Saurabh's article was published in Law.com International, 27 August 2023, and can be found here.
Third-party funding and the evolution of arbitration in India
In the recent case of Tomorrow Sales Agency Private Limited v. SBS Holdings, Inc. and Ors. 2023 DHC 3830-DB, a Division Bench of the Delhi High Court ruled that those who provide third-party funding are not liable to pay adverse awards in arbitration claims.[1] This is a landmark ruling which will change the landscape of arbitration in India, and is indicative of a shift in the Indian legal system to become more conducive to arbitration and mediation.
Arbitration is now a preferred method for resolving commercial disputes in India due to its flexibility, efficiency and confidentiality. However, the cost of arbitration proceedings and the potential for prolonged legal battles can bring significant challenges for the parties involved. In response, the concept of third-party funding has gained traction as a means to mitigate financial risks and enhance access to justice.
The decision in the SBS Holdings case has set an important precedent by making arbitration more accessible. The Court’s ruling not only promotes overall access to justice, but also enables those with limited financial resources to engage in arbitration, increasing the likelihood that meritorious claims are won and justice is rightfully distributed.
Third-party funding is a mechanism for a neutral third-party - typically an investor or a specialised funding entity - to provide financial support to one of the disputing parties (usually the claimant, or a defendant bringing a counterclaim) to cover the costs of arbitration or litigation. In return, the funder receives a share of the proceeds if the case is successful.
The Indian judiciary has historically been cautious about allowing third-party funding in arbitration and litigation proceedings, as such arrangements were considered to be in violation of the doctrines of champerty and maintenance. These doctrines were seen as safeguards to protect the sanctity of legal proceedings and prevent undue influence by external parties. However, with the evolution of global commercial practices and the need for more efficient dispute resolution mechanisms, the Indian judiciary has gradually recognised the potential benefits of third-party funding and have allowed it in certain cases. The recent decision is another step forward in making access to justice easier for those who cannot afford the often expensive and long process.
By allowing non-signatories to fund arbitration and avoid paying adverse awards, the courts have clarified the risk exposure for third-party funders. By limiting their exposure, funding litigation is now a far more attractive proposition. The knowledge that a party is being funded may encourage early settlement of disputes and discourage frivolous claims as funders are likely to perform thorough due diligence before investing in a case.
The ruling supports this environment and marks India’s continued commitment to promoting a favourable environment for resolving complex disputes and attracting international parties. This could well mark the start of India’s rise in the arbitration space and mirrors the similar rise of Singapore, which has quickly ascended the global ranks of international arbitration and has consequently matched London’s dominance.[2]
However, there are potential problems with third-party funding regarding conflicts of interest, ethical standards and transparency. Although there is no general obligation in arbitration for the party being funded to disclose its funding arrangement, different arbitral institutes have adopted rules that can require disclosure regarding third-party funding to avert allegation of conflicts by the opponent.
Nevertheless, the Delhi Court accounted for some of these concerns by stating that there may be circumstances when non-signatories are bound by an arbitration contract. Such circumstances include when a court suspects that the third-party is an alter-ego. In such instances, it may be necessary to pierce the corporate veil. The court has in the past also made adverse orders against funders who had taken undue control of cases to the extent that the funded parties lost their autonomy,
The establishment of the recent precedent is an example of progress and growth in the Indian judicial system. However, India’s future as a global leader in arbitration depends on how the judicial system deals with the other aims and requirements of arbitration as well. These include India’s ability to “implement technological advances to maintain procedural efficiency and effectiveness”.[3] Enacting such improvements will enable India to be truly globally competitive at last.
[1] In a recent landmark decision in R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal [2023] UKSC 28 the UK Supreme Court held that litigation funding agreements which allows funders to take a share of the claim proceeds should be treated as “damages-based agreements” and must comply with the statutory definition. Consequently, if the litigation funding agreement does not comply with these formal requirements, they will be unenforceable. The immediate effect of the judgment would necessitate the funders to review their funding agreements as most of those agreement will be unenforceable and there are views that in order to counter the effect of the Supreme Court judgment, the UK Parliament may also have to intervene to regulate this industry.
