[The Viewpoint] Regulating Third Party Funding in Arbitration in the Indian Context

Third party funding (TPF) is the process wherein a party unconnected to the arbitration proceedings funds the dispute proceedings for a party in return of a share in the win. To put simply, a party who is not a signatory to an arbitration agreement bears all costs of a party in contesting/defending the arbitration proceedings. Typically, such sponsorship covers the legal fees of the funded parties including the fees of their counsel and their share of the arbitrator’s fees and any other ancillary expenses that may be incurred during the arbitration including the costs of the other side, if imposed on the funded party.

Generally, investment banks, hedge funds, insurance companies and pension funds, fund such arbitration proceedings. TPF in arbitration is a fairly novel concept and hence, unregulated. The provisions governing TPF should not only encompass their applicability during the course of the arbitration process but should commence from the time the arbitration agreement is drafted.

TPF is administered through an agreement. TPF agreements can be broadly categorized into two kinds, viz. ‘Single Case’ funding and ‘Portfolio’ funding. A single case funding covers a single claim or action whereas a portfolio funding covers multiple claims of a single client. The reasons for opting for TPF are inter alia:

• The parties to the arbitration may not have the requisite financial competence to engage in a lengthy and complex arbitration;

• Parties may be unwilling to allocate their own resources to finance such time-consuming proceedings; and

• The uncertainty of winning or receiving the claimed compensation thereby burning a hole in their own pocket.

Although TPF offers some lucrative benefits to parties to arbitrations, however, the ethical conundrums are not to be overlooked. Some such moral concerns are:

• Arbitrator comportment with relation to his potential conflict with the funding party;

• Funding party’s involvement in the choice of arbitrator, thereby influencing the final damages awarded; and

• Abuse of pecuniary dominance by the funding party vis-à-vis the other party.

The role of common law in condemning ‘maintenance & champerty’ is one of the reasons that the growth of TPF has been constrained in various countries especially common law jurisdictions.

a. Maintenance is the “assistance in prosecuting or defending a lawsuit given to a litigant by someone who has no bona fide interest in the cause; meddling in someone else’s litigation.”

b. Champerty is defined as “[a]n agreement between an officious intermeddler in a lawsuit and a litigant by which the intermeddler helps pursue the litigant’s claim as consideration for receiving part of any judgment proceeds . . . .”

The doctrines of maintenance and champerty prohibited third parties from funding an unconnected party’s litigation. However, the common law jurisdictions are showing an increasing trend of abolishing the archaic doctrines of maintenance and champerty or at least excluding arbitration from their purview.

However, all the above contentions against TPF compel us to ponder whether we need some legislative guidance to regulate it.

The following nations have made considerable strides in regulating TPF:

• Hong Kong – On 1^st February, 2019, Hong Kong amended the Arbitration Ordinance to bring about changes such that the offence and tort of maintenance including champerty does not apply to arbitration. Consequently, TPF was permitted in arbitration where the place of arbitration is Hong Kong. However, funding may not be provided by a lawyer or legal practice acting for a party or likely or former party to arbitration. The key provisions of the HK Code are as follows:

  i. Application – The HK Code applies to third party funders, being a person who is a party to an arbitration funding agreement who does not have an interest in the arbitration other than under the funding agreement.

  ii. Application Date – The HK Code applies to funding agreements commenced or entered into on or after 7 December 2018.

  iii.  TPF Agreement – The funder must make the funding party aware inter alia of the following points pertaining to the TPF agreement:

  a) Their right to seek independent legal advice; and

  b) The key features and terms of funding.

  iv. Capital Adequacy – The HK Code contains capital adequacy requirements including maintaining the capacity to cover all funding liabilities under all funding agreements for minimum period of 36 months and access to at least HK$20 million of capital.

  v. Conflict of Interest – The funder must maintain effective procedures for managing any conflict of interest.  This should be done by senior management or partners of the funder. Effective procedures should include written procedures for identifying and managing conflicts of interest and implementation of such procedures. Conflicts of interest may include a situation in which a lawyer acts for both the funder and a funded party or in which there is a pre-existing relationship between any such parties.

  vi. Disclosure – The Code provides that the funder must remind the funded party of the obligation to disclose the identity of the funder for the arbitrator to carry out a conflict search.

  vii. Confidentiality & Privilege – Parties’ obligation to maintain confidentiality about arbitration proceedings is an inherent ingredient of arbitration. However, the HK Code permits an exception to this norm in case of TPF wherein, the funded party is permitted to divulge necessary details to the funder in order to receive appropriate funding from the latter.

  viii. Costs – The HK Code has also attempted to address a controversial issue in international third party funded arbitration, by providing that the TPF agreement should delineate the adverse costs to be borne by the funder.

  ix. Control – The HK Code specifies that the funder shall not wield any influence or control whatsoever on the funded party or the arbitral tribunal except to the extent permitted by law.

  x. Grounds for Termination of TPF Agreement – The HK Code specifically mentions the grounds available to a funder or a funded party to terminate the TPF agreement and forbids a discretionary use of such power to terminate the TPF agreement.

In Cannonway Consultants Limited v. Kenworth Engineering Limited, the Supreme Court of Hong Kong excluded arbitration from the purview of the doctrine of champerty, thus advocating TPF in arbitration. While doing so, it held that the doctrine of champerty should not be extended from the public justice system to the private consensual system i.e. arbitration.  

• Singapore - As a result of the Civil Law Act's modification in 2017, Singapore has accepted TPF in arbitration vide the Civil Law (Third-Party Funding) Regulations, 2017 (“Regulations”). The common law torts of champerty and maintenance were abolished in 2017, and funding was permitted—but only for international arbitration and associated cases. However, since 2021, TPF is now permitted in domestic arbitration and court cases resulting from or related to domestic arbitration. Even though Singapore has enacted a legislation on TPF, it is far from exhaustive, and it just provides for the qualifications of funders.

According to the Regulations, in order for a party to be eligible to provide funding under the Act, the funding of dispute resolution proceedings must be its "principal business" (in Singapore or elsewhere), and the third-party funder must have "a paid up share capital of not less than $5 million". The Regulations coming into force was accompanied by related amendments to Section 107 of the Legal Profession Act (LPA) and the professional conduct rules for lawyers in Singapore (the Legal Profession (Professional Conduct) Rules 2015 (LPRCR).

In Lao Holdings NV v. The Government of the Lao People’s Democratic Republic, the Singapore International Commercial Court held that the common law prohibitions against maintenance or champerty are illegal and a TPF contract is not contrary to public policy. The Court also held that the TPF framework was initially only applied to international arbitration proceedings, as well as court or mediation proceedings connected with such arbitration proceedings, as per Rule 3 of the Civil Law (Third-Party Funding) Regulations 2017. However, in 2021, the regulations were amended by the Civil Law (Third-Party Funding) (Amendment) Regulations 2021, which extended the application of the TPF framework to all arbitration proceedings (including domestic arbitration) and related court proceedings, as well as “proceedings commenced in the Singapore International Commercial Court for so long as those proceedings remain in the Singapore International Commercial Court”, appeals arising from decisions of the SICC, and mediation proceedings relating thereto.

• United Kingdom – Although UK has also abolished the archaic concepts of maintenance and champerty, TPF is not yet a regulated regime unlike Hong Kong. In 2018, the Report of the ICCA-Queen Mary Task Force on Third Party Funding in International Arbitration (“Task Force Report”) sought to bridge the gap between the theoretical expectations from TPF and its practical execution. The Task Force Report provides a comprehensive overview on TPF and ancillary concepts thereto. However, this Task Force Report does not pertain particularly to the UK but it governs international arbitration, in general.

• France – TPF in France is not illegal per se and in fact TPF has been qualified as a 'contract sui generis' by a French Court. Apart from this however, there is a noticeable dearth in regulation surrounding TPF despite Paris being an international arbitration hub. The validity and legitimacy of TPF in arbitration in France was actually affirmed in a Resolution adopted by the Paris Bar Association on the 21 February 2017.

Thereafter, the Conseil de l'Ordre of the Paris Bar released a report in support of TPF particularly in relation to international arbitration. To date, the Resolution and the Report are the only documents to address TPF in arbitration under French law. Both the Resolution and Report confirm that no provision of French law "prevents a party from using the services of a third party to finance an international arbitration procedure" and that TPF is in the interests of clients and counsels alike.

In the Indian context, there exists no statutory framework for regulating TPF, neither in litigation nor in arbitration, unlike the countries mentioned above. There are a few judicial decisions that have dealt with TPF, but that too on a superficial level. There is, hence, a lull in the growth of the TPF industry in India, as funders are apprehensive of investing in an unregulated market.

In 2017, an arbitral award passed by Justice Phillip Otton in London was challenged in the Hyderabad High Court, and one of the grounds of the challenge was the presence of a third-party funder. However, the petition was subsequently withdrawn. Although the Srikrishna Committee Report recognised the importance of TPF in arbitration, the Arbitration (Amendment) Act, 2019 fails to take it into consideration. It is therefore but obvious that India direly needs a regulated mechanism for TPF to increase access to arbitration by relieving parties of the financial risks involved.

The high costs involved in arbitration i.e. cost of the counsel as well as the arbitrators, are dissuading genuine parties to pursue arbitration. Even when claimants have high chances of success, only because of the expenses involved, they opt either to settle or not to file for arbitration. However, if TPF is permitted in India along with necessary regulations to safeguard interest of the parties, in the Author’s opinion, it may be beneficial.

There is no Indian precedent on TPF in arbitration, however, the Hon’ble Supreme Court in Bar Council of India v. A.K. Balaji & Ors., held that a lawyer is forbidden from financing his client’s claim but “There appears to be no restriction on third parties (non-lawyers) funding the litigation and getting repaid after the outcome of the litigation.” From the aforesaid, it may be safely inferred that as of today, there is no legal bar if TPF is allowed in arbitration in India.

Anant Garg is a Partner and Sreejita Mitra is an Associate at DSK Legal.