Tomorrow Sales v. SBS Holdings: Delhi High Court’s rendezvous with third-party funding

On May 29, 2023, a Division Bench of the Delhi High Court in Tomorrow Sales Agency v. SBS Holdings (TSA v SBS) set aside an order of a single-judge which required a third-party funder to furnish security and comply with other interim measures, for the costs of proceedings awarded against the funded party, in an application under Section 37 of the Arbitration and Conciliation Act, 1996.

The TSA v SBS judgment is a first of its kind, as it discusses highly relevant issues concerning the practice of third-party arbitration funding (TPAF) in India – the practice experiencing proliferation throughout the globe, but one that remains unregulated in India.

The Division Bench in TSA v SBS unequivocally pointed out that an arbitral award cannot be enforced against a third-party funder, one that was not a party to the arbitration proceedings or had any adverse orders against it. The moment which all Indian arbitration practitioners expected to be around the corner has now manifested. The practice of TPAF has now been judicially considered by the Delhi High Court.

This piece consists of four parts and builds an analysis of the TSA v SBS case.

Facts of the case

On the December 20, 2018, SBS Transpole entered into a Bespoke Funding Agreement with Tomorrow Sales Agency (TSA), whereby TSA would, among other things, fund Transpole’s claim for damages to the tune of ₹250 crore against SBS Holdings (SBS) and one other party for reneging on their contractual obligations.

TSA is registered as a Non-Banking Finance Company under Section 45-1 (f) of the RBI Act 1934, and is in the principal business of litigation funding.

The agreement laid down a non-recourse setup, which means that if the funded party’s claim failed, TSA would not be entitled to any recovery of the amount provided by it against Transpole.

A little over two months later, Transpole referred its claim against SBS to arbitration at the Singapore International Arbitration Centre (SIAC). The arbitral tribunal rendered decision in favour of SBS, declaring it free from any liability for damages against Transpole. Costs of proceedings were also awarded in favour of SBS.

SBS had been aware that Transpole was in strained circumstances and the award for costs against it remained undischarged for quite some time. In one last creative effort to recover the costs of proceedings, SBS roped in TSA, the funding party, and demanded that it pays the sums awarded against Transpole. TSA denied any such liability.

To protect its interests while this deadlock was resolved, SBS filed a Section 9 application in the Delhi High Court seeking interim measures in aid of enforcing the arbitral award.

Order of the single-judge – An attempt to render a remedy to a remediless party

When the matter for interim measures against TSA came up before the single-judge, the primary contentions in favour of imposing liability on the TSA were that first, TSA was calling the shots regarding the arbitral proceedings because ir had substantial power to control the proceedings as per the Funding Agreement, including a right to be informed of any settlement to be entered into between the parties. Second, that TSA was involved in funding to make a profit for itself by reserving a pre-emptory claim to recoveries made by the funded party, if any. On this ground, TSA was labelled as the real beneficiary of the arbitral award by SBS.

On the other hand, TSA was neither a party to the arbitral agreement, nor the proceedings. The arbitral award had not been made against TSA either.

The single-judge pointed out the need to strike a balance between ensuring access to justice for the funded plaintiff and the interest of the defendant in recovering the costs of defending meritless claims that would not have arisen without the funding assistance.

The single-judge accepted the arguments of SBS and ordered interim measures against TSA. He reasoned that the Funding Agreement’s termination on failure of Transpole’s claim did not absolve TSA from paying costs as ordered under the arbitral award. The agreement continued to be operative till the delivery of arbitral award; and since the costs awarded therein formed the cost of litigation of the funded party, TSA ought to be liable for the same.

Rationale of the Division Bench – Putting flesh on the bones of third-party funding in India

On appeal by TSA against the single-Judge’s order, a Division Bench of the High Court, consisting of Justices Vibhu Bakhru and Amit Mahajan, started with discussing the necessary ingredient of consent in instituting any arbitral proceedings. The Bench then discussed the various theories that allow for non-consenting entities, and therefore, non-signatories (to the arbitral agreement), to invoke or be roped into arbitral proceedings.

The Bench then took note of the stark differences between what the theories provided for, and what the case at hand involved. The theories (group of companies, alter ego, agency, assignment, etc) provide for making a non-signatory entity a party to arbitral proceedings despite absence of their consent. On the other hand, the controversy between SBS and TSA was not about making TSA a party to the arbitral proceedings, but only that TSA be bound to satisfy the adverse award passed against an opposite party that TSA had happened to be funding.

The Division Bench did not accept the proposition that an entity that could have been deemed a party to an arbitral agreement and proceedings thereunder can be bound by an award passed in proceedings to which it was not made party to. The judgment pointed out that even a signatory to an arbitral agreement is not bound to fulfil an award made in proceedings to which it was not a party.

It also noted that the fact of third-party funding was duly disclosed since the start of the controversy between Transpole and SBS. SBS had still failed to pntain an order for security and costs before the arbitral tribunal despite applying for the same, and had also not applied to make TSA a party to the arbitral proceedings. In the opinion of the Court, TSA could not be treated as a judgment-debtor, simply because that would amount to going beyond a decree during its execution.

For these reasons, the order of the single-judge awarding interim measures against TSA was set aside.

The Bench also failed to find any legal rule either under SIAC’s Rules, the High Court Rules, or the Act, or the Code of Civil Procedure, 1908 that could support a conclusion for imposing costs of proceedings on non-parties to an arbitration. Neither had SBS initiated any substantive proceedings against TSA for determining their liability.

Even though the agreement was only between TSA and the funded party, and therefore not of any use to SBS in ordinary circumstances due to privity of contract, the Bench also pointed out that the agreement also excluded any liability of TSA for adverse awards passed against the funded party. The agreement stood terminated at the failure of the funded party’s claim as well.

Besides this principled reasoning, the Division Bench also advanced the policy goal of ensuring access to justice through third-party funding. The Bench conceded that pursuing claims legally is a costly affair, and in the absence or over-regulation of third-party funding, many meritorious claims might end up not being taken up by parties without necessary financial or legal means. This policy goal requires that third-party funders not be mulcted with liability that they neither undertake nor are aware of, because otherwise, the potential uncertain liability might deter funding.

Takeaways and future developments to look out for

The judgment in TSA v SBS rests on sound reasoning. TSA was not fastened with any liability or made subject to any interim measures because there was nothing to support that conclusion. Even the policy goal of advancing access to justice stood against holding TSA liable.

On the flipside, a regulation of third-party funding should have provisions for compensating the affected party and/or for penalising the funder if it is found in a later case that a funder engaged in funding a claim that it knew to be bogus, with an intention of harassing the other party or profiting from the dispute in some other illegitimate way. State regulation of third-party funding ought to consider this possibility while laying down the law whenever they do so.

More such judgments in this regard are sure to follow given the proliferation of third-party funding in the international arbitration scene globally and the legal vacuum concerning regulation of third-party funding in India.

There are still some major takeaways from this judgment. Third party funding has been recognised as a legitimate and much-needed practice by the Delhi High Court, that allows access to justice for impecunious, indigent, or poor parties.

The High Court has also indicated that existence of a funding arrangement may be relevant for deciding an issue for depositing security of costs by the funder instead of the funded party, something that the arbitral tribunal did not allow in the matter between Transpole and SBS. For this and other purposes, one of which may be to prevent cases of exploitative funding, the Delhi High Court has also batted for transparency in cases involving funders.

It should also be kept in mind that SBS bore its own costs in defending itself against the funded party’s claims, and now finds itself unable to recover costs awarded in its favour, both against the impecunious funded party and against the funder. In regulating third-party funding, the interests of the defendant also need to be kept in mind. There should be legal certainty and consistency in what actions and through what mechanisms a defendant can secure their interests in being made to undergo legal proceedings for a meritless claim, even against a third-party funder. Such liability of the funder may still be held to not arise in non-exploitative ordinary circumstances. Considering this conclusion, one wonders why the arbitral tribunal in this case rejected SBS’ application for security of award and of costs when it was applied for.

For all the reasons discussed above, the judgment in TSA v SBS charts a new path for the arbitration scene in India.

Chandan Maheshwari is a Senior Research Fellow at the National Law University, Delhi.

Shantanu Pachahara is a Assistant Professor at the School of Law, NMIMS University Bengaluru, and a Research Scholar at the Gujarat National Law University, Gandhinagar.