Lao People's Democratic Republic, [2022] SGHC (I) 6; Singapore International Commercial Court had held that the prohibitions against 'Maintenance' and 'Champtery' in common law is illegal and TPF is not against public policy.

[17] The Civil Law (Third Party Funding) (Amendment) Act 2017.

[18] The Civil Law (Third-Party Funding) (Amendment) Regulations 2021 (Singapore).

[19] The Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Act, 2017 (Hong Kong).

[20] Canonway Consultants Limited v. Kenworth Engineering Limited, [1995] 1 HKC 179.

[21] The Criminal Law (Amendment) Act 1967, §13-14 (United Kingdom).

[22] The Criminal Law (Amendment) Act 1967, §14 (2) (United Kingdom).

[23] Pinheiro, Kaira and Chitalia, Dishay, Third-Party Funding in International Arbitration: Devising a Legal Framework for India, Vol. 14 NUJS L. Rev. 2 (2021).

[24] Arkin v. Borchard Lines Ltd, [2005] ECWA Civ 655, ¶16, 38 (England and Wales Court of Appeal).

[25] Essar Oilfields Services Ltd. v Norscot Rig Management Pvt. Ltd., [2016] EWHC 2361 (Comm).

[26] The Arbitration Act 1996, §59 (1) (c).

[27] Tomorrow Sales Agency (P) Ltd. v. SBS Holdings Inc., 2023 SCC OnLine Del 3191, Para 72 – 75.

[28] The Arbitration and Conciliation Act 1996, §42A.

[29] Supra 23.

[30] The Arbitration and Conciliation Act 1996, §12.

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