Third Party Funding in Arbitration

The concept of third party funding in arbitration is slowly being seen more prominently in India. This
mechanism can be used to benefit both the sides of the balance that is the well established
profitable companies and also, the growing business as a means for them to cover the costs the
company entails due to the legal proceedings. However, this means of third party funding has its
pros and cons which should be well understood before using the same as a resource. There are
various concerns like that of confidentiality and usage of classified information, the interests of the
funders and conflicts of interests that may take place between various organs of the corporate
body because of the involvement of the funder.

When third party funding is generally seen in the Indian context we see that in respect of civil suits,
express recognition has been granted in states like Uttar Pradesh, Madhya Pradesh, Maharashtra
and Gujarat. Rule 1 of Order XXV of Code of Civil Procedure 1908 (as amended by these states)
has laid down that litigation costs can be secured by making the financier a party to the
proceedings. In respect of third party funding in arbitration, there is no such express acceptance or
bar as under the Arbitration and Conciliation Act of 1996 which governs arbitration in India and the
procedural law of some states in India in respect of third party funding in civil suits cannot be taken
as adducing legality to third party funding in arbitration.

In reality as the Arbitration and Conciliation Act of 1996 is silent on this aspect, it has been taken to
be as nonexistent in India and till date, there is no such instance where third party funding has
been used in arbitration proceedings. However, if third party funding is taken as a champerty
contract which are contracts where the returns are contingent on the result, it doesn’t render it per
se illegal except in cases where an advocate may be an party and also in cases, where the
consideration of the agreement goes against any such law like gambling debt recovery then, it is
rendered illegal by the Contract Act of 1872.

However, as third-party arbitration funding is gaining momentum all across the world, it is pertinent
to understand the potential risks for a company and the ways in which these risks can be avoided
or minimized. As per the present Arbitration and Conciliation Act of 1996, there would be a need to
disclose the agreement between the company and the third party funder so as to establish the
relationship between them as otherwise the financier or funder would not be allowed to continue.
This exposes the company to a risk as the other party might use his influence to block the
arbitration at any stage, even at the beginning or may cause unnecessary legal hurdles by
challenging it on public policy grounds under the Contract Act of 1872. Moreover, a third party
funding can expose the party to risks like conflict of interest, autonomy dilution, confidentiality
breach and reluctance and discouraging attitude towards settlement only because a third party i.e
the financier or funder is involved. However, it is important to note that these are speculative in
nature as there are no such instances in India of third party funding in arbitration before and hence,
there has been no such instance where either the legislature or the executive or even the courts
could form any such directions and laws on the same. If in case, later on, the third party funding
agreements are rendered legal in respect of arbitrations, strict legal rules need to be formulated
like restricting the financier’s interference rights, his rights in respect of termination of the
arbitration agreement, rules in respect to non disclosures and confidentiality clauses in such
agreements and the stipulation of penalties in cases where the funder or arbitrator has resorted to
threat, duress or other modes to change the course of arbitration proceedings or terminate them.

In respect of third party funded arbitration, a major cause of concern arises in the form of
confidentiality and privilege of access and use of sensitive information in the arbitration
proceedings. The mere involvement of a non interested party to the proceedings merely because
of the fact that they have contributed funds puts the highly confidential and sensitive data to an
unprecedented risk. As there is no such data is present in the public domain respect of any such
third party funded arbitration, the risks that such information is exposed to cannot be gauged. This
risk of loss of confidentiality can be put in check by either entering into non disclosure or other such
separate third party funding agreement or better still, by proper laws in place. The laws which are
to be made should be made with the intent of avoiding unfair influence, economic duress or
unlawful use of information which can affect the result of the proceedings or can affect the parties
adversely. It should also take into account situations where the agreement can be rendered invalid
because of violation on grounds of public policy.

The legal and ethical issues that are connected with third party funded arbitration hence show the
imperative need for regulations to resolve potential interest conflicts, confidentiality, chances of
partiality. It also becomes increasing important with the developments that are taking place in the
global arbitration scenario especially in respect of international commercial arbitration. There is an
imperative need to have laws and guidelines from a statutory authority as an external regulator so
that the rules and parameters for third party funded arbitration agreement are crystal clear. Special
attention should be paid to the fact that a level of uniformity and certainty is maintained in the
agreements and constant assistance and help should be provided in later stages for proper
regulation and implementation. The laws should also be framed in such a way that limitations and
penalties are provided in case there is a misuse of the third party funded arbitration agreements.

The establishment of the Mumbai International Arbitration Centre seems as a hope that all of the
above stated ethical, legal and financial standards in respect of third party funded arbitration
agreement will be brought into place and standardized soon.

Authore

Arbitration cost’s going the

litigation way — Is third party
funding of arbitrations the way
forward in India to curtail huge
arbitration costs
Introduction

A well-known example of huge litigation costs is the famous defamation case of super model
Naomi Campbell, against the publishers of the newspaper Daily Mirror. The trial court awarded
damages of UK £3500. The decision was reversed by Court of Appeal[1] but restored by the
House of Lords[2] by a majority of 3:2. While doing so, the House of Lords ordered MGN Ltd., the
publishers of the newspaper to pay the costs in the Court of Appeal and in the House of Lords. The
solicitors of Naomi Campbell filed a bill of costs of UK £377,070.07 in the trial court, UK
£114,755.40 in the Court of Appeal and UK £594,470.00 in the House of Lords totalling a
staggering figure of UK £1,086,295.47!

According to a Press Note released by the Government of India in August 2016 the total amount
currently tied up only in infrastructure project related arbitrations is estimated at Rs 70,000 crores,
one can imagine the costs that would be involved by the time the entire arbitral process fructifies.
Today globally, various jurisdictions have recognised the benefits of third-party funding of
arbitrations and have legalised the same.

The most common benefits of third-party funding are, it can provide access to justice for under-
resourced parties (as is often the case in investor-State disputes), enabling them to pursue
proceedings which a lack of financing would otherwise have prevented. For parties that are
adequately resourced, funding can offer a more convenient financing structure, allowing capital
which would otherwise be spent on legal fees to be allocated to other areas of their business
during the proceedings. This article proposes to examine the Indian legal position vis-à-vis third-
party arbitration funding.

Legal position in India

In India, third-party funding is expressly recognised in the context of civil suits in States such as
Maharashtra, Gujarat, Madhya Pradesh and Uttar Pradesh. This consent to third-party funding can
be found in the Civil Procedure Code, 1908, (CPC) Order 25 Rule 1 (as amended by Maharashtra,
Gujarat, Madhya Pradesh and Uttar Pradesh) provides that the courts have the power to secure
costs for litigation by asking the financier to become a party and depositing the costs in court[3].

Currently, there is no law which expressly bars or allows third-party funding agreements in
arbitration. The Arbitration and Conciliation Act, 1996 (1996, Act) governs arbitration in India. As
the 1996 Act is silent on this issue, third-party arbitration agreements have been rendered virtually
non-existent in India. To date, no precedent on third-party arbitration funding exists and thus these
agreements are uncommon.

Debate on common law doctrines of maintenance and champerty

Maintenance refers to funding of legal proceedings by an unconnected third party. Champerty is

where a third-party funds legal proceedings for a share in the proceeds.

Although not directly deciding in relation to arbitrations, following are a few decisions which dealt
with the issue of maintenance and champerty. A few are as old as passed by the Privy Council:

A constitutional Bench of Supreme Court, in G, Senior Advocate, In re[4], has noted that a
champerty contract in which returns are contingent on the success of the case is not per se illegal,
except in cases where an advocate might be a party[5]. While making a distinction between
litigations that involve lawyers and those that involve non-legal persons, it was observed that in
case of the latter, “…there was, nothing against public policy and public morals in such a
transaction per se….”

The Privy Council, in Ram Coomar Coondoo v. Chunder Canto Mookerjee[6], while recognising
that champertous agreements are void in England, held that this principle is not applicable in India,
but would apply to a transaction which is “inequitable, extortionate and unconscionable and not
made with the bona fide objects of assisting a claim”. It was observed in this case that the
prohibition was not absolute, but restricted to “improper objects, gambling in litigation, or of injuring
or oppressing others by abetting and encouraging unrighteous suits”.

In Ram Lal v. Nil Kanth[7] the Privy Council went so far as to hold that “agreements to share the
subject of litigation, if recovered in consideration of supplying funds to carry it on, are not in
themselves opposed to public policy”.

In Lala Ram Sarup v. Court of Wards[8], the Privy Council observed that given the uncertainties of
litigation, the financier “may be allowed some chance of exceptional advantage”.

In Vatsavaya Ventaka Jagapati v. Poosapati Venkatapati[9], the validity of a charge on the

probable decretal amount in favour of the financier was upheld by the Privy Council on the ground
that the financier did not derive an undue benefit and was trying to recover only the amount loaned.
Additionally, if a third-party funding agreement contains an extortionate or unconscionable
objective or consideration (e.g. recovery of a gambling debt), the agreement would be rendered
unenforceable under the Contract Act, 1872.[10]

Projected risks of third-party funding

Despite the benefits highlighted above, there are concerns about third-party funding of arbitration
and there is a level of projected risks involved. Clear insight into the potential downsides and
sufficient risk preparation are therefore essential when making a decision on funding.

Under the 1996 Act, the claimant company would have to disclose any third-party funding
agreement to verify the absence of any connections between the financier and the arbitrator[11].
There are primary risks that arise out of this disclosure for claimant companies. A respondent
might use knowledge of the third-party funding to block the arbitration[12] at the outset, or if the
arbitration proceeds, to challenge it on grounds of it being against Indian public policy[13] or the
Contract Act.

Further, the claimant company is likely to face risks such as dilution of autonomy, conflict of
interest, breach of confidentiality and discouragement of settlement as part of the third-party
funding agreement because of the financier’s involvement.

As mentioned above these are merely projected risks, as neither the legislature nor the executive
has provided an opinion on the issue of third-party funding agreements and the courts have not
had a chance to verify their validity due to the absence of these agreements in relation to
arbitration.

Assuming that third-party funding agreements are rendered legal for arbitrations, the risks would
be best managed by legislating strict rules regarding: (a) the financier’s right to interfere; (b)
penalties for duress and threat; (c) the right to terminate the funding agreement; and (d) rules
regarding confidentiality and disclosures.

Conclusion

Arbitration funding is becoming increasingly prevalent around the world with funders who are
legally sophisticated and understand a wide breadth of claim types, with each funder having a
varying risk profile and appetite.

The International Council for Commercial Arbitration (ICCA), working with Queen Mary University
of London, has created a taskforce that has examined third-party funding in international
arbitration. Public consultation on the draft report ran from 1-9-2017 to 31-10-2017, with a view to
adopt the final report in April 2018 at the ICCA Congress.

American Jurist Oliver Wendell Holmes Jr. had famously quoted:

The life of the law has not been logic; it has been experience. The felt necessities of the time, the
prevalent moral and political theories, intuitions of public policy, avowed or unconscious, even the
prejudices which Judges share with their fellowmen, have had a good deal more to do than the
syllogism in determining the rules by which men should be governed.

In keeping with the felt necessities of the time and to keep pace with current economic scenario
and the global developments in international commercial arbitration, it is essential that India
considers legalising third-party funding of arbitration albeit, with external regulation in the form of
statutory guidelines in order to set out the parameters within which a third-party funding agreement
may apply. The proposed regulation should seek to maintain uniformity in relation to these
agreements, which would further assist in regulating them. Further, it would prevent unscrupulous
agents from misusing third-party funding agreements by establishing the necessary limitations and
penalties.

* M. Rishi Kumar Dugar, Advocate, Madras High Court.

[1] Compbell v. MGN Ltd., 2003 QB 633 : (2003) 2 WLR 80.

[2] Compbell v. MGN Ltd., (2004) 2 AC 457 : (2004) 2 WLR 1232.

[3] Or. 25 of CPC was amended for Maharashtra by Bombay High Court Notification P. 0102/77
dated 5-9-1983. This same amendment has been adopted by Gujarat and Madhya Pradesh.
Allahabad has added only R. 2 of Or. 25, which states that costs may be secured from the third-
party funding of litigation.

[4] AIR 1954 SC 557 : (1955) 1 SCR 490.

[5] R. 20, Bar Council of India’s Standards of Professional Conduct and Etiquette, Ch. II, Part VI,
Bar Council of India Rules, 1975 [read with S. 49(1)(c) of the Advocates Act, 1961 read with the
proviso thereto].

[6] 1876 SCC OnLine PC 19.

[7] 1893 SCC OnLine PC 7.

[8] 1939 SCC OnLine PC 55 : AIR 1940 PC 19.

[9] 1924 SCC OnLine PC 22.

[10] Ss. 27 and 28 of the Contract Act,1872.

[11] Under S. 12, read with Sch. 5 of the 1996 Act even affiliates of parties are covered.

[12] It may be argued that the arbitration agreement (inextricably linked to the third-party funding
agreement) is not prima facie a valid arbitration clause.

[13] S. 34(2)(b)(ii) of the 1996 Act.