Third Party Funding In Arbitration In India

Authors: Sakshi Srivastava*

Third Party Funding In India

Third Party funding (hereinafter referred to as TPF) is essentially a new package for an old gift, i.e., Maintenance and Champerty. Champerty has been a conventional practice followed in Indian litigation wherein a third-party, who is not a beneficiary to the dispute otherwise, makes a calculated investment in the legal proceedings, on the condition that he gets a share from the funded party’s future proceeds from said dispute resolution. This includes international arbitrations, commercial contracts, tortious claims, class action suits, etc.

History and Current Legal Status of TPF in India

Historically, they have been illegal under English law, as they were considered opposed to public policy. Ironically, they were never explicitly prohibited in India, unlike the English common law. The Privy Council[1] had allowed maintenance and champerty agreements in India except in the instances wherein an advocate[2] is the third-party funding the litigant and it was secured that English law of maintenance and champerty was inapplicable in India.[3] The Hon’ble Supreme Court of India has on several occasions stated that the rigid English rules of champerty and maintenance do not apply in India barring instances of advocate involvement, when it is not a bona fide purpose, extortionate, unconscionable & unfair agreements, gambling in litigation, etc. In a recent Supreme Court judgment, it was held that held that third-party funding in litigation is legal in India provided that the funder is a non-lawyer which is a welcome development.[4]

While, the Arbitration and Conciliation Act, 1996[5] per se does not explicitly discuss or mention TPF. However, recent amendments to the Act have introduced measures for the speedy disposal of matters. These include fast-track arbitration, strict compliance of deadlines and shorter duration for passing awards. In fact, TPF is statutorily recognised for civil suits under some state amendments of Order XXV Rules 1 and 3 of Code of Civil Procedure, 1908 (e.g., Maharashtra, Gujarat, Madhya Pradesh, and Uttar Pradesh). These provisions recognises the right of a plaintiff to transfer right in suit property to a financier in civil suits, in the aforementioned states.

Business and Legal Perspective

From a business perspective, TPF is deemed to be a lucrative investment when investing with a plaintiff/appellant/petitioner, considering the return on investment and the time-period. It is pertinent to note that there are also instances where-in parties were funded not with a view to make profits but to support the cause at hand. This motive and act of the third-party could be distinguished from that of a TPF, as a donation since there was no expectation of any proceeds or returns.

From a legal perspective, it is encouraged since it provides both the parties on the same legal and financial footing (with respect to the dispute resolution), thereby, affording equal access to justice. This can be deduced from various Supreme Court judgments over the decades. The Supreme Court has been liberally interpreting the Constitution and applicable laws, to ensure that parties and citizens at large, get access to legal aid and justice.[6] This additional support from funders encourages the otherwise disgruntled and dejected parties to approach a judicial forum for justice. However, there are valid concerns regarding the funders’ intervention in the legal proceedings, conflict of interest, arbitrator bias, non-disclosure of funding agreement, increase in frivolous & vexatious claims, impact on attorney-client privilege etc., cause for supporting the antiquated English rules prohibiting champerty and maintenance. These points of contention need to be examined in detail for a clearer understanding of the TPF, especially in India.

Points of Contention

An interesting point of contention is the difference of litigant status in courts vis-à-vis arbitration. In the former, there is a constitutional right to access to justice, whereas in the latter, the party effectively loses this right if it is unable to support its cause and the costs of arbitration. Since arbitration in India is only for private claims with no Government role, the parties are allowed to introduce TPF, and a financially-challenged litigant would have the same level-playing field as that of a financially stronger litigant. TPF is relevant in instances where a common man is up against a corporate entity or a rich entity and this could provide the former with access to better legal representation thereby, giving him a better chance of winning the claim. TPF could revolutionise the right to access to justice and bring forth the much needed legal aid in private claims.

With parties resorting to arbitration over traditional litigation, TPF regulation has become a subject of renewed interest. The recent past has witnessed increased resort to domestic and international arbitration by individuals/entities in India. The absence of a legal framework, either guidelines or rules, opens up a plethora of ancillary issues associated with TPF in arbitration. Furthermore, this unlegislated legal area would push the strained arbitrating parties to the Courts thereby, defeating the primary purpose of arbitration. The recent High Level Committee Report to review the Institutionalisation of Arbitration Mechanism in India, while making a passing reference to TPF, has also made an observation that the implementation of similar mechanism in India would give a boost to arbitration in India.[7]

Funder’s Control in TPF

The extent of control that can be exercised by the funder needs to be demarcated by a code of conduct. The funder can use his leverage of withdrawing financial support to dilute the litigant’s autonomy, breach confidentiality of the proceedings[8] and to discourage settlement of claims, etc. The argument of “party autonomy” should not be considered for the nascent stage of TPF in arbitration in India because seasoned funders might mislead litigants into unconscionable agreements. Hence, providing rules clarifying the boundaries of the funder’s role would be beneficial.

Disclosure of Funder and TPF agreement must be a pre-requisite.

Disclosure of the involvement of a third-party funder is necessary to ensure that there is no pre-existing relationship with a member of the Arbitral Tribunal and, further, to eliminate any conflict of interest with any of the involved parties to the arbitration and for security of costs. Section 12 of Arbitration and Conciliation Act, 1996 clearly casts a duty upon the arbitrator to disclose (in writing) any fact that may put a question mark on his independence or impartiality. Additionally, the fifth schedule of Arbitration Act, 1996 considers an Arbitrator’s indirect interest. Hence, it is necessary for disclosure of the funder and the relevant part of the agreement. This disclosure would ensure independence and impartiality of an arbitrator. In the case of a conflict of interest, it may lead to the setting aside of the award by approaching the courts which defeats the goal of arbitration. The extent of the TPF agreement to be disclosed can be decided by the parties involved, while safeguarding their confidentiality and employed legal strategies from being disclosed to the opposite parties.

Conclusion

In conclusion, TPF as a mechanism in the post covid-19 world could aid small and financially-distressed companies and litigants in reallocating litigation expenses to save their business from loss-making or bankruptcy. It also provides litigants equal access to justice while being a lucrative investment for funders. Hence, TPF is a welcome change in arbitration to correct the skewed positions of parties’ financial affordability. Inherently, India is in a better position vis-à-vis other countries, considering there was never a bar on maintenance and champertous agreements. Reforms including amending the existing legislations to reflect contemporary international standards, providing a comprehensive legal structure for alternative dispute resolution, provisions for transparent TPF agreements, speedy and efficient disposal of matters, and effective compliance of the awards and enforcing contracts, can ensure India becomes an arbitration hub for Asian and probably, international market.[9]

* Sakshi is an LL.M. candidate (’22) at Columbia Law School. She is also a student editor at ARIA and served as Co-Chair of Columbia Arbitration Day for the Columbia International Arbitration Association. Before her LL.M., Sakshi was an independent litigator in India for 8 years.

[1] Ram Coomar Condoo v. Chunder Canto Mukherjee (1876) L.R. 4 I.A. 23.

[2] B. Sunitha v. State of Telangana 2018 (1) SCC 638

[3] Raj Rai Bhagawat Dayal Singh v. Debi Dayal Sahoo 1908 (10) BOMLR 230

[4] Bar Council of India v. A.K. Balaji, (2018) 5 S.C.C. 379 (India), ¶ 35; Re: Mr ‘G’ A Senior Advocate v. Unknown, (1955) 1 S.C.R. 490 (India), ¶11; M.P. Jain, The Law of Contract Before its Codification, 14 J. INDIAN L. INST. (SPECIAL ISSUE) 178, 187-98 (1972).

[5] The Arbitration and Conciliation Act, 1996 – https://www.indiacode.nic.in/handle/123456789/1978?sam_handle=123456789/1362

[6]  M. H. Hoskot v. State of Mahrashtra 1978 (3) SCC 544; Hussainara Khatoon v. Home Secretary, State of Bihar 1980 (1) SCC 98; Mohd. Hussain v. The State (Govt. of NCT) Delhi AIR 2012 SC 750

[7] High Level Committee to review the Institutionalisation of Arbitration Mechanism in India (2017) -https://legalaffairs.gov.in/sites/default/files/Report-HLC.pdf

[8] Section 43A of The Arbitration and Conciliation (Amendment) Act obliges the parties and the Tribunal to maintain confidentiality of all arbitration proceedings.

[9] Pavni Tuli, Third party funding in arbitration in India: setting the law straight, Int’l Bar Assoc. (Jun. 3, 2021), https://www.ibanet.org/thirdpartyfunding-arb-India.