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-Byron Sequeira & Yusuf Tariq†
In the aftermath of the global pandemic, it is crucial to discuss an aspect of the law that has affected thousands of potential claimants in the last year – legal financing. As many claimants struggle to cope with the financial requirements of legal proceedings, it is imperative to assess whether they can opt for an alternative; and whether jurisdictions across the world have already formulated one.
Arbitration has evolved to be one of the preferable sources of dispute resolution in India in the past decade; with party autonomy and speedy disposal of matters being appealing advantages. However, while costs are often less intimidating than those of litigation due to its potential longevity, arbitration proceedings are still subject to exorbitant costs of the legal process. This often entails a grim look for parties, even for those with meritorious claims. This is where the notion of Third-Party Funding (hereinafter referred to as “TPF”) has seen a dramatic rise in popularity.
TPF is an agreement through which an unrelated third-party funds an arbitration proceeding in exchange for a profitable return or share in the award. There are different types of TFP agreements. The most common form is the ‘single case’ funding, where the funding is only for a single claim. However, there also exists ‘portfolio’ funding, where the investor covers a book of several claims. This allows the funder to spread out their investment risk and also extend funding for low-value claims, which may fail to attract funding independently.
It is notable that several jurisdictions like Australia, Singapore, and Hong Kong have already drafted legislation regulating TPF in arbitration, while it remains entirely restricted within certain jurisdictions, like that of Ireland. Nonetheless, the growing relevance of the concept in modern day arbitration is indisputable.
Process of Third-Party Funding in Arbitration
Essentially, TPF agreements are carried out by potential funders when the claims so raised have a high probability of being admitted and, more importantly, when the claimant has financial strains, which would make the process of litigation a cost that they may not be suited to bear. However, it is necessary for the claimant company to retain management of the case or not to provide an unreasonably high return of investment to the funder.
Once a claim for TPF is made, the funder will undertake detailed due diligence before approval. In deciding to grant funding, they will consider the merits of the case and the quantum of damages sought. For an opportunity to be suitable for TPF, there should exist a strong claim and a recoverable margin of profit between the damages sought and the legal costs that will be incurred. Some statistics indicate that almost 90 percent of TPF applications are rejected by the funders. Further, in a 2021 Survey on Third-Party Funding in India conducted by MNLU Mumbai, it was found that the success rate fluctuated between 20 percent and 85 percent for different TPF funders. It was noted that the success rate tended to be higher for parties who funded a higher number of cases.
A TPF agreement between two parties is bound to hold some confidentiality, but at the same time, the nature of arbitration would often necessitate that the third party is disclosed prior to the proceedings in case there exists a conflict of interest with the third party and any party involved in the arbitration proceedings. Further, the funded parties may look to disclose certain information relating to the arbitration, to the third-party funder to facilitate access to justice. However, to do so would be to violate the confidentiality principles of the TPF agreement and the arbitration; which raises the issue of striking a balance between disclosure and confidentiality obligations. It has been argued that disclosure requirements should accommodate confidentiality interests and seek to make exceptions for the same. Under many arbitral laws, disclosure to a third-party funder is possible without violating any confidentiality obligations to protect the interests of the parties.
In some cases, the parties seek interim measures in the form of ‘security of costs’ to protect themselves in case they are awarded costs but the other party does not have the financial ability to pay the same. To avoid such situations, the tribunal may, after approving the application, require the party to set aside a certain sum of money as security before the conclusion of the proceedings. However, the mere existence of TPF is not enough to show that the party is bankrupt or impecunious. Here, it becomes pertinent to disclose the TPF agreement in order to safeguard the enforceability of a future award and the opposing party’s interests.
Third-Party Funding in Foreign Jurisdictions
The evolution of TPF has often been traced about 30 years back to Australia, which arose as an alternative to contingency fee arrangements, which were prohibited by Australian law. In congruence with the same, the High Court of Australia noted that funding by a third party would not necessarily negate the rights of the claimant. Notably, TPF saw an immense rise in popularity during the 2008 economic crisis in the United States, wherein meritorious claims were often trampled by the lack of funding for litigation.
In the United Kingdom, courts have propounded the need to adapt and reconsider the principles of maintenance and champerty, which prohibited any individual who was not party to a suit from financing the litigation process for any benefit., In R v. Secretary of State for Transport, the Court of Appeal held that as long as TPF agreements were regulated, they would not contravene any prevalent law. Subsequently, in the case of Arkin v. Borchard Lines, the Court of Appeal looked favourably toward TPF agreements as a tool to access justice. Further, in the 2016 landmark judgment in Essar Oilfields Services Ltd. v. Norscot Rig Management Pvt. Ltd., where the arbitrator had granted third-party costs, the High Court held that third-party funding costs can be awarded under the Arbitration Act and ICC Rules if they are taken solely to pursue the proceedings and are reasonable in nature. This position was reiterated in the recent case of Tenke Fungurume Mining S.A. v. Katanaga Contracting Services, where the English High Court affirmed the decision of the ICC arbitral tribunal to award costs for third-party funding to the successful party of an arbitration. In 2011, the Association of Litigation Funders (ALF) released a self-regulated code of conduct which was published by the Ministry of Justice (England, Wales).
Hong Kong has dealt with TPFs in-depth, particularly in the decision of Cannonway Consultants Ltd. v. Kenworth Engineering Ltd. - wherein the doctrine of champerty was specifically nullified in arbitration proceedings. This is in furtherance of several measures taken by the legislation in Hong Kong to promote arbitration within the jurisdiction – a feature which will be revisited later in this article. Hong Kong has also defined TPF in the HKIAC Administered Arbitration Rules, 2018, as being a) under a funding agreement; b) to a funded party; c) by a third party funder, and d) in return for the third party funder receiving a financial benefit only if the arbitration is successful within the meaning of the funding agreement.
Similarly, Singapore amended the Civil Law Act and introduced the Civil Law (Third-Party Funding) Regulations, 2017, in order to prescribe dispute categories that may be enveloped by TPF, such as court or mediation proceedings arising out of international arbitrations, an application for the stay of international arbitration or any proceedings for or in connection with a foreign award under the International Arbitration Act.
In other preferred jurisdictions like Paris and London, TPF agreements are being recognised increasingly. The Paris Bar Council has also formulated a Resolution on Third Party Funding (2017), to regulate such agreements within arbitration. It is pertinent to note in this regard the 2021 ICC Rules of Arbitration, which specifically discuss the scope of TPF in arbitration proceedings. Article 11(7) of the Rules denote the importance of any TPF associations in an arbitration having to be necessarily spelt out. Thus, in a way promoting TPF in the arena of practitioners in Arbitration.
Third Party Funding in India
The stance of Indian laws concerning the applicability of Third-Party Funding has been curious; in so far as the principles of maintenance and champerty have been nullified by Indian courts on numerous occasions. The Bombay High Court, through an amendment to Order 25, Rule 1 of the Code of Civil Procedure, 1908, has provided plaintiffs the right to transfer a suit property to obtain financing for the litigation. The same amendments have been adopted by the states of Gujarat and Madhya Pradesh. This enables the Court to pass an order instructing the funder to give security for all costs incurred by the defendant.
Most notably, the Calcutta High Court in Ram Coomar Condoo v. Chunder Canto Mukherjee spelt that while there was a need to monitor third party financing of a suit, it would not be against public policy to have such agreements between parties. In Re: Mr. 'G', A Senior Advocate, the Supreme Court of India further held that the rigid principles of champerty and maintenance were not applicable to Indian laws. The court observed that an agreement of the nature of TPF is legally enforceable and is not against public policy or morals. In the case of Damodar Kilikar and Ors v. Ossman Abdul Ghani, the Kerala High Court noted that if no advocates are involved in the agreement, the agreement is not illegal or unenforceable for the sole reason of champerty. Reiterating this position, the Supreme Court of India in Bar Council Of India v. A.K. Balaji noted that while advocates could not fund the litigation or have any interest attached to the matter on behalf of their clients, there is no specific bar for any third party to fund the litigation process. However, each of the TPF agreements has to be scrutinised independently to ensure that they are not violative of public policy considerations. In Suganchand v. Balchand, the Rajasthan High Court, in refusing to uphold the transfer of half the property in exchange for litigation funds, noted that agreements made with the intent to gamble and earn huge profits cannot be affirmed. The court held that such agreements will be void as disproportionate returns to the funder will be opposed to public policy on account of being extortionate and unconscionable. Subsequently, in the case of Nuthaki Veukatawami v. Katta Nagireddy, the court noted that in deciding the validity of such agreements, the share that the funder is entitled to will be the most important determinant. Therefore, a TPF agreement will be valid and within the confines of public policy, provided that the litigant’s interests do not suffer due to the third party. In the absence of a proper legislative structure, the judiciary has rightly acknowledged the validity of TPF agreements. Perhaps, the bar on advocates to enter into such agreements needs to be reassessed in light of the impact it may have on TPF. The investors in this regard may find comfort knowing that the counsel’s risk in the arrangement is aligned with that of the investor.
In 2017, the Report of the High-level committee to review the institutionalization of arbitration mechanisms in India was submitted. The judicial committee recommended the introduction of third-party funding for the promotion of India as an arbitration hub, on par with that of Hong Kong and Paris. The Committee notably pointed out the ambition to push India as a renowned seat in International Arbitration, and the need to incorporate and elaborate on principles such as TPF within the legislation. India’s position towards TPF, therefore, has been with regards to its recognition and gradual adaptation into a legislative structure. The authors believe that legalisation and the consequential recognition of TPF as legal and valid may usher benefits to the country in encouraging foreign investments, could become an even more attractive venue for arbitration, by providing a mechanism for any company/individual with meritorious claim/s who may have limited financial means to also bring forward claims in the arbitration to protect their rights. Recently, a legal technology start-up called LegalPay has announced plans for launching India’s first third-party litigation funding platform. It aims to achieve an internal return of 20-25%.
Recommendations
One of the primary reasons why clauses of arbitration seats include ‘renowned’ jurisdictions can largely be equated to the enforcement of the rules in such jurisdictions. This is wherein other factors such as the legislative development, quality of the legal system, accessibility to justice for both parties, and other factors related to party autonomy play a significant role. This calls for proactive participation on part of the legislation to enact laws discussing the scope of TPF, especially given the seeming ineptitude of the present structure. It becomes pertinent for the Indian Council of Arbitration to follow suit to the precedent set by renowned arbitral institutions like CIETAC, ICSID, HKIAC, and SIAC, and incorporate principles of TPF by way of their rules.
The Supreme Court of India has assessed the need to promote private international law in Alcon Electronics Private Limited v. Celem S.A. One of the most crucial factors of private international law is the accessibility that parties will have within a foreign jurisdiction, and the enforcement of TPF rules within a jurisdiction enables thorough participation for parties with meritorious claims, thus promoting India’s arbitral institutions internationally.
It would also be pertinent for contracts in commercial sectors to inculcate a privilege of TPF to parties, which would further enable contractual compliance in many scenarios. This also directly confronts the aforementioned issues of confidentiality and protection of party rights in arbitration. It would be crucial for parties to insist on a well-defined TPF clause within the contract in order to substantiate such funding if a legitimate claim were to arise out of the contract. The Permanent Court of Arbitration in Muhammet Çap & Sehil Inşaat Endustri ve Ticaret Ltd. Sti. v. Turkmenistan notably propounded the same, ordering the claimant to inform whether they had a TPF arrangement for the proceedings and if so, to disclose the identity of the third party for transparency in the proceedings.
Conclusion
As has been noted by the Report of the High-Level Committee, it is imperative for principles of third-party funding to be adapted through legislation and associations to enable India to develop as an arbitration hub that would involve the parties to prefer Arbitration as the preferable mode of settling the dispute rather than ending up in litigation. The funders should also make the process easier by synergizing with the party seeking financing, which would be a pertinent feature for the success of TPF. As we begin to step out of the pandemic, there is a need to recognise financial constraints that claimants may face, but there is also a need for transparency of proceedings which cannot be understated when it comes to TPF agreements. Achieving a balance between the two is definitely what our present framework should aspire to achieve.
†Byron Sequeira is an Associate (Dispute Resolution) at L&L Partners and Yusuf Tariq is a V Year, B.A., LL.B(Hons.), National Law School of India University, Bangalore.