INTRODUCTION
In a relief from a catatonic arbitration regime in the context of litigation funding, the recent Delhi High Court decision in Tomorrow Sales v SBS Holdings probed the possibility of recovering adverse costs from arbitral proceedings from third party funders. At the outset, the Delhi High Court in the aforesaid decision has solidified the position for third party funding (“TPF”).
A brief version of the facts in the present matter pivoted around a Bespoke Funding Agreement between SBS Transpole (“Transpole”) and Tomorrow Sales Agency (“TSA”) which provided that TSA would, inter alia, provide financial assistance of INR 250 crores to Transpole’s claim against SBS Holdings Inc. (“SBS”) and Global Enterprise Logistics Pte. Ltd., Singapore. Transpole referred its claim by virtue of an alleged breach of contract against SBS to arbitration before the Singapore International Arbitration Centre (“SIAC” or “Tribunal”). However, the SIAC Tribunal rendered an award in favour of SBS, dismissing the claim and awarded costs of the proceedings in favour of SBS.
Accordingly, SBS filed a petition under Section 9 of the Arbitration and Conciliation Act, 1996 (“Act”) before the Delhi Court, praying, inter alia, for interim measures aiming to secure the arbitral award rendered by the SIAC tribunal. Notably, SBS prayed for the disclosure of the assets and related bank accounts of TSA and other respondents and further furnish security to secure the proceeds granted to it under the arbitral award. Pertinently, TSA was not a party to the arbitral proceedings nor an impugned party in the arbitral award rendered by the tribunal but had merely funded the claimant to pursue the arbitral proceedings under a funding agreement.
In the first instance, the Single Judge of the Delhi High Court imposed liability on TSA on account of substantial interest and control in relation to the arbitral proceedings. The Single Judge after referring to the decisions rendered in Arkin v. Borchard Line Ltd. & Ors. and Excalibur Ventures LLC v. Texas Keystone Inc and Ors reasoned that TSA had “an exclusive, unfettered right on the damages recovered”, and thus, labelled TSA the real beneficiary of the arbitral proceedings despite being neither a party to the arbitral agreement nor the consequent proceedings. Therefore, TSA was directed to disclose their fixed assets and bank accounts in view of the payment of adverse costs. The single judge of the Delhi High Court further held that a party that undertakes the funding of legal proceedings with a speculative intent for profit cannot evade accountability and that a delicate equilibrium must be struck between ensuring access to justice through funding arrangements and the encumbrance that a respondent might endure in instances where the litigation falters on account of its intrinsic lack of merit. The learned Singular Justice articulated that allocating the financial burden of litigation expenses onto the respondent for the sake of mounting a defense against litigation that is found devoid of merits – and perhaps would not have been instigated but for the financial backing of an external party(funder) – was incongruous.
However, on appeal, the Division Bench of the Delhi High Court overturned the decision of the single judge. The Division Bench distinguished that the instant matter was regarding “whether a person who is not a party to the arbitral proceedings or the award, rendered in respect of disputes inter-se parties to the arbitration, can be forced to pay amount awarded against a party to the arbitration” in lieu of whether a non-signatory can be bound by the arbitration agreement (group of companies/ alter ego doctrine). The Bench concluded that- firstly, TPF was disclosed at the start of the dispute, and SBS’s application to the SIAC tribunal for security and for costs was rejected on grounds of want of evidence. The division bench of the Delhi High Court observed that a third-party may be bound by the arbitral award only if was a party to the arbitration proceedings. Thus, the Court by a necessary corollary inferred that a party against whom the arbitration agreement was not invoked and who was not a party to the arbitration proceedings would not be bound by the arbitral award and consequently no question of enforcing an arbitral award against it would arise. Hence, as per the Court, SBS having failed to join TSA as a party to the arbitration cannot seek to add TSA to the enforcement proceedings by seeking interim measures against it. In the words of the Court, “[T]SA is not a party to the Arbitral Award. It cannot be treated as a judgment-debtor under the Arbitral Award if it is enforced as a decree, as required under Section 36(1) of the A&C Act…None of the clauses of the BFA provide any obligation for TSA to fund an adverse award.” Secondly, there existed no rule under SIAC, High Court Rules, the Arbitration and Conciliation Act, 1996, or the Code of Civil Procedure, 1908 that provided for imposing costs on a non-party to an arbitration. Thirdly, and lastly, the Bench laid a keen emphasis on observing a balance between ensuring access to justice through such funding arrangements and the cost borne by the defendant in the event of a meritless case. The Bench expressed that “third party funding is essential to ensure access to justice. In absence of third party funding, a person having a valid claim would be unable to pursue the same for recovery of amounts that may be legitimately due.” In light of the same, this post discusses TPF as a mechanism to ensure and safeguard access to justice for parties in international arbitration (I) and discusses the need to regulate nascent TPF arrangements in India (II).
I. Deciphering the access to justice rationale of TPF
The pivotal role of TPF in ensuring access to justice warrants careful consideration. It is imperative to delineate between access to justice and access to arbitration. Access to justice, in its broader purview, encompasses not only access to courts but also the availability of diverse judicial mechanisms for dispute resolution. Consequently, the equivalence of access to arbitration with access to justice holds merit only when arbitration represents the singular recourse for the funded party. It is noteworthy that parties may engage TPF not solely due to impecuniosity but as a deliberate strategic choice aimed at preserving their financial equilibrium or circumventing the onerous fiscal encumbrances associated with arbitration proceedings.
The empirical research carried out on the behavioural patterns of funders highlights that the claim that TPF promotes access to justice is a little wide off the mark. One research that analyzed the behavioural patterns of funders highlighted that funders are “rational” in their decision-making process and tend to primarily fund high value claims. The abovementioned proposition is further strengthened by the practice of funders wherein some funders disclose that the minimum value of claims they are willing to fund ranges between £15 million to £2 million or from €100,000 to €300,000. Similarly, another research indicates that TPF does not always result in an increase in access to justice and tends to increase the number of frivolous claims. The most extensive research carried out on the litigation funding industry in Australia concluded that TPF in litigation increases frivolous litigation and its impact on access to justice was “ambiguous”. The summation of all empirical research carried out on TPF leads to the unmistakable conclusion that TPF is only available to a limited number of claimants who have a high number of claims and particularly those claims that have a high chance of success. Hence, as a necessary implication, low value claims and claims that are weak on merits are likely to lose out on accessing funding.
II. Normative Frameworks Governing TPF in India
In addition to the issue of TPF furthering the tenets of access to justice, there exists a regulatory vacuum for such financing transactions in India. It is pertinent to note that the Supreme Court in Bar Council of India v AK Balaji clarified that there appears to be “no restrictions on third parties (non-lawyer) funding the litigation and getting repaid after the outcome of the litigation”. Despite the Apex Court paving the way for TPF, the legal landscape in India is bereft of a legislative instrument, such as the ones introduced in Singapore and Hong Kong, that regulates litigation funding.
In a similar vein, the rules of prominent institutional arbitration centres in India like the Delhi International Arbitration Centre Rules, 2023, Mumbai Centre for International Arbitration Rules, 2016, International Arbitration and Mediation Centre Arbitration Rules, and International Centre for Alternative Dispute Resolution Arbitration Rules, 1996, do not contain any provisions for TPF or litigation funding. Barring the residuary powers under institutional rules that allow a Tribunal to take appropriate decisions on all matters which are not specifically provided for. Moreover, both- the Act and institutional rules- are silent regarding the regulation of TPF.
Notably, recognizing the significance of litigation funding in Tomorrow Sales v SBS Holdings passes the smoke-test but also poses a a potential minefield, particularly in the absence of a legislation governing third party funders. At the outset, it was the High Level Committee to review the institutionalization of Arbitration Mechanism in India that recognized the need for such legislation to make India an “arbitration-friendly jurisdiction”. A parchment safeguard for TPF exists in the form of amendments made by Maharashtra, Karnataka, Gujarat and Madhya Pradesh to the Code of Civil Procedure, 1908 that acknowledged the possibility of litigation funding and set out the situations when such financier may be made a party to the proceedings.
Pursuant to this objective, it is recommended that the legislature borrows guidance from the regulatory framework in other jurisdictions. For instance, the Code of Conduct by the Association of Litigation Funders in the United Kingdom, and the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance, 2017 that implemented the Code of Practice for Third Party Funding of Arbitration demonstrate the regulatory framework enacted to provide measures and safeguards in relation to TPF. Moreover, in view of institutional arbitration, for example, the International Chamber of Commerce Rules of Arbitration 2021 via Article 11(7) provides for TPF and requires parties to disclose TPF arrangements to avoid potential conflicts of interest.
In conclusion, a two-fold implication presents itself. The decision by the Delhi High Court highlights the significance and application of TPF arrangements in India, and analogously, opens the scope and extent of such arrangements to obscurity. At the first blush, the recognition of TPF, and the nexus between litigation funding and access to justice is a welcome measure. However, the continuation of a regulatory vacuum in India would result in the measure’s transition into an unruly horse, and thus, a consideration for legislative interference.
[1] Gautam Mohanty is an Assistant Professor at Jindal Global Law School (JGLS), India and a Ph.D. student researching on Third-Party Funding at Kozminski University, Warsaw, Poland. He is also a Fellow at JGLS Centre for Alternative Dispute Resolution (CADR) and an advocate enrolled at the bar in India. He can be reached at gautam.mohanty1414@gmail.com. Arnav Doshi is a fifth-year student currently pursuing the B.B.A LL.B (Hons.) programme at Jindal Global Law School, Sonipat. He is also a Senior Staff Editor for The Arbitration Workshop.
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