Third Party Funding in India Arbitration

The process of arbitration got statutory sanction by the enactment of the Indian Arbitration and Conciliation Act, 1996. Since the enactment, there have been various developments in the field of alternate dispute resolution mechanism and the government has been trying to fill up the lacunae through amendments. One such lacuna which has been identified by scholars and academicians is the policy regarding Third Party Funding in India. Third Party Funding is an arrangement where someone who is not directly involved as a party in the process of arbitration agrees to provide funds to a party in exchange for a specific return. Generally, the third party covers the cost of the party’s legal fees and expenses incurred during the process of arbitration. Third Party Funding can provide access to justice to the parties who are under-resourced, enabling them to take recourse of legal proceedings which a lack of funding would otherwise prevent. It also permits the companies and institutions to invest their limited resources to more necessary and emergency needs rather than block the capital in legal fees and expenses of arbitration. A Third Party Funding arrangement can incur legal liabilities and the following must be considered before entering into an agreement for third party funding.

  • Conduct due background check and diligence of funder.
  • Place a confidentiality agreement meaning the party should declare all the relevant facts and laws necessary to be known to the funder before agreeing to fund the party.
  • Draft a funding agreement laying down all the relevant terms and conditions according to which the relation will work.

In common law countries like India and England, the concept of Third Party Funding can be closely related to the doctrines of barratry, maintenance, and champerty. Maintenance would include where the party promises to provide funds to the party without any contrary promise of fees or share in the gains of the case. Champerty would include where the party agrees to provide funds subject to share in the gains received in the case. Barratry would include unnecessary stirring up cases or litigation.

In India, the regulation regarding the same is as follows. The agreement of maintenance or champerty would be valid unless

  • It is unreasonable or unjust to the other party
  • It is made by malicious motives, like that of gambling in the process of litigation or not having bona fide object in helping the claim as held by Bombay High Court in Raja Rai Bhagwat Dayal Singh v. Debi Dayal Sahu (1908) 10 BOMLR 230
  • An agreement made to provide legal service where remuneration will depend on the property gained in the suit as it would be against public policy as held in Kothi Jairam v. Vishvanath (1925) A.I.R BOM 470

By way of such pronouncements, it may seem that the Third Party Funding cannot be allowed in India but the international community has held that third party funding in arbitration does not come under the doctrine of maintenance and champerty. In Cannonway Consultants Ltd v Kenworth Engineering Ltd [1995] 1 H.K.C. 179 Hong Kong Court held that the concept of maintenance has no ground in the field of arbitration. The courts have held that the concept of public policy needs to evolve through time and new methods and innovation should not be bridled by public policy. In Unruh v Seeberger [2007] 2 H.K.L.R.D. 414 it was held that the concept of third party funding does not belong under the doctrine of maintenance and champerty.

This ignorance of India on formulating a policy on such a recent development will create hurdles in its path of being a hub of arbitration. The world has recognised the concept of Third Party funding in the process of Arbitration. England and Australia allow such third party financing in its litigation proceedings. Though originally champerty was found illegal by the Statute of Westminster in 1275, England has shifted from its traditional approach to allow third party funding in litigation. The leading case of Arkin v Borchard Lines Ltd & Ors [2005] EWCA Civ 65 opened the gates of third party litigation in England. Hong Kong though prohibits such funding in litigation, it allows the same in arbitration proceedings. In Singapore, the concept of champerty and maintenance was applicable to both public and private litigation as held in Tech Pakistan Pvt Ltd v Clough Engineering Ltd & Anor [2007] 1 SLR(R) 989  but the Government recently passed a bill known as Civil Law (Amendment) Bill which allows third party funding in arbitration proceedings.

In a Third Party Funding arrangement, there exists a funding agreement between the claimant and the funder known as the Arbitration Funding Agreement (AFA), which guides the entire relationship between the parties including their share in the final recovered sum. Where India has not even recognised the concept of Third Party Funding, the international community has moved forward to the question whether such arrangement should be disclosed to all the relevant parties in the proceeding. The IBA Guidelines on Conflicts of Interest in International Arbitration in its recent amendment accepted the mandatory provision of disclosure of the Funder. No doubt, there exist a lot of issues in recognising such a liberal approach in the process. India will face issues like (1) regulation regarding funding agreement, (2) the necessary provisions to be included in such funding agreements, (3) regulation regarding conflict of interest of the funder in the proceeding, (4) law regulating the bandwidth of control by the funder over the proceeding, (5) hijacking of proceeding by the powerful funder. India needs to adopt the liberal path and open its door for third party funding if it wants to become an important international arbitration centre.

References:

  1. https://www.ashurst.com/en/news-and-insights/legal-updates/quickguide—third-party-funding-in-international-arbitration/
  2. https://www.law360.com/articles/808955/does-3rd-party-funding-complement-the-arbitral-process
  3. http://indiacorplaw.blogspot.in/2016/09/arbitration-in-india-merits-of-third.html
  4. http://www.hkreform.gov.hk/en/docs/tpf_e.pdf
  5. https://www.jamsinternational.com/blog/how-is-third-party-funding-affecting-arbitration
  6. http://barandbench.com/tpf-series-part-highly-profitable-world-litigation-financing/
  7. http://barandbench.com/third-party-funding-series-part-ii-conversation-selvyn-seidel-fulbrook-capital-management/
  8. http://www.arbitration-funding.com/arbitration-funding/arbitration-funding-explained
  9. https://www.harbourlitigationfunding.com/singapore-legislation-tabled-permit-third-party-funding-arbitration/
  10. http://hsfnotes.com/asiadisputes/tag/third-party-funding-in-arbitration/
  11. http://www.mylegaladvisor.in/blogging/arbitration-in-india-the-merits-of-third-party-funding/
  12. http://www.ey.com/in/en/services/assurance/fraud-investigation—dispute-services/ey-emerging-trends-in-arbitration-in-india
  13. http://www.lexology.com/library/detail.aspx?g=96b44540-05ae-4e57-b036-cdf1151798d0
  14. https://en.wikipedia.org/wiki/Champerty_and_maintenance
  15. http://www.mondaq.com/x/103272/Arbitration+Dispute+Resolution/The+Role+of+the+Doctrines+of+Champerty+and+Maintenance+in+Arbitration
  16. http://mercantilelaws.blogspot.in/2013/01/is-maintenance-and-champarty-illegal-in.html
  17. http://whoswholegal.com/news/features/article/31825/third-party-funding-litigation-perspective-international-landscape
  18. https://harbourlitigationfunding.com/wp-content/uploads/2015/07/arkin.pdf
  19. http://www.lexology.com/library/detail.aspx?g=189c6ee5-26b2-4273-8bf5-dcda09adb684
  20. http://www.latham.london/2017/01/singapore-to-permit-third-party-funding-of-international-arbitration/

 

Nikunj Poddar

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