- Neha Bhambhani*
INTRODUCTION: UNVEILING THIRD PARTY FUNDING
Third-party funding (hereinafter referred as “TPF”), also known as “Litigation Financing”, is the creation of an agreement between parties involved in legal proceedings and a stranger party funder. It is an arrangement where the third party not involved in the proceedings funds the whole or part of the litigation process on the pretext of financial benefit if the funded party wins the dispute. Generally, third-party funders are profit-driven entities, such as banks, investment firms, insurance companies, hedge funds, or individuals. These entities carefully engaged in assessing the case merits and likelihood of victory before granting the funds because, if the funded party loses, the funder cannot retrieve their investment, thus bearing the funding risk themselves.
Although TPF has been a major consideration globally among countries including the United States, the United Kingdom, and Canada, there lies no specific legislation for India to regulate it. Only two nations, Hong Kong and Singapore have recently taken the initiative to regulate TPF through enacted legislation and amendments. In order to set the qualifications and ensuring compliance with public policy, Singapore amended its Civil Law Act and formed Civil Law (TPF) Regulations. Similarly, the Hong Kong Legislative Council passed the Arbitration and Mediation Legislation (TPF) (Amendment) Ordinance 2017 (hereinafter referred as “Ordinance”) and Code of Practice for TPF of Arbitration 2018 (hereinafter referred as the “HK Code”) allowing TPF in Hong Kong.
THIRD-PARTY FUNDING IN INDIA: CURRENT STATUS AND JUDICIAL PERSPECTIVE
In India, TPF remains valid even though there is no statutory recognition to regulate it. The Indian Judiciary has demonstrated, through its prevailing judgments, the need to regulate and facilitate the smooth functioning of TPF. In the case of Ram Coomar Coondoo v. Chunder Canto Mookerjee, the Privy Council held that the old concept of Maintenance and Champerty is not considered an offence as long as the TPF agreement is not against public policy. Maintenance is a condition where a third party often persuades a person to initiate litigation proceedings and may or may not have an interest in those proceedings. Champerty becomes a more specific arrangement, as the third party funder provides financial support to the party in arbitration proceedings with an intent for profit.
In the recent intra-court appeal case of Tomorrow Sales v SBS Holdings, the Division bench of Delhi High Court ruled that third party funder Tomorrow Sales Agency (TSA) cannot be held financially liable for the cost incurred by funded party SBS Transpole Logistics Pvt. Ltd. as funder is not a party to the arbitration agreement or arbitral proceedings. Therefore, the arbitral award cannot be enforced against Tomorrow Sales Agency. Additionally, the TPF is recognised under Order XXV rule 3 of the Code of Civil Procedure 1908 for civil suits in states like Maharashtra, Gujarat, Uttar Pradesh, and Madhya Pradesh acknowledging the possibility of TPF applicable to their states. The court exercises discretion to add the third party funder as a party in the proceedings who is bearing the litigation cost of the plaintiff. In Maharashtra, the court may direct a third-party funder along with the plaintiff to furnish security for the costs of the proceedings to avoid frivolous litigation. Moreover, the Indian landscape has evolved where some of the funders such as Legal Pay had already announced plans for launching the first third-party litigation funding platform with an estimated return of 20-25%.
HONG KONG TPF FRAMEWORK: A MODEL FOR INDIA?
In order to legalize TPF in Arbitration proceedings, Hong Kong has passed an Ordinance and HK Code for third-party funders to follow during arbitration proceedings. These provisions ensure consistency and protection for the funder and the funded party in the proceedings. It establishes a comprehensive and mandatory legal framework to safeguard funded party interests and emphasises the disclosure requirement by the funder to ensure transparency in the proceedings.
India could consider adopting similar ideas from the Hong Kong ordinance and code for implementing its legislation by incorporating a clear definition of a third-party funder. (Section 98J Ordinance). It is crucial to establish the meaning of the third party by identifying their rights and liabilities and excluding individuals and entities with no other special interest beyond funding the proceedings.
The Content Code of Practice outlines terms, features, and risks that should be set out in the funding agreement. This includes reasons for terminating the agreement or for third-party funders to withhold funding (Section 98Q Ordinance). The agreement must also specify the degree of control the third-party funder will have in arbitration proceedings. (Section 98Q(1)(b)(i) Ordinance).
The ordinance of Hong Kong requires disclosure of third-party funding in arbitration proceedings. (Section 98U Ordinance). It includes a written notice of the funding agreement and the name of the third party funder provided to each party involved in the arbitration and to the arbitration body. This is significant to ensure the neutrality of the arbitrator and for parties to assess the involvement of a third party funder in the proceedings. Additionally, the ordinance authorizes the Hong Kong Secretary for Justice to appoint an advisory body and an authorized body to observe and implement the operation of the ordinance and the code. (Section 98X Arbitration Ordinance).
THE DEGREE OF CONTROL
The Ordinance obligated parties to set out the degree of control of the funders in relation to arbitration. This is essential to safeguard the autonomy of the funded party as the funding process involves inherent risk for the investor, with no guarantee of regaining their invested capital. In such situations, the funder gets the leverage in controlling and influencing the decision-making rights of the funded party. If a funder is not content with the outcome of the proceedings, he can force the funded party to renegotiate the award for their benefit. In this way, the entire TPF process has the potential to become a power game where the funded party, being financially unstable relies on the funder to provide financial resources and legal expertise. India could benefit by incorporating such provisions to ensure the independence of the funded party in decision-making, especially in cases where the party is unable to make informed decisions.
TERMINATION OF FUNDING AGREEMENT
The TPF agreement should be formed to balance the rights of both the funded party and the funder. It should unambiguously stipulate circumstances and reasons for third party funders to withhold funding in the arbitration proceedings (Section 98Q(1)(b)(iii) Ordinance). The HK Code specifies certain conditions under which funders are allowed to terminate a funding agreement during the proceedings to prevent funders from arbitrarily terminating the agreement. (Paragraph 2.13 HK Code). This becomes important because arbitration proceedings are unpredictable which may prompt funders to terminate funding for their benefit. For example, a funder decides to invest elsewhere to maximize their profits or to avoid any potential risk arising from a conflict of interest. Therefore, it is imperative to include clear reasons in the agreement to eliminate the burden on the funded party to search for substitute sources for funding to withstand proceedings.
India can adopt similar provisions in its legislation to protect funded parties from the consequences of withholding funding. The agreement should contain specific situations and reasons where the funder is unable to continue funding or decides to withdraw a percentage of their investment. In these cases, the funder must obtain the consent of the appropriate authority to ensure that the funded party remains informed and prepared for such situations. However, specifying the conditions of withdrawal in the termination clause does not exempt the third party funder from honouring the rights of the funded party. They must secure the latter’s position which could be compromised due to such termination or withdrawal of funding agreement.
ENSURING ACCOUNTABILITY: ENFORCEMENT MECHANISMS
The Hong Kong ordinance has adopted a soft law approach as there is no imposition of civil or criminal proceedings for non-compliance with the HK Code (Section 98S(1) Ordinance). Whereas, in the Indian context, it is vital to incorporate regulatory measures by implementing TPF legislation that include the imposition of compensation, proportionate fines for non-compliance, and constraining the funder from participating in future TPF agreements. These measures can prevent funders from participating in corrupt practices, such as exerting financial means to influence the decision of the Arbitrator or concealing illicit gain from unlawful activities by funding arbitration proceedings. In addition, this ensures that funders adhere to the terms of the agreement and avoid superfluous reasons to withhold funding. The legislation should consider the exercise of jurisdiction of the arbitral tribunal in situations like imposing orders in cases of conflicting of substantial interest of the funders in the outcome of proceedings, and preventing interference with decision making right of the funded party that impacts the outcome of the proceedings. This ensures the balance between the autonomy and fairness in the proceedings.
Similar to Hong Kong, the Indian legislature can establish an oversight body responsible for the implementation and suggesting changes in the legislation. This preserves the authority of the legislature to modify, alter, or improve any procedure based on changing circumstances thereby guaranteeing continuous scrutiny.
CONCLUSION
The use of the TPF in India in arbitration proceedings reflects the necessity for establishing a clear and strong statutory framework drawing from Hong Kong legislation. India requires a nuanced approach for forming legislation to ensure smooth functioning and fairness between the parties involved. The judicial decisions also show willingness to accept TPF, but the absence of clear guidelines leaves room for different interpretations that lead to uncertainty. While Hong Kong provides flexibility to third party funders by implementing a soft law approach, India can include penalties for non-compliance and also establish authorities to monitor the whole process. By tailoring international practices, India can pave the way for a just and transparent TPF process.
*Fourth-year Student, B.A. LLB. (Hons.), Institute of Law, Nirma University.
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