HomeLegal ColumnsValidity of Third Party Funding in Domestic Arbitrations in India

Validity of Third Party Funding in Domestic Arbitrations in India

INTRODUCTION

Third-Party Funding (“TPF”) refers to the financing of litigation, arbitration or mediation expenses of a party by a third-party financier in return for a share in the proceeds of such legal proceedings. Such financiers have no interest in the dispute other than monetary investment. Arbitrations, specifically, can be vastly expensive affairs, including the tribunal’s fee, counsel’s fee, expert witness fee, costs imposed by the tribunal and other dispute related costs. TPF ensures that a party is able to effectively pursue claims in an arbitration without financial hurdles. The validity of TPF arrangements in legal proceedings has been the subject of considerable debate in various countries around the world. However, the recent trend in most pro-arbitration regimes has been in favour of TPF arrangements.

The objections against TPF are based on the common law prohibition of the tort of maintenance and champerty in England. Maintenance is defined as the intermeddling by unrelated parties in disputes without cause or justification.[1] Champerty, an aggravated form of maintenance, is an agreement to finance litigation on behalf of a party in return for a share in the fruits of such litigation.[2] Historically, this tort was targeted at the malicious and wanton interference in the disputes of others, which often resulted in vexatious and frivolous claims.[3] The prohibition of champerty was a principle of public policy, designed to protect the sanctity of justice.[4]

INDIAN APPROACH

1. Judicial acceptance

The courts in India, however, took a different approach. The Privy Council in Ram Coomar Condoo v. Chunder Canto Mukherjee[5] categorically held that the English laws of maintenance and champerty were not applicable in India. It was held that “a fair arrangement to supply funds to carry on a suit in consideration of having a share of the property, if recovered” was not opposed to public policy.[6] However, the Privy Council also cautioned that such agreements would not be enforced if they were extortionate or entered into with unlawful objectives. Since then, various courts have reaffirmed that champerty contracts are not per se opposed to public policy.

Therefore, it is clear that a TPF agreement, which is akin to a champerty contract in nature, is not per se opposed to public policy. The validity of a TPF agreement has to be adjudged on the basis of Section 23 of the Indian Contract Act 1872.[7] Thus, a TPF agreement which is unconscienable and extortionate so as to be inequitable against the borrower, will be considered contrary to public policy.[8]

2. Statutory recognition

The role of TPF in litigations has also been given statutory recognition in India. Order XXV of the Code of Civil Procedure 1908 (“CPC”), as amended in a few states like Karnataka, Maharashtra, Gujarat, Madhya Pradesh and Uttar Pradesh, provide that the courts have the power to order a third-party financier of a particular suit to be made a party to the suit and to order such financier to pay security for costs of litigation.

3. Prohibition of litigation financing by lawyers

Recently, in Bar Council of India v. AK Balaji (AK Balaji),[9] the Supreme Court (“SC”) has held that “there appears to be no restriction on third parties (non-lawyers) funding the litigation and getting repaid after the outcome of the litigation”.

Evidently, lawyers have been explicitly barred from funding litigations.[10] In AK Balaji, it was observed that, though not expressly prohibited, a conjoint reading of the following rules of the Standards of Professional Conduct and Etiquette to be Observed by Advocates made by the Bar Council of India, strongly indicate that an advocate cannot finance litigation for his clients:

  • Rule 18 (fomenting/inciting litigation),
  • Rule 20 (charging contingency fees on result of litigation or agreeing to share proceeds thereof),
  • Rule 21 (agreeing for a share or interest in an actionable claim), and
  • Rule 22 (participating in bids, execution, etc)

4. TPF in arbitrations

The Arbitration and Conciliation Act 1996 (“the Act”) does not address TPF in arbitration proceedings. An arbitral award passed in an India-seated arbitration, in which TPF is involved, would have to pass the “public policy” test as enshrined under Section 34 of the Act.

In Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India,[11] the SC held that public policy of India refers to either the “fundamental policy of Indian law” or “basic notions of justice or morality”. The recent SC decision in Vijay Karia v. Prysmian Cavi E Sistemi SRL has clarified the scope of “fundamental policy of Indian law” to mean “core values of India’s public policy as a nation, which may find expression not only in statutes but also time-honoured, hallowed principles which are followed by the Courts”.[12] Additionally, the “justice or morality” ground can only be invoked when an award “shocks the conscience of the court”.[13]

The validity of TPF agreements in legal proceedings has been repeatedly expressed by Indian courts and in statutes like the CPC. Therefore, it is reasonable to infer that the practice of TPF is not inherently contrary to the fundamental policy of Indian law. Thus, it is reasonably apparent that TPF of arbitrations would not be in conflict with the public policy of India.

PRO-TPF APPROACH IN COMMON LAW STATES

Other common law States have made significant strides in legalising, facilitating and regulating TPF in arbitrations.

England and Wales[14] as well as Australia have abolished any criminal or tortious liability for maintenance and champerty. In Arkin v. Borchard Lines Ltd.,[15]the Court of Appeal held that TPF arrangements are not only valid, but also facilitate access to justice. In Campbells Cash & Carry Pty Ltd v. Fostif Pty Ltd.,[16] the High Court of Australia held that TPF in litigation was not an abuse of process.

In Singapore, the Civil Law (Amendment) Act 2017 has permitted TPF for international arbitrations and related court proceedings. Hong Kong has recently adopted the Code of Practice for Third-Party Funding in Arbitration in 2019. Both Singapore International Arbitration Centre (“SIAC”) and China International Economic and Trade Arbitration Commission (“CIETAC”) have formulated rules for regulating TPF in arbitrations.[17]

VIABILITY OF TPF IN DOMESTIC ARBITRATIONS

Considering the increasingly pro-arbitration attitude in India, and the judicial approval of the practice of TPF in litigation, TPF in domestic arbitrations must be welcomed, in consonance with the approach adopted by other arbitration-friendly regimes. The High-Level Committee to review the Institutionalisation of Arbitration Mechanism in India (2017), headed by Justice B. N. Srikrishna, has hailed the legislative recognition of TPF in arbitrations by Singapore and Hong Kong as a significant step towards the growth of these jurisdictions as arbitrations hubs.

Financially weaker parties, who would otherwise be discouraged from pursuing the arbitration of legitimate claims due to financial strain, would be greatly aided by TPF to pursue such claims, thus facilitating access to justice. This would create a level-playing field and prevent deep-pocketed parties from taking advantage of the opposite party on account of their economic might. TPF would also open doors for investment in a previously unexplored market. Investment banks, insurance companies and hedge funds will invest in legal claims as a new asset class, and there will also be a rise of specialised third-party financiers.[18] A slowdown in the financial market would affect all other types of investment, but litigation/arbitration financing, being independent from the market, would remain unaffected.[19]

Acknowledging its drawbacks, there could be cases where the financier may direct the course of the arbitration, overriding the party availing the TPF, which would be detrimental to the latter’s interest. There also exist reservations regarding confidentiality in an arbitration with the involvement of a third-party financier. Nonetheless, the formulation of rules which regulate TPF agreements and disclosure in arbitrations involving TPF, as done in Singapore and Hong Kong, would be sufficient to address these objections against TPF in arbitrations.


[1] British Cash and Parcel Conveyors Ltd v. Lamson Store Service Co Ltd, [1908] 1 K.B. 1006 at 1014 (“British Cash”).

[2] Kamrunnisa widow of Mirza Beg v. Pramod Kumar Gupta, AIR 1997 MP 106, ¶13.

[3] British Cash, [1908] 1 K.B. 1006 at 1014.

[4] Giles v. Thompson, [1993] 3 All E.R. 321.

[5] 1876 SCC Online PC 19 at 48.

[6] Id.

[7] Kamrunnisa widow of Mirza Beg v. Pramod Kumar Gupta, AIR 1997 MP 106, ¶13.

[8] Nuthaki Venkataswami v. Katta Nagi Reddy, AIR 1962 AP 457, ¶17.

[9] (2018) 5 SCC 379, ¶ 38.

[10] In re, G, A Senior Advocate, AIR 1954 SC 557, ¶11.

[11] (2019) 15 SCC 131, ¶36.

[12] 2020 SCC OnLine SC 177, ¶91.

[13] Associate Builders v. DDA, (2015) 3 SCC 49, ¶36 to ¶39.

[14] Criminal Law Act, 1967 c. 58, §13 and §14.

[15] [2005] EWCA Civ 665.

[16] (2006) 229 CLR 386.

[17] Singapore International Arbitration Centre (SIAC) Investment Arbitration Rules (1st Edition, 1 January 2017); China International Economic and Trade Arbitration Commission International Investment Arbitration Rules (CIETAC) (In force as from 1 October 2017).

[18]Amita Katragadda, Bipin Aswatwar, et al., Third Party Funding in India, cyril amarchand mangaldas, 20 February 2019,

[19] Paul Sullivan, Pandemic Is Expected to Bring More Lawsuits, the new york times, June 19 2020,

 

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Nabeel Wasim Malik
Nabeel Wasim Malik
Nabeel Wasim Malik is an Associate at AKS Partners, a Delhi-based dispute resolution firm. Nabeel specialises in domestic and international arbitration law, and civil litigation.
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