Arbitration Reforms: The Crying Need for Legislation on Third-Party Funding

Nearly eight years have passed since the 2015 amendments to the Indian Arbitration and Conciliation Act, 1996, and since India’s stated goal of becoming an arbitral destination. However, comprehensive legislation on third-party funding (“TPF”) continues to elude us. The absence of legislation governing TPF in India presents a significant obstacle to India being a serious contender as an arbitral hub.

Despite the decision of Bar Council of India v. A.K. Balaji & Ors. ([2018] 5 SCC 379) where the Supreme Court observed that there appears to be “no restriction on third parties (non-lawyers) funding the litigation and getting repaid after the outcome of the litigation”, medieval doctrines of maintenance and champerty continue to exist in principle.

Maintenance refers to the provision of financial support for legal proceedings by an unrelated third party, while champerty is a specific form of maintenance where a third-party funds legal proceedings in exchange for a share in the resulting proceeds. As far back as 1876, while the Privy Council, in Ram Coomar Coondoo v. Chunder Canto Mookerjee [1876 SCC OnLine PC 19], recognised that champertous agreements are considered invalid in England due to their conflict with public policy, the prohibition does not apply in its entirety to India.  The application of champertous agreements would be applicable only to transactions that are “inequitable, extortionate and unconscionable and not made with the bona fide objects of assisting a claim”. This case set the early tone that the prohibition was not absolute but confined to situations such as “improper objects, gambling in litigation, or of injuring or oppressing others by abetting and encouraging unrighteous suits”.

More than a hundred years later, in Tomorrow Sales Agency Pvt. Ltd. v. SBS Holdings Inc. & Ors. [2023 SCC OnLine Del 3191] a Division Bench of the Delhi High Court has recently set aside an order of the Single Judge, which had directed interim measures to be taken against TSA, the third-party funder, in an application filed by SBS under Section 9 of the A&C Act, 1996. The Single Judge had inter alia directed TSA, the funder, to disclose its assets and furnish security for the amount awarded in the arbitral award and restrained it from alienating or encumbering its assets. The Division Bench set aside the Single Judge’s order, inter alia holding that if TSA was not a party to the arbitration proceedings or the arbitral award, then an application securing amounts in dispute against it, would not be maintainable; and that as TSA was not a party to the arbitral award, and had no obligation to pay any amount under the award, it could not be treated as a judgment-debtor for purposes of enforcement.

Interestingly, the Court in Tomorrow Sales made a distinction and highlighted that SBS sought interim measures in aid of enforcement of an arbitral award, and not costs against third parties in a suit, stating that - “Thus, the powers of the courts to award costs in a trial would have no relevance for determining whether the awarded amount can be recovered from a person who is not a party to the arbitral proceedings or the arbitral award.”.

While highlighting the importance of transparency and non-exploitative practices in TPF, the Court also underscored its importance in ensuring access to justice, stating, “In absence of third-party funding, a person having a valid claim would be unable to pursue the same for recovery of amounts that may be legitimately due”, and that “Third party funders play a vital role in ensuring access to justice.”. [That said, it is important not to lose sight of the fact that the observation of the Court in Tomorrow Sales, to this extent, are obiter dicta].

There can be no argument against the fact that TPF is a necessary concomitant to the increase in commercial litigation. Invariably, there will be a requirement for TPF, particularly for parties that may not have access to funds to sustain protracted litigation. In the absence of TPF, individuals and businesses with valid claims may be unable to pursue them due to financial constraints. TPF allows claimants to overcome these barriers by providing financial support for litigation/arbitral fees and expenses, which is particularly crucial in a country like India, where a significant portion of the population faces financial limitations in seeking legal recourse.  The situation becomes exacerbated for those pitted against a party with greater resources.

Moreover, if India truly wishes to become an arbitration destination, keeping pace with international practices, such as in Hong Kong, Singapore and France, is imperative. A robust litigation funding framework would attract domestic and foreign investment, stimulating economic growth.

It may be mentioned that India’s reticence to the legal recognition of TPF is even more concerning in light of recent strides to open up India’s legal sector to foreign lawyers, by virtue of the Bar Council of India Rules for Registration and Regulation of Foreign Lawyers and Foreign Law Firms in India, 2022. The validity of the said Rules aside; it is nevertheless important to note that a level playing field for Indian lawyers will remain a pipe dream until they can avail of TPF – and contingency fees – the way their foreign counterparts can.

Further, as the procedure for merit assessment of claims becomes increasingly sophisticated, funders rely on teams, including of claim assessors, technical experts, forensic investigators, and local law firms, to assess the viability of disputes. With advancements in artificial intelligence and machine learning, this process will not only create job opportunities and promote competition but will also position funders as credible gatekeepers, weaning out unmeritorious claims through exhaustive, data-driven decisions.

In recent years, the TPF landscape in India has witnessed notable developments, including the emergence of several funding entities, growth of industry groups, and an increase in parties availing of TPF. However, in the absence of legislative guidance, stakeholders are compelled to rely on developing self-regulatory standards and limited judicial precedent to navigate India’s TPF waters.

The concerns surrounding TPF in India go further than its legality – questions arise on transparency of funding arrangements, balance of confidentiality v. disclosure; what would amount to exploitative TPF agreements; adverse costs, and conflict of interest. Further, there are deeper economic/financial considerations, including those of foreign exchange and the treatment of repatriation of funds, tax questions, and treatment of income from funding arrangements.

The absence of comprehensive legislation governing TPF leaves these questions unanswered and undermines India's progress as an arbitration hub. It is imperative to enact specific legislation which would not only encourage the growth of TPF in India but also provide confidence to funders looking to operate within the country. As the Delhi High Court in Tomorrow Sales observed - “Any uncertainty in this regard would dissuade third party funders to fund litigation.”.

A 2021 “Survey Report on Third Party Funding in India” by the Maharashtra National Law University, Mumbai’s Centre for Arbitration and Research, highlights stakeholders’ calls for clear regulations. In response to the question, “What are the regulatory or legal reforms pertaining to third-party funding you would like to see in India?”, funders stated, “there is a need for a general framework of regulations to clear the ambiguities surrounding TPF in India, including the scope of permissibility, tax matters, disclosure issues, adverse costs, contingency fee agreements; and specifically, a law abolishing champerty and maintenance similar to the Singapore law, for the sake of clarity.”

With the constitution of the expert committee, India has an opportunity to enact legislation while TPF is still at the nascent stage in India, ensuring its effective and regulated integration into the Indian legal system, positioning India as a TPF-friendly jurisdiction, and an arbitral hub.

Payal Chawla is a practicing advocate specializing in arbitration and commercial litigation and is the founder of JUSCONTRACTUS.

Aastha Bhardwaj is an Associate at JUSCONTRACTUS.