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Liability of Third-Party Litigation Funder for Cost of Arbitration in India

Article by Kumar Shashwat Singh Sawno and Ankur Mishra

Beyond contractual enablement, the legal validity of third-party litigation funding (“TPLF”) in India is an open-ended question. While the courts recognize the increased access to justice offered by TPLF, there is an aversion to TPLF based on the understanding of common law principles of maintenance and champerty. This is despite maintenance and champerty not being part of Indian law.[1] In other common law jurisdictions, the conflict between maintenance and champerty vis-à-vis TPLF has been resolved.[2] The Hon’ble Supreme Court in Bar Council of India v. A.K. Balaji[3]  has noted that there is no bar for any third party to fund the litigation process, however, the advocates could not fund the litigation or have any interest attached to the matter on behalf of the Client. This recognition is in fact a recognition of the contractual structure that underlies the TPLF and not the substantive framework of TPLF itself.

In this backdrop, the Hon’ble Delhi High Court in Tomorrow Sales Agency Private Limited v. SBS Holdings, INC[4] (“Tomorrow Sales Agency”) ruled that no interim relief can be granted for payment of cost awarded by arbitral award against the litigation funder who was not impleaded and against whom no order for payment has been made by the arbitral award. In United Kingdom, UK Supreme Court has in R (on the application of PACCAR Inc and Others) v. Competition Appeal Tribunal and Others [5]  (“R v. Competition Appeal Tribunal”) ruled that a funding arrangement wherein the funder’s remuneration was in the form of a share in the damages recovered through the claim were unenforceable under Section 58AA of the Courts and Legal Services Act, 1990.

This Article analyzes the decision of Delhi High Court and UK Supreme Court in detail as far as it impacts the framework of law governing TLPF in India and abroad.

Analysis of the Judgment

In the Tomorrow Sales Agency, the arbitral dispute was raised by the Claimant with the financial support of the Appellant against the Respondent before the arbitral tribunal constituted under the aegis of SIAC. Admittedly, the arbitral dispute did not implead the Appellant as a party to the Dispute.

The Appellant’s role was limited to providing financial assistance to the Claimant in terms of the Bespoke Financing Agreement. The Court in Tomorrow Sales Agency interpreted and enforced the Bespoke Financing Agreement as any other commercial contract. Whereas in R v. Competition Appeal Tribunal, the conclusion of non-enforceability of funding arrangement was drawn based on interpretation of funding arrangement as “Damages based Agreement” under Section 58AA of the Courts and Legal Services Act, 1990.

Litigation Funder as Party: Identification as beneficiary

The first approach under which the Delhi High Court looked at the liability of the Litigation funder was through impleadment as non-signatory to the award. This was on the basis that Litigation funder, as was argued, was the real beneficiary to the claims raised by the Claimant in arbitration. Under Code of Civil Procedure, 1908 (“CPC”), Order I Rule 10 provides that the court may add any person as party at any stage of the proceedings, if the person whose presence before the court is necessary in order to enable the court effectively and completely adjudicate upon and settle all the questions involved in the suit. The Delhi High Court observed that the question in issue is not whether, in a given circumstance, a non-signatory can be bound by the arbitration agreement, it is whether a person who is not a party to the arbitral proceedings or the award, rendered in respect of disputes inter-se the parties to the arbitration, can be forced to pay the amount awarded against a party to the arbitration.

The Delhi High Court correctly limited the impleadment of non-signatory to the confines of compelling arbitration and not to enforcing of arbitral award. A key point on this count was that the SBS had not during the arbitration impleaded the Appellant as a party to the dispute. This was despite adequate disclosure as to the existence of third-party funding being made before the Hon’ble Arbitral Tribunal. In Kasturi v. Uyyamperumal,[6] the Supreme Court has ruled that there are two tests that must be satisfied for determining the questions of who is a necessary party: firstly, there must be a right to some relief against such party in respect of the controversies involved in the proceedings and, secondly, no effective decree can be passed in the absence of such party. However, merely being affected by the judgement is not a sufficient ground for being impleaded as party to the litigation.[7] The party must have a defined, subsisting, direct and substantive interests in the litigation which is cognizable in law as either legal or equitable.[8] In this backdrop, the Delhi High Court ruled that a third party may be bound by the arbitral award only if it has been compelled to arbitrate and is a party to the arbitration proceedings. The Delhi High Court added that even a signatory to an arbitration agreement against whom an arbitration agreement is not invoked and is not joined as a party to the arbitral proceedings, would not be bound by the arbitral award rendered pursuant to the said proceedings. In light of the same, the Delhi High Court refuted enforcement of arbitral award against a non-signatory who was not a party to the arbitral proceedings.

Litigation Funder as outsider to Dispute: Non-imposition of cost

The Delhi High Court also ruled that the Appellant had no obligations to pay any amount under the Arbitral award as the award of cost was made against the Claimant and not the Appellant. Given that the Appellant was not a party to the arbitration and that no award was made against him, the Hon’ble Delhi High Court ruled that the Appellant cannot be treated as a judgment-debtor under the Arbitral Award if it is enforced as a decree, as required under Section 46(1) of the Arbitration and Conciliation Act, 1996. As the Appellant cannot be treated as a judgment-debtor, the Hon’ble Delhi High Court ruled that the application under Section 9 of the Act for securing the amount in dispute against the Appellant was also not maintainable. The Delhi High Court also rightly emphasized that SBS was seeking interim measures in aid of enforcement of the Arbitral Award and not costs against third parties in a suit. Thus, the powers of the court to award costs in a trial would have no relevance for determining whether the awarded amounts can be recovered from a person who is not a party to the arbitral proceedings or the arbitral award.

Imposition of Cost on third parties: Lack of Framework in India

Cost is defined as the “pecuniary allowance made to the successful party (recoverable from the losing party) for his expenses in prosecuting or defending a suit or a distinct proceeding within a suit.”[9]

The Delhi High Court referred to Rule 48.2 of the Civil Procedure Rules introduced by Civil Procedure Act, 1997 of United Kingdom (UK) which provided for the procedure for costs order in favor or against non-parties. Pertinently, Rule 46.2 of Section A of the Civil Procedure Rules, 1908 provided that where the Court makes a costs order against a person who is not a party to proceedings, that person must be added as a party to the proceedings for the purposes of cost only and that such person must be given a reasonable opportunity to attend a hearing at which the Court will consider the question of cost order. There is an element of natural justice since a person who is not a party to the dispute cannot be laden with the liability of cost awarded without being afforded an opportunity to present his case.

In Arkin v. Borchard Lines,[10] the UK Court of Appeals laid down the principle that the liability of the claimant’s funders to pay the costs of a successful defendant will be limited to the value of their funding. However, the rule is flexible in cases of unusual nature of the funding arrangements.[11] However, the recent judgment of R v. Competition Appeal Tribunal requires that Funding Arrangement with third party cannot be based on returns being calculated as a share of damages awarded against the claims made by the Party.

In India, Section 35 of the CPC provides for imposition of cost by the Court. Section 35 provides for General costs, Miscellaneous cost, Compensatory Cost and cost for causing delay.

However, in the present context, unlike UK the cost imposed does not follow the event especially in matters involving TPLF. The Hon’ble Delhi High Court ruled that the questions relating to whether the costs are required to be imposed; what is the quantum of costs; who are the parties that are required to bear the costs; and in what proportion, are matters that are required to be determined by the Trial Court. These questions cannot be determined without hearing the person affected by such determination. However, there are no rules applicable to proceedings for awarding costs against third parties. There are however state amendments to Order XXV Rule 1 and 3 in Maharashtra, Gujarat, Madhya Pradesh that recognize the right of the plaintiff to transfer right in suit property to a financier in civil suits. There is no procedure for impleading third parties for the limited purpose of determining the costs. Order XXA of (“CPC”) provides that cost shall be in accordance with the rules as the High Court may make in that behalf.

Conclusion

The ruling of the Delhi High Court in Tomorrow Sales Agency is progressive since it clarifies the role of third-party litigation funder vis-à-vis liability to make payment towards cost awarded by the arbitral tribunal. However, it must be noted that the role played by third party litigation funder is based on contractual arrangement and the same may be subject to interpretation by the Courts. The importance of contractual basis of funding arrangement and their interaction with other statutory law was shown in R v. Competition Appeal Tribunal.

The ruling in Tomorrow Sales Agency is crucial as it creates settled norms for participation of third-party litigation funder in the litigations funded by them. The ruling by referring to Order XXV of CPC also highlighted the lacuna in the existing law when it comes to addressing the specific challenges of TPLF. However, as shown by R v. Competition Appeal Tribunal, progressive TPLF framework depends on factors beyond recognition of funding arrangement and enforcement action would depend upon how laws are interpreted to define the scope of operation for TPLF.

[1] Ram Coomar Coondoo v. Chunder Canto Mukherjee, 1876 SCC OnLine PC 19. Re. Mr. ‘G’, A Senior Advocate, 1955 1 SCR 490. Valluri Ramanamma v. Marina Viranna (1931) 33 BOMLR 960, Re. Mr. ‘G’, A Senior Advocate, 1955 1 SCR 490.

[2] R. v. Secretary of State for Transport (UK), Cannonway Consultants Ltd v. Kenworth Engineering Ltd. (Hong Kong). Civil Law Act (1999) (amended 2017) (Sing.); Civil Law (Third-Party Funding) Regulations (2017) (Sing.)

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

[4] Tomorrow Sales Agency Private Limited v. SBS Holdings, INC. And Ors, FAO(OS)(COMM) No. 59 of 2023.

[5] R(on the application of PACCAR Inc and others) v. Competition Appeal Tribunal and Others, [2023] UKSC 28.

[6] Kasturi v. Uyyamperumal and Others, (2005) 6 SCC 733.

[7] Antony Devaraj v. Aralvaimozhi (Kurusadi) Devasahayam Mount Oor and Thuya Viagula, Annai Church rep by the Trustee, 2004 (2) C.T.C. 183.

[8] Mahadeva Rice & Oil Mills v. Chennimalai Gounder, AIR 1968 Mad. 287.

[9] Replevin, Black’s Law Dictionary (10th ed. 2014).

[10] Arkin v. Borchard Lines, [2005] EWCA Civ 655.

[11] Chapelgate Credit Opportunity Master Fund Ltd v Money [2020] EWCA Civ 246, [2020] 1 WLR 1751

 

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