By Rishika Sharma and Shambhavi
[Authors are final year students at Chanakya National Law University]
ABSTRACT
With India’s growth as a global commercial hub, inviting businesses and corporations, it is natural that there are expectations for smooth arbitration proceedings. Third-party funding emerges as a win-win situation, where claimants can access financial support to pursue their claims, and funders can find an investment outlet . Absence of regulations is creating a risk prone environment for TPF, and the situation appears to be dawdling. In order to create an avenue for TPF, arbitral institutions in India need to step in. Through procedural rules on TPF compliant with best practices, arbitral institutions can help funders navigate Indian arbitration landscape.
INTRODUCTION
Another Asian, predominantly common-law jurisdiction has embraced third-party funding [“TPF”] within its arbitration laws. The recently passed Arbitration (Amendment) Bill 2024 will introduce significant changes to the Arbitration Act 2005 in Malaysia. Out with the old rules on maintenance and champerty and in with the new provisions regulating TPF.
TPF is basically a financial arrangement wherein a third party provides financial support to one of the parties in the dispute in exchange for a share of the monetary award accrued. The third party is generally not entitled to reimbursement if the funded party loses. TPF enables financial access to justice, for parties who might not have the financial means to set the wheels of justice in motion.
Currently, the TPF industry is witnessing exponential growth and litigation is no longer a luxury for the rich. The last decade saw countries adopting TPF in arbitration with great fervour, revoking doctrines of maintenance and champerty. Maintenance refers to an act by an unrelated party of encouraging or maintaining a litigation proceeding, through financial funding. Champerty refers to financing a suit, in return for a part of the sums accrued. Both were prohibited under criminal and tort laws.
TPF in India has seen significant growth, marked by the rise of various funding organisations. However, without legislative direction, stakeholders have to depend on underdeveloped self-regulatory standards and existing judicial precedents, which creates of a non-conducive environment for arbitration.
The authors have therefore suggested that in the dearth of legislation, TPF in India can be regulated by arbitral institutions themselves through their rules. The article begins by examining the TPF regime in other jurisdictions, and moves on to describing the TPF landscape in India. Finally, the authors analyse how arbitral institutions can set the stage for TPF.
TPF REGULATIONS IN INTERNATIONAL ARBITRATION HUBS
While TPF is gaining traction, the legal regime varies from country to country. In order to evolve a TPF regime in India it is important to examine how other jurisdictions have already embraced TPF through legislation.
Singapore: Singapore saw a tectonic shift in the TPF framework on 1st March 2017, when the Civil Law (Amendment) Act, 2017 was passed abolishing these torts, thus paving the way for TPF in international arbitration. Up until 2021, TPF was limited to international arbitration proceedings. Accordingly, the Singapore International Arbitration Centre [“SIAC”] vide Practice Note dated 31st March 2017, captured the obligations of the arbitrator with respect to external funding.
Hong Kong: The Arbitration Ordinance of 2017 came into force in February 2019. Thus, making TPF legal in instances wherein the place of arbitration is in, or outside Hong Kong. Similar to SIAC, the Hong Kong International Arbitration Centre [“HKIAC”] vide 2018 HKIAC Administered Arbitration Rules also developed provisions related to TPF with respect to disclosures and costs.
Australia: The origins of TPF are owed to this country, which began by allowing insolvency practitioners to engage in TPF in the 1990s. Surprisingly, till date, no centralised regulations are overlooking the arrangements of TPF in the country. However, keeping pace with the growing market of TPF, the government introduced the Corporations Amendment (Litigation Funding) Regulations 2020 requiring litigation funders to register themselves under the Australian Financial Service License. Following this, the Australian Centre for International Commercial Arbitration [“ACICA”] introduced the revised 2021 ACICA Arbitration Rules, mandating disclosure of TPF arrangements.
TPF LANDSCAPE IN INDIA
In India, maintenance and champerty did not face prohibition and TPF in litigation has been acknowledged. The Code of Civil Procedure, 1908 has been amended by some states to accommodate these provisions as in Uttar Pradesh, Tamil Nadu, and Orissa.
The Privy Council in Ram Coomar Coondoo v. Chander Canto Mookerjee, held that the English doctrines of champerty and maintenance are not applicable in India, and TPF agreements that are not violative of public policy and can be treated at par with other contracts. An exception arises when the funder happens to be a legal practitioner, as held in cases of Re:‘G’ A Senior Advocate of the Supreme Court, a more recent judgement of Bar Council of India v. AK Balaji.
The Arbitration and Conciliation Act 1996 (“the ACA”) does not address TPF in arbitration. Nonetheless, the fifth schedule to the ACA prohibits an arbitrator having significant financial interest in either of the parties or outcome of the case from participating in the proceedings. Section 42A was incorporated via 2019 Amendment, mandating confidentiality of information in arbitration proceedings, which can include TPF contracts.
The Report of the High-Level Committee to Review the Institutionalisation of Arbitration Mechanism in India, recommended developing supporting legislation enabling third-party funding for arbitration and associated proceedings. The committee acknowledged that legislation on third-party funding in arbitration shall impact the world’s perception of India as an arbitral seat, simultaneously enhancing the growth of arbitral institutions in the country.
The recent ruling by a Division Bench of the Delhi High Court in Tomorrow Sales Agency Private Limited v. SBS Holdings, Inc. & Ors (“Tomorrow Sales”), set aside the decision of the Single Bench, to hold that a third-party funder, who was neither a signatory to the arbitration agreement, nor a party to the arbitration proceedings, cannot be held liable to pay adverse costs or be bombarded with enforcement actions.
CAN ARBITRAL INSTITUTIONS LEAD THE WAY FORWARD?
When it comes to TPF in arbitration, there is no regulatory mechanism in the form of legislation, and the precedents are scarce. The Division Bench in Tomorrow Sales was successful in highlighting the role of TPF as an instrument essential to ensure access to justice, and emphasised the need to regulate TPF in arbitration. With rampant judicial interference in arbitrations in India, mere acknowledgement of TPF, would only create uncertainty for parties, and a consequent rise in the number of litigations. Dependence on the judiciary for interpretation of various nuances of TPF in arbitration is antithetical to the principle of minimal judicial interference. Additionally, judicial pronouncements would be unable to resolve policy questions surrounding TPF.
Currently, the situation in India appears dawdling. The judicial pronouncements so far reveal that while we don’t lack intention, we do lack regulation. Along with the rule of law, our current Hon’ble CJI has also emphasised on the need for establishing robust institutional framework, paving the way for resolution of commercial disputes in India.
International arbitration in general, and TPF in particular happens to be an unregulated part of the private international law system. Arbitral Institutions, through their procedural rules, happen to be the backbone of the jurisprudence surrounding this unregulated sector of law. Not only do they function as a rulemaking body, but are also entrusted with promotion of international arbitration in their respective jurisdictions as a method for dispute resolution.[1] The economic influence of having a notable arbitral institution is understood by governments, and consequently, there is a rise in the number of arbitral institutions across the world. We can observe a dynamic system of rulemaking, in accordance with renowned guidelines like that of the International Bar Association and other Best Practices.
This power to make rules, in turn, endows them with significant ability to influence the growth of TPF, both nationally and internationally. With the burgeoning international TPF market, it has become imperative to address the concerns that come with it, including disclosure requirements, and its balance with confidentiality, transparency, cost issues, etc.
The rules of the arbitral institution, combined with the seat, greatly influence the process of dispute resolution. The selection of the seat is crucial to deal with the consequences flowing from the arbitration-related issues in that jurisdiction. India ranked third in the list of top foreign users at SIAC for the year 2023, which is a testament to strong rules and regular reviews that enable efficiency and access to justice.
India seeks to attract foreign investments and businesses in its efforts to globalise its economy. An important factor to ascertain the same is a smooth and efficient dispute resolution system. The absence of regulations creates uncertainty in the enforcement of awards, which drives people to arbitrate under favourable jurisdictions. As stated by the Hong Kong Law Reform Commission report, TPF regulations can prevent attrition of prospective parties to an arbitral institution under a different jurisdiction. For instance, in the case of HKIAC, the incorporation of TPF provisions has shown an increment in TPF-related disclosures from 3 in 2020 to 73 in 2022. Similarly, it has been stated that the introduction of express provisions on TPF by SIAC, has greatly facilitated the rise in the number of arbitrations.
The success of proper and concrete self-regulation, in absence of a centralised framework can be witnessed in Australia, with no centralised regulations governing the TPF practice, except licensing requirements under 2020 Regulations. A positive step has been observed in this direction, in India, with the introduction of new Draft Mumbai Centre for International Arbitration (MCIA) Rules 2024, which incorporates disclosure provisions for TPF agreements.
A sustainable arbitration regime is dependent on a conducive arbitration milieu, which in turn depends on legal protection and appropriate judicial support. Nonetheless, in absence of formal regulations, arbitral institutions can take upon themselves to adopt such rules that can answer process and policy questions surrounding TPF. This will help nurture the nascent TPF market in India, and create an incentive for our policymakers to legislate upon this issue.
CONCLUSION
The landscape of TPF in India is at a critical juncture awaiting legal recognition which in turn shall pave the path to justice for individuals facing financial constraints. In order to create a conducive environment for international commercial arbitration, it is important that our institutions uphold best practices and take proactive steps in establishing guidelines fostering an environment that embraces TPF and simultaneously substantiates India’s motive to rise as the epicentre of international foreign investment.
[1] Alexis Mourre, ‘Arbitral Institutions and Professional Organizations as Lawmakers’, in Jean Engelmayer Kalicki and Mohamed Abdel Raouf (eds), ‘ICCA Congress Series No. 20 (Sydney 2018): Evolution and Adaptation: The Future of International Arbitration, ICCA Congress Series’, (ICCA & Kluwer Law International 2019, Vol 20).