STATUS QUO OF THIRD-PARTY FUNDING IN INDIA

Siddharth Chechani, Advocate, Supreme Court of India

 Introduction

International arbitration with its global and distinctly adaptive nature has continued to grow amongst major business transactions. Multinational companies are opting for International Commercial Arbitration considering its speedy disposal mechanism and its expertise to resolve the complex business matters in a time bound manner. It started in the early years of twenty first century from Australia, and subsequently this practice has been adopted in United Kingdom, and in United States of America (‘USA’) respectively.[1] 

With the growing international arbitration, it is continuously growing in prominence, and with the increase in costs, it has led to increase in demands of parties to fund their matter.[2]   Due to these reasons, institutions, law firms, individuals, companies and other entities started funding the arbitration proceedings of parties, to facilitate them for going into arbitration and in return they take some amount of money which might be on the basis of percentage of award or on fixed costs. This practice under international arbitration is called Third-Party Funding (‘TPF’). The global market of third-party funding in litigation and arbitration has increased to more than $10 billion.[3]

The main reason behind increase in demand is due to increasing access to justice through arbitration.[4] A company tries to maintain their cashflow in their regular course of business as arbitration involves huge amount of costs in its proceedings.[5] By the virtue of 2008 financial depression, parties facing economic crunch were forced to go for funding their business to maintain the concerned cashflow.[6] It also reduces the risk with regard to the claims, as in the new setup, it is shared between the funder and the party to arbitration.[7]

The first question to be answered is whether there is any need of regulating the third-party funding, as the contract of funding will be between funder and parties and there is no need of any interference from arbitrators and the opposite party. But with this, there is another possibility of conflict of interest between third party and arbitrators. In case the party discloses to the third-party, the details of the funding, then it might influence the arbitrator to give the award based on the funding. Various arbitration institutes have included the clause of mandatory disclosure of third-party funder to arbitrator.[8] Third party funding may also restrict the parties to go for settlement as the huge amount of funds are involved. This paper will try to answer the issues related to the impact of TPF on independence of arbitrators.

Various countries & arbitral institutions have now incorporated regulations related to third party funding in their national legislations/rules. Singapore has allowed third party funding in the Civil Law Act & Civil Law (Third Party Funding) Regulation 2017.[9] Singapore International Arbitration Centre’s (‘SIAC’) Investment Arbitration Rules has also included third party funding in their rules. Hong Kong, China, European and Latin American countries has already adopted the rules related to Third Party Funding.[10] In India, there is no express law related to third party funding but no other law expressly prohibits it. This paper is restricted to analyse the legality and status of Third-Party Funding in India.

Issues & Practices Involved in Third Party Funding

A. Determining the Definition

With the establish jurisprudence of international arbitration, the definition of third-party funding is still under consideration. Even as per stakeholder, third-party funding cannot be defined considering the different nature of fundings.[11] In some cases, the funding is arranged through contingency fees arrangement, and in others it is based on incurring parties’ expenses to arbitrate. Even the funders nowadays have started providing funding in the form of after the event insurance, and it is being purchased when a party enter into the TPF Agreement.[12] As, the time progresses the nature of TPF is also becoming very complex, funders are trying to propose new mechanism which often contradicts the released guidelines by the institution or International Bar Association (‘IBA’).[13] For example, funders are incorporating “special purpose vehicle” (SPVs) to facilitate funding arrangement.[14] This practise raises the fundamental question with respect to TPF’s identity. SPVs are transferable entities due to which third party funder can repeatedly change the funder which cannot be identified[15] due to which even the conflict of interest with the arbitrator cannot be resolved.

Special purpose vehicle created can easily defy the narrow definition provided by IBA. This may also lead to violation of IBA Conflict of Interest guidelines, which mandates the disclosure and disqualification of arbitrator in case the funder is funding for multiple times in different arbitration.[16] There is a requirement of a broad definition of TPF where all kind of funding can be included.

B. Jurisdictional Approach

When it comes to domestic contexts to determine the legality of third-party arbitration, the question arises is regarding the extent it can be regulated. Common law countries still recognise champerty and maintenance is a civil wrong.[17] It is very necessary to determine the legality of third-party funding in domestic jurisdiction, even if the nature of arbitration is of international commercial arbitration.

Firstly, if a funder or parties want to file a case for interim relief in a court, the court may deny any relief to the party as the TPF is illegal in the jurisdiction. If it is a common law country, the claimant may be sued by the respondents for the tort of champerty or maintenance. Secondly, while enforcing the award in any jurisdiction the respondent may challenge the arbitration proceedings on the grounds of public policy for setting aside the award.[18]

Singapore and Hong Kong is the only country who tried to regulate third party funding by passing a law. Singapore’s Civil Law Amendment Bill defines third party funding as, an entity that,

carries on the principal business, in Singapore or elsewhere, of the funding of the costs of dispute resolution proceedings to which the Third Party Funder is not a party” and “has a paid-up share capital of not less than S$ 5 million or the equivalent amount in foreign currency or not less than S$ 5 million or the equivalent amount in foreign currency in managed assets.”[19]

Previously in Hong Kong TPF was prohibited on ground of champerty and maintenance.[20] But recently the government has bought the legislative reforms through an ordinance where they also defined the third-party funding separately under Section 98G of the Ordinance.[21] However, it expressly prohibits legal counsel who is representing the case to be the funder in that particular arbitration.

Other jurisdictions like England, France, USA have accepted third party funding through judicial precedents. England has been very reluctant to accept the third-party funding because of its common law background.[22] Since 1986, doctrines of champerty and maintenance were prevalent and legal in UK. Over the years, champerty and maintenance were negated by the English Courts.[23] In Ram Coondoo v. Chunder Mookerjee, the court held that third party agreements are not per se opposed to public policy.[24] In 1967, UK officially abolished these prohibitions via Criminal Law Act, 1967.[25] Even the court rejected the plea which was challenging the validity of third-party arbitration.[26] House of Lords in case of Giles v. Thompson,[27] held that although we have historical root to champerty and maintenance but it would be very inappropriate if we could not extend it to international commercial arbitration. Even if England does not have any law related to third party funding but it cannot be stated that it is illegal by any means. In the landmark judgment of Essar Oilfields Services Ltd. v. Norscot Rig Management Pvt. Ltd.,[28] the court held that, ‘costs of funding a legal proceeding may be recoverable in arbitral award.’

India’s Position

India also follows the common law principles adopted from United Kingdom. But in India, the doctrines of champerty and maintenance have not adopted since its inception. This consent to third-party funding can be adduced from the Civil Procedure Code 1908. The concept of third party funding is statutorily recognized in civil suits under the Civil Code of Procedure in states such as Maharashtra, Gujarat, Madhya Pradesh and Uttar Pradesh.

The Arbitration and Conciliation Act, 1996 makes no mention of third party funding. The presence of a third party funding clauses in specific state amended Civil Procedure Code cannot adduce the legality of a similar clause in arbitration. Therefore, any possible third party funding agreement would depend on it being a valid contract under the Indian Contract Act, 1872. This answer has been addressed by the Supreme Court in the matter of In re: G A Senior Advocate. The Supreme Court had ruled that a champerty contract in which the returns are contingent on the success of the case is not per se illegal, except in cases where an advocate is an party. There can be further challenges in Indian jurisprudence when a third party has funded the claims while executing the arbitration award. As of date, there are no cases which have discussed the validity of an award which has been obtained by third party funding. 

The Privy Council Judgment,[29] holds valid for Indian jurisdiction as well where court held that champertous agreements are not per se void, they can be made applicable when “inequitable, extortionate and unconscionable and not made with bona fide objects of assisting a claim.” This case is the first in the series where the court partially allowed the champerty but restricted it in the above mentioned criteria. In another Privy Council case of 1893, Kunwar Ram Lal v. Nil Kanth the court held that any agreement which can be shared via subjects of litigation can be settled via supplying funds are not to be held as violation of public policy.[30]   

Conclusion

The increasing practice of including arbitration clause in an agreement has led to compulsory invocation of arbitration clause by the companies who are not financially well off. International Arbitration is a very expensive affair wherein each step incurs cost to parties. Even though there are no particular laws in India which forbid or allow third party funding agreement, there are CPC provisions, which allow for third party funding in litigation. Therefore, an award which has been obtained due to third party funding is not in contradiction with the public policy of India. 

References:

Reports:

Articles:


[1] N. Casado Filho, Arbitragem e Acesso á Justiça: O Novo Paradigma do Third Party Funding (Saraiva 2017) pp. 1-272.

[2] J. Von Goeler, Third-Party Funding in International Arbitration and its Impact on Procedure, International Arbitration Law Library, Volume 35 (Kluwer Law International 2016) pp. 1-2.

[3] Burford Capital’s Quarterly Summer 2017 Overview, available at <http://www.burfordcapital.com/wp content/uploads/2017/07/Burford-Quarterly-Summer-2017.pdf> (last accessed 28 September 2018).

[4] Report of the ICCA-Queen Mary Task Force On Third-Party Funding In International Arbitration: https://www.arbitrationicca.org/media/10/40280243154551/icca_reports_4_tpf_final_for_print_5_april.pdf 

[5] L. BENCH NIEUWVELD and V. SHANNON SAHANI, Third-Party Funding in International Arbitration, 2nd edn. (Kluwer 2017), p. 11

[6] Id.

[7] Tejas Karia, Workshop on International Commercial Arbitration, Institute of Law, Nirma University (2018).

[8] Varun Mansinghka, ‘Third-Party Funding in International Commercial Arbitration and its Impact on Independence of Arbitrators: An Indian Perspective’ (2017) 13 Asian International Arbitration Journal, Issue 1, pp. 97–112

[9] C. BAO, “Third Party Funding in Singapore and Hong Kong: The Next Chapter”, 34 Journal of International Arbitration (2017, Issue 3) pp. 387-400

[10] Id.

[11] M. SCHERER, A. GOLDSMITH and C. FLÉCHET, “Third-Party Funding in International Arbitration in Europe: Part 1 – Funders’ Perspectives”, 2 RDAI/IBLJ (2012) pp. 209-210, available at <https://www.transnational-dispute-management.com/ news/20120312.pdf>

[12] A. J. SEBOK, “The Inauthentic Claim”, 64 Vand. L. Rev. (2011) p. 61 at pp. 63-67.

[13] IBA Guidelines: 3.1.3

[14] C. VELJANOVSKI, “Third-Party Litigation Funding in Europe”, 8 J.L. Econ. & Pol’y (Spring 2012, No. 3) p. 405 at p. 430; Queen Marry Report page 47.

[15] IBA Guideline 3.1.3

[16] “Standard 6” of the IBA Guidelines on Conflicts of Interest in International Arbitration, and Explanation to Standard 6 (b),

[17] Kabir Singh, Sam Luttrell and Elan Krishna, Third-party funding and arbitration lawmaking: the race for regulation in the Asia-Pacific, Kluwer Arbitration Blog (14 July 2016), <http://kluwerarbitrationblog.com/2016/07/14/third-party-funding-and-arbitration-lawmaking-

the-race-…>.

[18] Varun

[19] Section 2 of the Civil Law (Amendment) Act 2017 to amend the Civil Law Act (Chapter 43 of the 1999 Revised Edition) (Jan. 10, 2017)

[20] Unruh v. Seeberger (2007) 10 HKCFAR 31, at para. 123

[21] para. 1.6 of “The Law Reform Commission of Hong Kong Final Report on Third Party Funding for Arbitration” (October 2016).

[22] Marie Stoyanov and Olga Owczarek, ‘Third-Party Funding in International Arbitration: Is it Time for Some Soft Rules?’, BCDR International Arbitration Review, (© Kluwer Law International; Kluwer Law International 2015, Volume 2 Issue 1) pp. 171 – 200.

[23] British Cash & Parcel Conveyers Ltd. v. Lamson Store Service Co. Ltd., [1908] 1 KB 1006, 1014.

[24] [1876] 2 App Cas 186.

[25] Law Act (1967), §§ 13–14 & Sch. 4.

[26] Mansell v Robinson [2007] EWHC 101.

[27] [1994] 1 AC 142.

[28] [2016] EWHC (Comm) 2361.

[29] Ram Coomar Coondoo v. Chunder Canto Mukherjee, 1876 SCC OnLine PC 19.

[30] 1893 SCC Online PC 7.

[31] AIR 1940 PC 19 at 23.

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