Introduction:
Third-party funding in domestic and international arbitration and litigation is an upcoming development that is gaining worldwide momentum. It essentially means investing in the claimant in order to gain profits from the monetary settlement or award. The primary objective behind third party funding is to create a level playing field between the parties in a dispute by leveraging the capital. Third-party funders include investment banks, hedge funds that invest in commercial arbitrations which have a higher probability of winning a substantial sum.
Arbitration is expected to be cost-effective but it has become an expensive affair, both domestically and internationally. Hence, the funding could cover legal expenses including, arbitrator’s fee, counsel’s fee, tribunal’s s fee, adverse costs, etc. There is a need for India to develop regulations and guidelines regarding third-party funding in arbitration due to the lack of legislative framework in the country.
The paper aims to analyse the validity of third-party funding in domestic arbitrations in India by examining various case laws and statutory provisions. It will further provide a comparative analysis with several jurisdictions such as Singapore, Hong Kong, Britain that have taken key decisions in this regard. Finally, it will highlight certain issues concerning third-party funding and offer some solutions and suggestions to tackle it. Hence, the paper will argue that third-party funding is beneficial for Indian society as a whole and should be effectively implemented.
Background & Comparative Analysis
The ancient common law doctrine of champerty and maintenance prevented funding litigation by a third party with no personal interest in the dispute. However, England and Wales abolished this archaic law by passing the Criminal Law Act, 1967 to facilitate the litigation funding in the market of England and Wales. In 2011, they set up a voluntary Code of Conduct for Litigation Funders called the “Association of Litigation Funders” which adopted a guiding tool for better facilitation of Third-party funding. Other countries also followed suit and abolished these traditional common law doctrines in their jurisdiction.
Singapore and Hong Kong are two major arbitration hubs in Asia which have recently formulated a legislative framework to regulate third-party funding.
Singapore passed the Civil Law Amendment Act in 2017, which eliminated the prohibition against third-party funding for international arbitrations but the restrictions continue for domestic arbitration and state litigations. It has laid down certain requirements such as eligibility criteria, duties of lawyers, disclosure, etc. the lawyers have to mandatorily disclose all the necessary details regarding the funding agreement as well as about the funder. The lawyers are further prohibited from having any interest or personal involvement with respect to a funding agreement.
Hong Kong has introduced amendments to legalise third-party funding for arbitrations seated in Hong Kong. In 2019, it implemented “Hong Kong’s Code of Practice for Third-Party Funding in Arbitration” which is a comprehensive piece of legislation covering all important aspects. It has further issued guidelines for the code of conduct and the principles of practice. It prescribes several important criteria such as disclosure of conflict of interest; terms and conditions of the funding agreement regarding termination, control, adverse costs; and requirements of capital adequacy. Therefore, it provides a more holistic approach by taking into account all the shortcomings of Singapore and Britain and formulating a better legislation.
In contrast to Britain, these two jurisdictions have a mandatory requirement for disclosure whereas it is only a voluntary requirement in Britain. Singapore and Hong Kong have set out an example for the rest of the jurisdictions by establishing such rules on a national level which is completely new in the world of arbitration.
Legal validity in India
There are no specific bar or prohibition against third party funding in arbitration in India except for the public policy principles that have acted as a hindrance in the past. The Supreme Court in the case of Bar Council of India v. A.K. Balaji[1] upheld the legal validity of third-party funding in litigation provided that the funder is not a lawyer. Hence, the Indian courts have held that the rules of maintenance and champerty are not applicable in India or violative of public policy as long as legal practitioners are not involved in the transaction. This judgment was also followed in B. Sunitha vs. State of Telangana[2] wherein, the court held that the advocates cannot have any interest arising out of the outcome of the proceedings and agreements on a contingency fee is bad in law.
One of the most important factors for introducing third party funding in the arbitration is to provide resources to those who are less privileged and cannot afford the heavy arbitration costs. There are provisions for free legal aid in the case of litigation but no such provision exists in the Arbitration and Conciliation Act, 1996 (“Arbitration Act”). Hence, the litigant has a constitutional right to access to justice but a party to arbitration would have to forfeit its claim due to financial restraints. Therefore, it is important to implement a mechanism that is similar to legal aid in litigation.
One of the essential factors of arbitration is party autonomy and hence the parties should be allowed to decide if it requires funding from a third party. The courts can further affirm this decision after examining the benefits and the risks associated with such a funding agreement. The Arbitration Act further empowers the court to impose a penalty on the parties in case they bring forward a frivolous or vexatious claim. However, the court has suggested that third party funders would not risk investing in a claim that is frivolous or is not likely to succeed.
Therefore, third party funding would act in the interest of the state by encouraging more people to participate in arbitration proceedings. It is necessary to bridge the gap between legitimate claims and the lack of financial resources for the same. The Supreme Court ruling has further paved the way for third party funding by non-lawyer entities and created a room for making regulations in this regard.
Issues and Suggestions
There are certain issues surrounding third party funding that includes the impartiality of arbitrators, security of costs, confidentiality, etc. The arbitral tribunal does not have the power to adjudicate matters outside the purview of the arbitration agreement. Hence, it does not have the jurisdiction to deal with the funding agreement since the funder is not a party to the arbitration.
The disclosure principle entails that all the necessary details of the funding agreement may be revealed to avoid any conflict of interest. It is imperative for the parties in a dispute to disclose the existence of the funding agreement to ensure the independence and impartiality of the arbitrators. The Arbitration Act further stipulates that the arbitrator must disclose in writing anything that would create doubts regarding his independence or impartiality.[3] Hence, the arbitral tribunal can compel disclosures to preserve the integrity of the arbitral proceedings.
The second issue is regarding the security of costs which opines that a funder may withdraw his support by disappearing in the middle of the proceedings, at the time of payment since he is not a party to the dispute. Hence, it is important to demarcate the degree of control that the funder may possess at the beginning of the arbitration. Another issue is regarding confidentiality as sharing private case-related information with a third party might waive the attorney-client privilege.
One of the solutions is to draw up agreements that stipulate clauses for disclosure, confidentiality, and security of cost to prevent any future mishaps. It is pertinent for the courts to issue certain rules and guidelines in this respect as it is important to balance out the drawbacks against the benefits. The courts in India have a crucial role to play in making regulations for third party funding by amending or reinterpreting the existing provisions to help the courts and tribunals effectively adjudicate the matter. There is also a risk of over-regulating which might effectively restrict the application of third party funding. Hence, it is important to develop a set of non-binding rules which offer greater flexibility to the legal practitioners such as international guidelines and institutional arbitration rules.
Conclusion
Taking into account the above discussion, it can be argued that third-party funding in the arbitration is a step in the right direction. India needs to formulate legislation for the regulation of third-party funding like other jurisdictions to facilitate advancement in the arbitration sector. There is a need for adopting a transparent mechanism for the funding process to avoid any ethical or moral dilemmas. Third-party funding is beneficial for society and should be implemented to promote access to justice in India and hence, outweighs the public policy doctrine.
The idea is to popularise arbitration amongst the masses by making it more cost-effective. It would further boost the possibility of India becoming the next big arbitration hub. Therefore, it is pertinent to issue regulations and guidelines by keeping in view the risks and flexibility associated with its application.
References:
[1] Bar Council of India v. A.K. Balaji, (2018) 5 S.C.C. 379 (India)
[2] B. Sunitha vs. State of Telangana, (2018) 1 SCC 638
[3] S. 12 of Arbitration and Conciliation Act, 1996
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