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Delhi High Court Upholds The Legality of Third-Party Funding in Indian Arbitration

Updated: Sep 26, 2023

by Sahsransh Pandey and Urmi Shah*


In a country that still strives to recover from the disruptions and economic hardships plagued by the pandemic, it is of great importance to address the need for Third Party Funding (‘TPF’) under Indian Arbitration.

The Arbitration & Conciliation Act 1996 (‘A&C Act’) was brought to resolve disputes efficiently and cost-effectively, while also attributing importance to party autonomy. However, the arbitration proceedings still involve huge costs, which act as an impediment to the making of legitimate claims. Therefore, the role of TPF assumes significance, as it accords an opportunity for impecunious parties to pursue their claims and seek justice.

This post seeks to analyze the recent decision by the Delhi High Court on the validity of third-party funding and the evolving jurisprudence on the subject, in light of the Indian jurisprudence on the application of TPF to arbitration proceedings.


THIRD-PARTY FUNDING IN ARBITRATION PROCEEDINGS

TPF is carried out by way of agreements, through which, an entity or a person, who is independent of the claim and also not a party to the dispute, provides financial assistance to any party. This is done primarily due to financial constraints, as a result of which such party is not able to pursue their claims.

This agreement, in terms of arbitration proceedings, entails assistance towards the fees of the legal counsels and that of the Arbitrator, venue costs, and costs of expert witnesses, along with other ancillary costs incurred throughout the arbitration proceedings. Mostly, this financial assistance is given in lieu of remuneration or reimbursement, the granting of which depends upon the successful outcome of the arbitration.

While dealing with the validity of TPF in litigation, the courts in Ram Coomar Condoo v. Chunder Canto Mukherjee, In Re: Mr. 'G', and Bar Council of India v. A.K. Balaji have held that the same is not expressly prohibited under Indian laws. These decisions indirectly favour the use of TPF in litigation, unless such application is contrary to public policy or undertaken by a legal professional. However, there is no legislative framework currently which deals with the application of TPF in arbitration.

Therefore, in the absence of a legal framework that regulates TPF in arbitration proceedings, the Delhi High Court, in what can be understood as a pivotal judgement with far-reaching implications, in Tomorrow Sales Agency Private Limited v. SBS Holdings, Inc. & Others gave the much-needed recognition to TPF in arbitration proceedings, while also laying down the contours on the liability of such entities.


FACTUAL BACKGROUND

The facts of the case revolve around the non-payment of amount as awarded in the arbitration proceedings between SBS Holdings Inc. (‘SBS’) and SBS Transpole Logistics Private Limited & its promoters (‘Transpole’), which took place under the aegis of SIAC Rules.

In this regard, it is pertinent to note that Tomorrow Sales Agency Pvt. Ltd. (‘TSA’) provided financial assistance to Transpole, so that Transpole could pursue their claims by way of arbitration. For this purpose, TSA and Transpole entered into an agreement, which was nothing but a Third Party Funding Agreement.

After the conclusion of arbitration, the award was passed against Transpole, which failed to oblige its obligation towards SBS. SBS, therefore in an attempt to secure the award, tried to satisfy its claim through the assets of Transpole. However, having failed to do so, it filed a Section 9 application before the court seeking the disclosure of details of assets and bank accounts of TSA, and calling upon it to pay the claim as Third-Party Funder, which was granted by the single judge bench of the court. This gave rise to an appeal before the division bench of the court, before which the question was to deliberate upon the liability of TSA as Third Party for providing financial assistance to Transpole.


JUDGEMENT

While dealing with the question with respect to the liability of TSA for providing financial assistance in the capacity of third party funder, the court examined various arguments to ultimately come to the conclusion that such liability cannot be saddled upon the funding entity.

Firstly, to rope in the liability of the funder, reliance was placed on the decision of Gemini Bay . However, the court distinguished Gemini Bay from the present case by holding that, in the present case, the funder was neither made a party to arbitration nor compelled to arbitrate, which, in terms of Gemini Bay, is essential to bind a non-signatory to arbitration.

Secondly, reliance was also placed upon Cheran Properties, where non-signatories were made responsible for an adverse award, as such persons would fall within the sweep of the term ‘claiming under’. However, the court categorically held that the third-party funder cannot be made liable by categorizing it as a person ‘claiming under’ as the funder.

Further, the court held that to hold funder accountable to an award, there must be complete awareness of their potential liabilities and exposure because holding them liable for obligations they are not undertaken or made aware of would be unjust in the eyes of the law. The court also emphasized the need for disclosure and transparency in TPF, while also ensuring that such funding is not exploitative.

Therefore, in light of the above deliberations, the court declined to hold the funding entity (TSA) liable to the award holder for providing financial assistance.


ANALYSIS

Upon analysis of the decision of the Delhi High Court, along with the Indian jurisprudence of TPF, the position of law that emerges is that the third party funding entity (funder) can be made liable only upon the fulfillment of conditions which are that the funder; (1) must have been made a party to an arbitration or compelled to arbitrate by imputing their consent to it; (2) must be made aware of the potential liabilities and its exposure as per the terms of the TPF; (3) must not be saddled with liabilities that are not undertaken; (4) TPF agreement must be disclosed to ensure transparency, (5) the agreement must not be exploitative or contrary to public policy; and (6) the funding must have not been undertaken by any legal professional. All these considerations, along with the existence of beneficiary relationships and involvement in contracts, play an active role in determining the liability of the funder.

This view seems to be in line with the consensual nature of arbitration, which stands to be its cornerstone. Further, the decision leaves its print on the sands of time as it allows the TPF in a market that is very relevant for funders due to its inner economics. On the one hand, arbitral tribunals generally offer efficient and effective dispute resolution procedures and commercial arbitrations often pertain to high-value claims, while, on the other, such disputes entail high costs, both in terms of arbitration tribunal fees and lawyers’ and experts’ fees and risks, which parties often are not willing to bear. These features often encourage parties to seek funding for arbitrations, and funders to look at them with interest.

On the question of application of group of companies doctrine, the court distinguished the present case from that from one where Group of Companies doctrine would have been applied. The jurisprudence on this doctrine shows that its application arises from the “touchstone of a direct relationship with the signatory party, direct commonality of the subject matter, and the agreement between the parties being a composite transaction.” Due to the distinguished factual matrix of the present case, the court did not go into the application of this doctrine.

Additionally, the latest position of the Supreme Court on the application of Group of Companies doctrine was to refer the same to a Constitution Bench in Cox and Kings v. SAP. Therefore, the unresolved nature of the applicability could have also contributed to the hesitance of the court to go into such question.

In the author’s opinion, it seems impermissible to invoke Chloro Controls to rope in the liability of funders in the absence of any direct relation to the subject matter of dispute. This can be further corroborated by the ICCA Report, which states that such an application of the law would not be tenable given the “typical one-off and arm’s length commercial relationship and the lack of corporate links between a third-party funder and a funded party, [and the absence of] any involvement in the performance of the underlying contract or its termination.”

However, the decision suffers from the anomaly that it stays silent on the use of TPF, where a non-impecunious party undertakes such funding only to transfer or share the risks involved in the dispute, or to utilize and allocate its funds into other profitable sources. This assumes significance due to the emergence of TPF in the corporate world, where even the non-impecunious parties may benefit from this instrument, and are therefore willing to make such deals.

While this instrument has initially raised some concerns, the legislators, courts, and commentators have now recognized that TPF could play a fundamental role in ensuring and enhancing access to justice, at least for parties that lack the resources to pay for the legal costs. This further strengthens the position as taken by the court that TPF is a tool that is utilized not only to ensure the resolution of disputes but also to increase access to justice, which has been on a constant decline due to the pandemic.

There have been a series of legislative changes globally, such as the changes brought in Hong Kong and Singapore, allowing TPF in arbitration and non-application of champerty & maintenance to TPF in arbitration. The purpose of these changes was to allow these markets to stay competitive and to provide a clear legal framework. Therefore, it becomes even more necessary for the Indian legal landscape to evolve quickly and in a favourable manner to support this innovation in dispute resolution as any further uncertainty would dissuade potential funders from providing financial assistance.


CONCLUSION

Thus, in the absence of any legislative framework, the decision of the Delhi High Court lays down the foundational stone for the jurisprudence on the application of TPF particularly in the context of arbitration proceedings.

Additionally, the decision could not have come at a time better than this in the context that an expert committee has been constituted 14 June 2023 to look into the need for reforms in the A&C Act. Thus, the decision sets the stage and holds significant opportunities that must be unlocked by the committee to investigate the aspect of TPF and provide a legal framework for regulating TPF in arbitration proceedings. This must be done in such a way that access to justice and effective enforcement, on the one hand, and freedom to conduct business, on the other, would not be hampered.


Sahsransh Pandey is a law student at Gujarat National Law University at the time of publication of this article, you can reach out to him here.

Urmi Shah is a second- year law student at Gujarat National Law University at the time of publication of this article.



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