Third-party arbitration funding – Comparative analysis and Indian Perspective

Author: Shubhangi Nangunoori

OVERVIEW

Arbitration in India has evolved a great deal ever since the inception of the Arbitration and Conciliation Act in 1996. There are multiple developments that are taking place in the world of Arbitration and one such advancement is the acceptance of Third-party funding by numerous legislations, which has managed to take the world by a blizzard. This concept refers to the act where the funder, a party who is not interested in the disputed matter makes an investment in the arbitration, and later reaps the benefit of such investment made. In contrast to Third-party funding being a stepping stone in providing justice to parties in need, there were also multiple questions raised regarding the breach of confidentiality of the proceedings, dilution of the power exercised by the financed party due to the funder, creation of trouble by encouraging vexatious claims, etc. Third-party arbitration funding is like a double-edged sword that has to be utilized with utmost caution as the financer may be tempted to tamper with the process as he is interested in the outcome, but is also often exaggerated thus making it a coin with two sides. Third-party funding is rather a new concept and was adapted by many legislations only recently due to the illegality of the doctrines of maintenance and champerty in common-law jurisdictions in the past. However, despite the worldwide acceptance of Third-party arbitration funding in legislations like Singapore, Hong Kong, etc, India still remains silent in this aspect. Through this research, the current situation prevailing in India will be examined in order to determine whether India is ready for Third-party funding and if there exist some grey areas that need to be given attention. 

INTRODUCTION

Since the 1996 enactment of the Arbitration and Conciliation Act, arbitration in India has progressed significantly. There are several advancements in the area of arbitration, one of which is the recognition of third-party funding by numerous legislations, which has managed to engulf the entire world in a blizzard. This notion relates to the conduct of a funder, who is a party uninterested in the dispute, investing in the arbitration and afterward reaping the benefits of that investment. It can be observed commonly in commercial and investor-state arbitrations. The common models observed in Third-party funding[11] are as follows:

• Where a trust is created and the proceeds of the dispute go to the trust containing the funder as a beneficiary
• Where the claimant assigns the profits of the claim(s) to the third-party funder; or
• Where the claim(s) are assigned to the funder.

International arbitration, which has become the go-to method for resolving cross-border issues, cannot be ignored. Despite the fact that it is the favored method of conflict settlement, the process’ high expenses are unavoidable. The Apex Court itself identified these outrageous costs as one of the major reasons responsible for the hindrance to the growth of arbitration[12]. Third-party funding in Arbitration faced growth due to the possibility of being able to provide everyone an equal right to access justice coupled with the unhidden fact that arbitration is a costly affair and that the costs can reach the sky.

Third-party funding is rather a new concept and was adapted by many legislations only recently due to the illegality of the doctrines of maintenance and champerty in common-law jurisdictions in the past[13]. Maintenance referred to the involvement of a third party that was unrelated to the proceedings and someone who did not have a locus. Champerty referred to an agreement where the proceeds were shared between the party involved with the third party who aided in the claim’s enforceability. The evolving times call for change and this can be observed in the way the doctrines of maintenance and champerty were slacked with[14]. However, despite the worldwide acceptance of Third-party arbitration funding in legislations like Singapore, Hong Kong, etc, India still remains silent on this aspect. There is no express law against Third-party arbitration funding unless it is done by lawyers as can be understood on a conjoint reading of the Bar Council of India rules. The objective of this research is to bring to light the readiness of India to welcome Third-party arbitration funding with wide arms along with examining it through a judicial lens.

CURRENT SCENARIO THROUGH A JUDICIAL LENS

Common law traditions that are being followed in India have been acquired from the UK but still the doctrines of “maintenance” and “champerty” have not been followed strictly here. In 1939, a stance was taken in Ram Surap v. Court of Wards[15] where it was clarified that as long as the funding for the process was for a portion of the proceeds, it was not illegal. The only condition that needs to be satisfied for a champertous agreement to be void is the ability to prove that it is contrary to public policy, “justice, equity and good conscience” which can be made for improper objects. This stance was also confirmed in Raja Rai Bhagwat Dayal Singh v. Debi Dayal Sahu[16].

The extent of acceptability of TPF in India has been clarified in a plethora of cases one of them being Bar Council of India v. A.K Balaji[17]. It was clearly pronounced that “there appears to be no restriction on third parties (non-lawyers) funding the litigation and getting repaid after the outcome of the litigation”[18]. This was again confirmed by the Court on various occasions[19]. There also exists a provision in the “Civil Procedure Code, 1908” wherein it is permitted to seek security from third parties, which again points towards the acceptance of TPF. Further, the “IBA Guideline” also mentions the possibility of a third party being concerned with any dispute and how it is mandatory for an arbitrator to make disclosures in case there exists any related party.

In India, the absence of contingency fees[20] makes it extremely difficult for the advocates to compete with foreign jurisdictions where they are permitted to do so. The BCI Rules do not permit such an arrangement[21] as this may hamper the professional services furthered by a lawyer. Despite the absence of an open provision for TPF, the amendments in the “Arbitration and Conciliation Act, 1999” and the “Specific Relief Act, 1963” which have ensured that the performance of a contract is mandatory, boost the confidence of the funders and make it prone to increased cases of funding. The statistics in India also point toward the hidden success of TPF in the field of arbitration. This can be said due to the FDI for the previous decade has been at around $456.79 billion[22], which is a huge indicator of the already existing opportunities and the willingness of foreign investors. This coupled with the increase in the number of cases makes it inevitable for TPF to succeed in the arbitration sector as almost every commercial contract has an arbitration clause[23]. Therefore, India shows a huge potential for TPF without the cases having to face any restrictions from the judiciary as well.  

DRAWBACKS OF TPF: SUFFICIENT FOR IT TO BACKFIRE?

The concept of TPF, though accepted explicitly by the law of the land, has two sides to it similar to the way of a coin. However, in order to assess the implementation of a concept, the drawbacks need to be examined intricately in order to ensure that the harm done is not outsized by the benefit caused to the public at large. TPF in a general sense deals with certain drawbacks such as party autonomy and the disclosure related to the independence of an arbitral tribunal.

While these are concerns regarding any arbitration, they become very specific when a third party is involved as it includes multiple variables in the equation. Considering the various milestones that need to be achieved with the concept of TPF in India, where there is no concrete legislation with regards to the same, the following are some parameters that need attention to detail.

DEFINITION  

It is proposed that TPF be allowed for all domestic and international arbitral procedures, as well as judicial procedures actions. Simultaneously, a set of qualifications for financiers, along with any minimum financial standards, must be established. At the outset of regulations, it’s ideal to limit TPF in India to specialist financing companies, that is, companies whose core activity is providing such funds and therefore are not tied to the group’s official adviser in any manner. Considering India’s clear restriction on attorneys entering into conditional fee arrangements[24], the researcher urge that India’s rules only enable participants to pursue funds straight without the participation of their legal counsel. 

DEGREE OF CONTROL

Participants should be entitled to determine the amount of engagement in the conflict they relinquish to the financier, as long as the procedure of the judicial authority is not jeopardized. It is recommended that the concepts of the payment assertion have included the source of financing having minimal authority, particularly over the selection of legal advisers, specialists, and arbiters, and or otherwise, the financial backer and/or its lawyers must be consulted as to regardless of whether a specific settling bid must be acknowledged or if a complaint must be delisted[25].

It is also critical that the financial backer does not constrain or inhibit the attorney’s moral and trustee responsibilities due and owing to the capital provider, and also that, inside the occasion of a confrontation among both the financial backer and the sponsored partner, the litigator is independent to act in this same finest preferences of a capital provider, even though this is disadvantageous to the financial backer. It is advised that certain safeguards be explicitly mentioned in the financing contract and conflict-of-interest guidelines.

CONFIDENTIALITY

The 2019 Constitutional Amendment adds a quasi-clause (Section 42A) that requires the arbiter, arbitral institution, and participants to keep the processes private. Nevertheless, in fact, for a side to use the assistance of an insurer, it is unavoidable that the parties must reveal some sensitive data about the procedures to the funders in enough for the financial backer to assess the claim prior to entering into a financing arrangement[26]. As a result, the “Arbitration and Conciliation Act 1996’s” confidentially rule will need to be changed to enable the release of sensitive material “for the purpose of having, or soliciting, TPF of arbitration from a third-party.”[27] In particular, the sponsor must be required to maintain the secrecy of all arbitration-related data and paperwork.

DISCLOSURE

India’s present arbitration process solely considers a side’s contradiction with an arbiter. When a TPF is engaged, the sponsor as well as the arbiter, or the funders as well as the non-funded side, may have a dispute[28]. As a result, the disclaimer rule must be revised to necessitate the stakeholders and/or one‘s legislators to offer a formal notification to the judiciary and/or presiding judge, as quickly as feasible after financing is supplied or a configuration to offer to finance for the arbitral proceedings, divulging the presence of a TPF agreement and the individuality of the financial backer[29]. This method is the result was in line with the more recent issue of the “IBA Guidelines on Potential conflicts Of involvement” in International Arbitration which requires disputants to disclose any connection among each other, even those with a “direct economic interest in the award to be rendered in the arbitration, such as an entity providing funding for the arbitration.”

ADVERSE COSTS ORDERS

A tribunal may have authority to impose an expenses judgment over a TPF without an explicit authority in the “Arbitration and Conciliation Act, 1996” or the related organizational norms. As a result, courts must be allowed to impose expenses it against funders if the financing contract specifically states that the funders is responsible for unwelcome expenses and the negative costs decision relates to expenses involved during the time when the dispute was sponsored by the funders in issue[30].

IS IT TIME FOR INDIA TO CHANGE?

In an International setting, when arbitration is viewed, there is no harmony as to the propriety of TPF agreements. In comparison, there exists consensus on the arbitration front with regards to TPF. There arises a need to examine the legality of these TPF agreements in various jurisdictions to understand whether India is geared up for the introduction of TPF in Arbitration.

UNITED KINGDOM

 Despite the origin of the doctrines of “maintenance” and “champerty” in this land, they were allowed ever since 1886. It was held by the Privy Council in Ram Chandoo v. Chunder Mookerjee[31] that “TPF agreements are not inherently contrary to public policy”. This was further supported when the Criminal Law Act, of 1967 did away with these crimes and torts of “maintenance” and “champerty”. Over time, the acceptance of TPF agreements was also drastically increased when the Courts’ questioning regarding the same deteriorated. The restriction on contingent fee agreements, on the other hand, remains in effect and has been extended to arbitration procedures as well. As a result, in terms of arbitration proceedings, TPF’s legality cannot be questioned[32].

SINGAPORE

Singapore is one of the major hubs for arbitration and it is still in the process of marking itself as the “International commercial dispute resolution hub”[33]. This was a journey with multiple stops because in the earlier periods, the doctrines of “maintenance” and “champerty” were still in force. It was observed in Otech Pakistan v. Clough Engineering[34] that TPF is against the public policy and this had to be applicable for both litigation as well as international and domestic arbitration. Nevertheless, taking into account the importance of the place in International arbitration, proposals were made for legitimizing TPF which was finally accepted and started to take shape in 2017 through a new framework for TPF which included the “Civil Law (Third-Party Funding) Regulations 2017. Through this framework, it was intended that any funding received, would be from qualified entities who meet certain thresholds and would still preserve the sanctity of the arbitration process for both domestic and international disputes. 

HONG KONG

The following the doctrines of “maintenance” and “champerty” in Hong Kong sure did make it dawdle in the race of TPF development. It was only in Winnie Lo v. HKSAR[35], that it was stated that the extent of applicability of these doctrines has watered down. It further went on to mention that this was only possible due to the public policy considerations. Further, in Cannonway Consultants v. Kenworth Engineering[36], it was clarified that these doctrines seize to apply when it came down to international arbitration. Finally, it was expressly stated that TPF in foreign seated arbitration was valid in Unruh v. Seeberger[37]. 2017 was the time period when TPF was accepted in the field of arbitration and mediation[38]. For the purposes of better facilitation, the Arbitration Rules in 2018 further ensured the express acceptability of TPFs.  

INDIA

It is time for India also to bring amends to the current legislation and ensure that it ups its game in terms of the arbitration sphere. Moreover, better implementation can be assured in India as it can be ensured that the problems faced by other jurisdictions are not repeated. TPF is commonly considered to be in an “embryonic regulatory state”[39]. Because of the legal and moral difficulties connected with TPF, there is currently no definite system in place, excluding handful of territories. The “ICCA QMUL Task Force Report”, published in April 2018, presents authoritative advice on a multitude of topics relating to TPF in global arbitral proceedings and serves as the foundation for future legal changes in states such as “India”, which lack a legal structure.

IS INDIA READY FOR TPF?

Litigation is a never-ending process and is only increasing in numbers as the hours pass by. The whole journey of dispute resolution was never known to be easy on parties. More so, the Covid-19 pandemic certainly did not reduce the burden on the parties by adversely distressing their businesses. This period would certainly be a much-needed boost for the introduction of TPF since it would ease the financial burden on the individuals/businesses while guiding them towards a light at the end of the tunnel after having faced the massacre of shrinking balance sheets and credit.

Formalization alleviates unfavorable concerns about the validity and use of TPF in arbitral proceedings among all sides, namely clients, panelists, arbitral tribunals, and financial backers, as shown in statutory revisions in Hong Kong And Singapore[40]. The proposed changes to the “Arbitration and Conciliation Act 1996” permit this same utilization of TPF in dispute resolution, which include specifying the context and impact of the regulations, forming a system that will improve with a rigorous process to settle conflicts and desire to engage, and constructing a disclaimer responsibility, will help India’s dispute settlement sector grow. After the famous “BALCO judgment in 2012”[41], India’s judicial system is becoming lesser intrusive, giving more attention to the arbitration proceedings program’s legitimacy, bringing forth a fresh, pro-arbitration legal climate. Nevertheless, prior to starting any of the others, the Indian administration should convene an experienced group to do a viability assessment on the extent of TPF’s growth and development in India, as well as the potential advantages in terms of ensuring fairness as well as the regulation problems.

This is especially true in India, where it is unclear to forecast exactly the legal environment would regard TPF, notably in terms of overseas capital management (within the context of its “Foreign Exchange Management Act, 1999”). It is crucial to determine if the financing of a claimant is considered overseas straightforward capital or borrowing. Because, in actuality, financing a complaint can be done in any way and funders can have any organization, determining whether it should be controlled is a challenging task at this time and requires further research.

Meanwhile, India’s politicians will have to choose between a harsh stance and this gentle method used by “Singapore and Hong Kong”. In the writer’s opinion, a gentle method would have been the best way for Indians, certainly at first. It is self-evident that legislation has to be rational and appropriate to the real hazards in the issue in an attempt to function properly. A rising sector with little legislation might result in marketplace malfeasance, while a moderate-risk industry with much legislation might stifle development.

As a result, the researcher suggests that non-rules or standards of practice for interested parties, such as claimants, their agents, panelists, financiers, and administrative bodies, are a good place to start for TPF regulation in the Indian scenario.

CONCLUSION AND SUGGESTIONS

On the basis of the best experiences and norms worldwide, India has every reason to favor Third-party funding in arbitration. One of the very first steps toward this direction would be the implementation of such a provision in International commercial arbitration as there lies a lot of potential in this area. The assistance that these kinds of disputes receive in the form of funds would act as a catalyzing agent to achieve the problem of serving justice and also ensure that the revenues are channelized for purposes such as expansion rather than towards expensive litigations. Further, after this becomes a success, India can then venture into other parts of arbitration. This would aid in putting India back on the map for International arbitration alongside helping it gain the status of the South Asian Hub.

Given that the economy is still in the nascent stages of recovery after the pandemic, it increases the chances of instant success for TPF. Moreover, the adaptability of TPF in India would be smooth given that the “Arbitration and Conciliation Act, 1999” is in consensus with the “UNCITRAL Model Law on International Commercial Arbitration”. 

International arbitration has experienced phenomenal growth and Hong Kong and Singapore are the legislations that made this possible. The favorable rules and encouragement for arbitration in these legislations, along with the explicit acceptance of TPF have made these legislations “the explosion of international arbitration in Asia”. These favorable circumstances helped prove that Asian actors are not just “rule takers”. As of now, India has not taken any notable steps in this direction. However, irrespective of whether or not this concept is implemented in India, it is a “commercial reality” and is not going to vanish soon on the other hand, is a trend that is to stay. The absence of a provision in this regard in the 2019 Amendment definitely is an opportunity that was not utilized to its potential and this is the real task in the arbitration community that India needs to overcome. Considering the positive attitude of the judiciary over the years towards TPF, it can be concluded that it is definitely not within a lot of time that India will also be a hot seat for International Commercial arbitration that would essentially involve TPF along with certain thresholds to be fulfilled.

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[15] [1939] ILR 1 (PC).

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[32] Varun Mansinghka, supra note 6.

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[34] [2007] 1 SLR (R) 989

[35] (2012) 15 HKCFAR 15

[36] [1995] 1 HKC 179

[37] (2007) 10 HKCFAR 31

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[41]  Bharat Aluminium Co v. Kaiser Aluminium Technical Service Co, 2012 (9) SCC 552.