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Third-Party Funding of Arbitrations in India – Risks & Liabilities

Article by Prateek Dhir and Mohit Kandpal

Introduction

The recent judgement pronounced by the Delhi High Court in the case of Tomorrow Sales Agency Private Limited v. SBS Holdings, Inc. and Ors.[1], is being hailed as a favorable step towards third party funding of arbitration in India. This article discusses the concept of third-party funding for arbitration proceedings and why it is considered as a progressive measure for the arbitration regime.

Third party funding is a practice where a party unrelated to the dispute would extend financial support to one of the disputing parties (generally, the claimants). This support lent by the funding party is usually motivated by monetary gains or sometimes even by the cause for which the parties to the dispute stand. The monetary support provided by the funding parties is usually an investment that they make and as returns of their investment, they would receive a share in the award, if favorable to the party they had funded. The third-party funders are usually banks, hedge funds, insurance companies or sometimes can even be an individual.

In India, there is a lack of legislation to govern or regulate the practice of third-party funding and thus, the practice is flourishing unregulated and is usually governed by the terms of the contract as agreed between the funding party & the party receiving the funds. Considering a lack of legislation on the issue, the Supreme Court of India has also noted that there appears to be no restriction on third parties funding the litigation and getting repaid after the outcome of the litigation. Third Party Litigation Funding/Legal Financing agreements are not prohibited. However, the lawyers are prohibited from funding the litigation on their client’s behalf.[2]

When we talk about profit sharing in a favourable arbitration award, a pertinent question comes to mind of what happens in the cases of unfavourable arbitration awards. The way the funding party derives a benefit from favourable awards, should they also be liable to bear the costs of unfavourable awards? The Hon’ble Delhi High Court has deliberated into this question at some length in the case of Tomorrow Sales (supra).

Brief facts

Tomorrow Sales Agency Private Limited (hereinafter referred as “TSA“) registered as a non-banking financial company, entered into a Bespoke funding agreement (hereinafter referred as “BFA’) dated 20.12.2018 with the claimants, to provide financial funding for an arbitration administered by the Singapore International Arbitration Centre (“SIAC“). The claimants were unsuccessful in its claims during the arbitration and the award dated 22.12.2022 (“Arbitral Award”) was passed against the Claimants. Subsequently, the respondent in the arbitration, SBS Holdings Inc. (hereafter “SBS“) filed a petition under Section 9 of the Arbitration and Conciliation Act, 1996 (“A&C Act“), being OMP(I)(COMM) 71/2023, before the Delhi High Court, seeking interim measures to secure the amount awarded to SBS in terms of the award. The Single Judge of the Hon’ble Delhi High Court issued the interim order dated 07.03.2023 (“impugned order”) wherein TSA was directed to disclose on affidavit their fixed assets and bank accounts along with the credit balance held by them in India or any other jurisdiction. Further, TSA was restrained from creating any third-party interest/right/title in respect of any of their unencumbered immovable assets to the extent of the sum awarded in favour of SBS in terms of the Arbitral Award. The instant order was challenged by the third-party funder (TSA) under Section 37 of the Act before the Division Bench of the Hon’ble Delhi High Court vide intra-court appeal being FAO(OS)(COMM)59/2023. The Hon’ble Division Bench vide its judgment dated 29.05.2023 allowed the appeal and set aside the impugned order to the extent, requiring TSA to disclose its assets, furnish security for the amount awarded in terms of the Arbitral Award and restraining it from alienating or encumbering its assets.

Analysis by the Division Bench

  • Impleading non-signatories to be bound by the arbitration –

The Court observed that Consent is the corner stone of arbitration. Consent of the parties to be bound by the award of the arbitral tribunal and an agreement to that effect is the basis of enforcing any award. Absent any agreement to the said effect, any award against a party would be without jurisdiction. Impleading non-signatories into the arbitration is an exception to the said concept of express consent, wherein consent is implied, and even non-signatories are bound by the arbitration agreement by imputing their consent to the said agreement.[3].

However, the Court observed that, it was not the case where SBS sought to bind the third party i.e., TSA to the arbitration clause and compel it to arbitrate. Instead, SBS sought to enforce the award against TSA in a case where TSA was not even a party to those arbitral proceedings. The Court was of the view 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 Court remarked 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.

  • Parties were to abide by the SIAC Rules –

The Court noted that the parties had agreed to be bound by the procedure under the aegis of SIAC. The SIAC rules under Rules 7.1 & 7.8 provided for joinder of non-parties to an arbitration provided the conditions mentioned therein were satisfied. The Court observed that since the rules which bound the parties did not allow for joining of TSA as a party to the arbitration, SBS could not now seek to compel TSA to be bound by it.

The Hon’ble Court further referred to, the SIAC Practice Note dated 31.03.2017 issued by SIAC regarding ‘Disclosure’ and ‘Costs’ and noted that the funding arrangements are required to be disclosed to the Arbitral Tribunal and that the Arbitral Tribunal had the power under SIAC rules to order disclosure regarding existence of any funding relationship. Further, the Court duly noted that the practice note enabled the Arbitral Tribunal to consider the funding arrangement while awarding costs. The Hon’ble Court duly observed that although the Arbitral Tribunal may allocate costs amongst the parties, it could not award costs against a third-party funder.

  • Section 9 relief against non-party to the arbitration –

Another pertinent observation of the court was that under the arbitral award, there was no obligation of TSA to pay any amount. The Court observed that Section 36(1) of the A&C Act provides that the arbitral award shall be enforced in accordance with the provisions of the Code of Civil Procedure, 1908 in the same manner as if it was a decree of the court. It is trite law that a decree is to be executed in its term and it is not open for the executing court to go behind the decree. The Court was of the view that since this award was not against TSA, it cannot be considered as a judgement-debtor under the arbitral award. Further it also noted that, the relief under section 9 of the Arbitration Act is available only in aid of the enforcement of arbitral award and since the instant award cannot be executed against TSA, application under Section 9 of the Arbitration & Conciliation Act, for securing the amount in dispute against TSA, was not maintainable.

  • Terms of the agreement entered between TSA & the Claimant –

TSA was bound only by the BFA entered into between TSA & the claimants to provide financial assistance to them. Article 1 of the BFA sets out the purpose & scope of funding which is to provide funding to the lawyers on behalf of the Claimants for pursuing the claims. Further, it was on a non-recourse basis which meant that if the claims are not successful then TSA could not recover the amount it has financed.  The Hon’ble Court noted that Article 7 of the BFA further provided that the BFA would cease to be in effect if the Claimants could not prevail in the arbitration proceedings. The Court observed that, none of the clauses of the BFA put any obligation upon TSA to fund an adverse award.

  • Disparate view of Division Bench on the reliance placed by the Ld. Single Judge–

The learned Single Judge had referred to the decisions in the cases of Arkin Borchard Line Ltd. & Ors.[4], & Excalibur Ventures LLC v. Texas Keystone Inc and Ors.[5], the said decisions were in exercise of powers conferred under Section 51(1) and (3) of the Supreme Court Act, 1981, which expressly empowered certain courts in the United Kingdom to determine by whom and to what extent the costs are to be paid. The Division Bench observed that the Supreme Court Act, 1981 is now called the Senior Courts Act, 1981 and Civil Procedure Rules (CPR) were enacted for exercise of the powers under Section 51 of the Senior Courts Act 1981. Further, it was observed that Rule 46.2 of the Civil Procedure Rules, 1998 provides for the procedure for costs orders in favour of or against non-parties. The said rule also provides that the third party is required to be afforded a reasonable opportunity to attend hearing at which the Court would consider the matter for the purpose of determination of the question of costs. The Hon’ble Division Bench further stated that there are no rules applicable to proceedings in this court for awarding costs against third parties. There is no procedure for impleading third parties for the limited purpose of determining the costs. The Ld. Division Bench duly observed that in circumstances as such, it was difficult to accept that the procedure contemplated under Civil Procedure Rules, 1998 in the United Kingdom, for the purpose of imposing costs on non-party(ies), is applicable to civil proceedings in India.

The Hon’ble Division Bench further observed that the reliance of the Learned Single Judge to the case of Gemini Bay Transcription Pvt Ltd vs Integrated Sales Service Ltd[6] was misplaced, as in the said case non-signatory who had sought to resist the enforcement of an arbitral award, was a party to the arbitral proceedings and the arbitral award in that case was directed against the said non-signatory. Thus, the said decision had no application in the present matter. After consideration to the aforesaid the Division Bench remarked that permitting enforcement of an arbitral award against a non-party which has not accepted any such risk, is neither desirable nor permissible and that it would be counterproductive to introduce an element of uncertainty by mulcting third party funders with a liability which they have not agreed to bear.

Conclusion

In the instant judgement, the court has emphasized the significance of third-party funding for the arbitration regime as the cost for pursuing claims in arbitration are significant. In such a situation, to have a level playing field for all parties and to ensure access to justice, it becomes essential to have an ecosystem that supports third-party funding of disputes. This ensures that financial inequality does not result in inequity or injustice to the claims of those who might lack the financial means to pursue them. It is imperative to mention here that the judgement is based upon the specific facts & circumstances of the instant case and does not settle the principles of law concerning liability of third-party funders. The Hon’ble Court has also acknowledged that there needs to be certainty concerning the liability of third-party funders in the arbitration regime. Therefore, a legislation that deals with the rights & liabilities of the third-party funders and also the other concerns such as the extent of involvement, influence that the party exerts over the process of dispute resolution, would be a welcome move on the part of the legislature.

[1] 2023 SCC OnLine Del 3191
[2] Bar Council of India v. A.K. Balaji, (2018) 5 SCC 379
[3] Chloro Controls (India) (P) Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641
[4] [2005] WLR 3055
[5] [2015] EWHC 566 (Comm)
[6] (2022) 1 SCC 753
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