A recent judgment from the Delhi High Court has placed arbitration financing in the spotlight and seems to provide more comfort to third-party funders of disputes in India. On 29 May, the High Court stated in Tomorrow Sales agency v. SBS Holdings Inc & Ors. that courts ought not to pass orders dissuading third-party funding on the basis that it was “essential to ensure access to justice”.
Litigation and arbitration financing, also called third-party funding (TPF), is where a third party unconnected to the dispute provides a party with finance to meet the costs of a dispute. This financing could cover attorney/ lawyer fees, the litigating party’s share of the arbitrator’s fees and other expenses, and any costs that may be imposed if the party is unsuccessful. The exact details are set out in a contract between the funder and the litigant.
Funders are typically hedge funds or other alternative investment funds, and their funding can work in one of two ways. The first is straightforward: they lend a party money to be used for litigation/ arbitration, which the party does not have to return if unsuccessful. However, the funders will get a specified portion of any money that the party wins in the proceedings.
Earlier this year, gold exploration company Panthera Resources turned to litigation funder LCM Funding DG for a USD 10.5 million deal to fund its claims against the government of India under the Australia-India bilateral investment treaty. LCM is still completing due diligence, and the deal has not yet closed.
The second type of funding is a little more complex: a party transfers its rights under an arbitration or court award to a funder against a fixed amount of money. The funder then has the right to pursue recovery actions for those awards/ claims. This was the method adopted by asset manager BlackRock in one of the first TPF deals in India. BlackRock paid Hindustan Construction Company (HCC) INR 17.50 billion, and in return, HCC transferred its rights in a portfolio of awards and claims to BlackRock.
The diversity in how these deals are structured reflects a broader uncertainty in the underlying legal framework: there are no national legislations in India regulating third-party funding. However, the Code of Civil Procedure (CPC) has been amended in some states in a fashion that recognises third-party funding as valid.
For instance, in Maharashtra, Order 25 Rule 1 of the CPC specifically allows the court to secure costs by asking the litigation funder to deposit costs in court and be made a party to a suit. However, these only govern proceedings in court and not arbitration.
On the case law side, there is precedent. As far back as 1877, the Privy Council observed that a “fair agreement to supply funds to carry on a suit” was not opposed to public policy, and in fact furthered the interests of rights and justice.
In 2018, the Supreme Court reiterated in Bar Council of India v. A.K. Balaji that there appeared to be no restrictions on third parties funding litigation and being repaid depending on the outcome. However, the caveat was that lawyers could not fund litigation on behalf of their clients.
Beyond this, however, there has been no regulation of the issue of TPF in India. In 2017, the Srikrishna Committee Report on the Institutionalisation of Arbitration recommended that adopting measures to recognise third-party funding for arbitration could boost institutional arbitration in India.
However, the multiple subsequent rounds of amendments to the Arbitration & Conciliation Act, 1996 (Arbitration Act) failed to implement this. In the absence of explicit legal recognition, there could very well be doubts among funders about whether any successful claim they fund will in fact be enforced, and whether the respondent can challenge enforcement on the grounds that TPF was involved.
New case supports third-party funding
The hope is that the Delhi High Court’s decision in Tomorrow Sales goes some way in promoting confidence that TPF is judicially recognised.
In that case, a lender funded a claimant for an arbitration at the Singapore International Arbitration Centre. However, the award ultimately went against the claimant, and the respondent was awarded around INR 96 million.
The respondent asked the Delhi High Court for measures in aid of enforcement. A single judge of the Delhi High Court passed directions against the funder, directing the funder to disclose assets and encumbering the funder’s assets. The funder challenged this order before a division bench of the same court, arguing that it was simply a financier and not party to the arbitral proceedings or the award. The award holder responded that the funder had controlled the arbitration to derive benefits if the claimant was successful.
The division bench agreed with the funder and said that the funder was not obliged to pay any amounts under the award. The bench analysed the funding arrangement and found that it imposed no obligations on the lender to fund the consequences of an adverse award.
The bench said that TPF was “essential to ensure access to justice”, and in its absence, parties with valid claims would be unable to pursue recovery. Therefore, the court said, funders could not be “mulcted with liability” which they had neither undertaken nor were aware of. If not, the court cautioned, funders would be dissuaded from participating in these arrangements.
It would be naïve to assume that this decision alone will clear the air and make TPF more attractive. There are well known systemic issues in the Indian legal landscape that make TPF an uncertain investment, from the well documented delays in enforcing awards, to the perception that courts interfere with arbitral proceedings. Expanding TPF’s presence will require an improvement in these aspects too, along with clear guidelines specifying how it should function in proceedings governed by the Arbitration Act.