Abstract
Though not prohibited, there is no specific legislation or guidelines under the existing Indian legislation to regulate Third Party Funding. Suppose one considers the pay-off scenario under game theory, which dictates that the players should act in accordance with their best response. In that case, the parties in the arbitration proceeding will be better off if they have a dominant strategy. This translates to both sides opting for a third-party funder. Game theory helps the parties make decisions, but there is no substantial pay-off difference since a lot depends on the legal strategy. There is no such law under International Arbitration that prevents collusion on the front of the third-party funder. On the contrary, it is supported. This paper is an attempt to interpret the game theory in light of third-party funding in international arbitration, identifying the lacunae in its applicability in the Indian market and then reinterpreting it to propose a concrete strategy and solution in the field of international arbitration while also appraising the cost-benefit ratio of regulating third-party funding in India vis-à-vis highlighting upon the jurisprudential aspect deducing from instances where such an arrangement can become unfruitful.
Introduction
Litigation funding or financing has a long history that several jurisdictions existed as a means to support litigation proceedings and could be utilized by both – the plaintiff and defendant. Although addressed with different terms such as Third-Party Funders, Attorney Financers, Law Firm Financers, Arbitration Funders and many others, the import of all such terms remain and mean the same. However, in the present situation, we are concerned with third-party funding in international arbitration proceedings in consideration of the Indian scenario.
The concept of third-party funding entails that funding entities that can be individual proprietors, firms, or companies provide finances to law firms or lawyers to conduct arbitration proceedings on behalf of the party they are representing. It is often equated with maintenance and champerty. Maintenance refers to the funding or providing of financial assistance to a holder of a claim that allows the claim to be legally pursued when the funder or provider of financial assistance holds no connection or a valid interest in the claim itself. The concept of champerty takes this understanding to a step forward by adding that the funder or finance provider has a direct financial interest in the outcome of the claim[1]. In champerty, the arrangement so provides that the funder lends money in return for a portion of the damages awarded by the court should the claim prevail. It is deemed as against public policy, thereby making it an illegal consideration under Section 23 of the Indian Contract Act, 1872[2].
The parallel between third-party funding in the arbitration proceedings and game theory can be drawn based on the common ground of determining strategy by the opposite and taking steps in reply to it not to lose out.[3] In other words, game theory suggests that the players in the market price their products in such a way that it is similar to the price range, if not lower, to that of their competitors. Similarly, the main objective of hiring third-party funders is to level the playing field in the arbitration proceeding, especially the one in opposition to huge corporate companies.
In order to match up with the resources and tactics available at the disposal of the giant MNCs, the parties can bring in third-party funding to help them compete at equal grounds and resources.[4] In the International sphere, third – party funding is appreciated and in fact, encouraged. Nevertheless, now, the question arises as to how effective it will be, considering both the parties can opt for the same. Recent figures show that in private arbitration proceedings, which is not subject to national litigation and court-appointed judges, the use of third – party funding has given rise to a number of unethical issues and procedures.[5]
Economists say that just keeping resources for advertising does not really directly affect the outcome since most of the time, the potential pay – off might not be more. This potential pay – off is difficult to determine as well accurately. The theorists also propound that half of the amount spent on advertising goes to waste, but half is beyond determination.
Assimilating this reasoning to International Arbitration proceedings and third-party funding, the advantage that the outsiders bring in is just with respect to funding one-off cases and aiding financially. There is a lot more that goes on in legal arbitration which deals with the actual existence of rights and viability of claims. The legal strategy employed has a more significant effect on determining the outcome of the case.
Another leg to this argument comes up as the degree of appropriateness in engaging third – party funding or litigation finance. Jurists are of the opinion that litigation financing will be appropriate in only cases where “funding is generally only available to claimants or to defendants with a monetary counterclaim… funders will require a certain investment to quantum ratio… The place of enforcement will also be important as the fact of funding may be used to raise public policy arguments to frustrate or deny enforcement.”[6]
Nevertheless, in some instances, funding becomes essential and in fact, a necessity if the claimant is not in the position to pursue a meritorious claim, considering the reality that arbitrations are expensive.
Economic Efficiency Perspective
Game theory suggests an accurate determination of the competitor’s strategy and helps to devise one’s own tactics to deviate the market towards oneself. Third-party funding is the next stage after this determination. The author is trying to determine the feasibility, and the third – party funding might be able to provide the marginal profit that is deduced as a result of the same.
From the funder’s perspective, figures from Bloomberg report high comparative return on investment[7] and opens up an unexplored capital – seeking market. From the party’s perspective, an analysis into the dispute from the funder does balance not only the bargaining power but also bolster assessment of “winnable” claims. To balance out the previous discourse related to the legal strategy, an additional benefit derived from the funder would be the experience and expertise of being a repeat-player in the litigation – finance market, furthered by the funder’s ability to ensure greater discipline from lawyers and other intermediaries.[8]
This is so expected, since the funders would consider the financial agreement as a business venture, with an apparent desire to earn back the profits. This would then lead to monthly reporting and invoicing of legal costs and the case’s progress, demanded from the side of the funders.
The examination of lawsuit financing disclosure requirements across different jurisdictions uncovers important legal principles and conclusions. Initially, global methods show more statutory quiet than reform. India, Singapore, and Hong Kong’s primary arbitration systems do not yet have clear obligations for disclosing information. On the other hand, common law precedents show a greater readiness for court-ordered disclosures, stemming from inherent abilities to maintain procedural ethics. This discrepancy between legislative inactivity and judicial creativity is seen in several regions that lack openness in financing.
Foreign courts have enforced implicit disclosure responsibilities based on good faith, parties’ duty of secrecy to tribunals, and supervisory court powers to maintain the integrity of arbitration, even without specific directives. Disclosures are justified to prevent possible funding misuse based on principles of fairness, honesty, and public interest. This demonstrates the changing views of the judiciary that legal arbitration funding need appropriate openness under ethical supervision when laws are insufficient in addressing real consequences. Regulators stress the importance of disclosure to allow evaluation of conflicts of interest arising from profit-driven funding.
Currently, only a small number of laws compel upfront disclosure, but international examples show a preference for giving tribunals or courts the authority to force disclosure of funds after a disagreement, especially if there are concerns about misconduct or undue benefit. This postponed method aims to strike a balance between providing early monitoring without excessively discouraging lawful funding access, until more concrete evidence of harmful effects arises at a later stage.
Existing Jurisprudence and Public Policy Laws
The jurisprudential aspect of it can be traced to Bentham’s theory in which it was observed as follows,
“A mischief, in those times it seems but too common, though mischief not to be cured by such laws, was, that a man would buy a weak claim, in hopes that power might convert it into a strong one, and that the sword of a baron, stalking into court with a rabble of retainers at his feet, might strike terror into the eyes of a judge upon the bench. At present, what cares an English judge for the swords of a hundred barons? Neither fearing nor hoping, hating or loving, the judge of our days is ready with equal phlegm to administer, upon all occasions, that system, whatever it be, of justice or injustice, which the law has put into his hands.” [9]
The above view of Bentham was opined in the year 1843 where the concept of maintenance and champerty had merely originated and subsequently, in the year 1908, in the case of British Cash and Parcel Conveyors v. Lamson Store Service Co.[10] The description of the said concept was echoed. The court observed that the notions of public policy were subject to change and in furtherance of the same, the old common law of maintenance is largely obsolete.
However, the questions that how does the principle of maintenance and champerty extend to arbitration and whether India can open the doors to join other developed nations legalizing third-party funding is necessary to be determined.
In India, as against the law of maintenance and champerty, there is no existing municipal legislation legalizing third-party funding. However, in the case of Bar Council of India v. A.K. Balaji[11], the Supreme Court of India allowed third-parties (non-lawyers) to fund an ongoing matter and to claim some outcome to make a case, citing instances from USA and U.K. judgements where even lawyers are allowed to engage in third-party funding practices. Undeniably, international commercial arbitration is a thriving market with numerous cases administered by seats spread across the globe, some of the prominent seats including the International Chamber of Commerce Paris, London Court of International Arbitration. In the Asian regime, some of the prominent seats are Hong Kong and Singapore. For obvious reasons the demand for these seats is increasing, which include favorability due to minimal interference from the domestic courts. For instance, in Singapore, separate legislation called the International Arbitration Act governs international commercial arbitration to facilitate smooth arbitration proceedings for international parties. The Act also recognises and legalizes third party funding in such proceedings.
As per § 49A of the Legal Profession (Professional Conduct) Rules of 2015 under the Legal Profession Act (Chapter 161), a legal practitioner must disclose to the tribunal and all the parties involved about the presence of a third-party funder which includes identity and address of the funder. Further, § 34(b)(ii) of the Arbitration and Conciliation Act, 1996[12] provides for setting aside an arbitral award if it is in conflict with the public policy of Indica, if it is against fundamental policy of Indian law, or it is against morality or justice. In the landmark decision of Renusagar Power Co. Ltd. v. General- Electric Company[13] the Hon’ble Supreme Court of Indica evolved grounds to adjudge if an award is in conflict with Public Policy of India- fundamental policy of Indian law, interest of Indica, justice or morality.
The compassionate tone included in global legal principles reflects the broader public policy focus on increasing access to conflict resolution, but also maintaining ethical standards in the face of excessive profit-driven incentives. Foreign jurisprudence emphasizes that openness is an ethical precaution when implemented specifically in cases of procedural bias. Nationally, arbitration rules are still in the process of incorporating changing court standards into legislation change. Cross-border jurisprudence is consistent in prioritizing “outcome transparency” in financed cases over enforcing upfront disclosure in all instances due to shared public policy interests. Indian authorities can use transitional measures from global learning in the absence of rapid statutory certainty.
Conclusion
The parties making rational decisions subject to their self-interest are also subject to a sense of bounded rationality. When both the parties disclose the fact of engaging a third-party funder, then the proceeding becomes more transparent whereas, when both the parties do not disclose the engagement of the third-party funder then it may appear as if that both the parties are playing in an advantageous position. However, the information gap so created renders the overall proceeding and outcome arduous. in International Commercial Arbitration, it is not sure whether third-party funders will definitely result in the favorable award of the case, in favor of the own party. Sometimes, the best strategy will be the same, no matter how other players act. This is known as the dominant strategy.
On the other hand, there exists the so-called Nash Equilibrium, which does not describe a particular strategy per se, but rather a sort of mutual understanding between each player to understand the other player’s optimal strategies and takes those into consideration when optimizing his own strategy.
The situation in India with respect to third-party funding is highly debatable because a potential conflict of interest kind of a situation can arise between the third-party funder and the arbitrator or either of the arbitrators appointed by the parties to a dispute. There is no regulatory mechanism in India to deal with circumstances wherein non-disclosure would affect the outcome of the arbitration. In the case where the arbitrator is a partner in a law firm with whom the third-party funder shares a prior relationship, the existence of this fact can lead to a dent concerning the justiciability of such proceedings. Additionally, in circumstances where the existence of a third-party funder is not disclosed for a long time post the commencement of the arbitration proceeding can lead to acute conflicts as the party doing so may secretly wait until the opposite party exhausts their funds and attempt to take advantage of the situation.
Whenever a situation concerning the involvement of a third-party will arise where the other party to the dispute may feel that such involvement will have the capacity to erode the sanctity of the arbitration proceeding, then the foremost issue to be decided upon by the arbitrator will be either the jurisdiction of the tribunal to rule over the question or to decide in consideration of all the available shreds of evidence that the involvement of the third-party funder is a mere necessity and it does not hamper the proceeding.[14] In India, the question of jurisdiction is settled as it follows the doctrine of kompetenz-kompetenz meaning that the tribunal can rule on its jurisdiction. However, the question relating to a third-party funder will still have to be adjudicated based on the public policy grounds.
In the above scenario, what may be brought to light is that the ‘essence of time’. Apart from transparency, another crucial element of arbitration is to save the time of the parties.[15] If a third-party funder is involved in all such cases, the court will keep on sparing time on adjudicating whether the involvement of the concerned third-party funder is harmful to the proceeding or not then there will be no economy of time and indeed, no economy of costs as well.[16]
The incorporation of game theory in the analysis of third-party funding brings a fresh perspective to the discussion on the strategic interactions between parties involved in arbitration. By applying game theory principles to the arbitration process, stakeholders can better navigate the complexities of third-party funding arrangements and mitigate potential conflicts of interest.
The precedential interpretation of market structures in arbitration further underscores the importance of maintaining a level playing field among parties engaged in third-party funded disputes. Just as in competitive markets where players adjust their strategies to align with market dynamics, participants in arbitration must adhere to ethical standards and regulatory requirements to uphold the integrity of the dispute resolution process. The parallels drawn between market behavior and arbitration practices highlight the need for a balanced and transparent approach to third-party funding regulation.
Notes:-
[1] Henry Campbell Black, Black’s Law Dictionary, (West Publishing Co. 1968) 292.
[2] The Indian Contract Act, 1872, (Act 9 of 1872).
[3] Shannon, V. A. (2015). Harmonizing Third-Party Litigation Funding Regulation. Cardozo Law Review, 36(3), 861-912.
[4] Gian Marco Solas, “Third Party Funding: A Comparative Legal and Factual Overview”, Third Party Funding: Law, Economics and Policy 38–122 (2019).
[5] Third Party funding in International Arbitration, https://www.ashurst.com/en/news-and insights/legal-updates/quick guide—third-party-funding-in-international arbitration/#:~:text=What%20is%20 third%20party%20 funding,expenses%20occurred%20in%20the%20 arbitration, (last visited Dec. 24, 2020).
[6] Id at 4.
[7] Amita Katragadda, “Third-party funding in India”, Cyril Amarchand Mangaldas, http://www.cyrilshroff.com/wp-content/uploads/2019/06/Third-Party-Funding-in-India.pdf, (last visited Dec. 24, 2020).
[8] Id at 6.
[9] John Bowring, The Works of Jeremy Bentham, 3 (Nabu Press 2013) 19-22.
[10] Cash and Parcel Conveyors v. Lamson Store Service Co, [1908] 1 KB 1006.
[11] Bar Council of India v. A.K. Balaji, AIR 2018 SC 1382.
[12] The Arbitration and Conciliation Act, 1996, § 34(b)(ii), The Gazette of India, pt. II sec. 1 (January 1, 1996).
[13] Renusagar Power Co. Ltd. v. General Electric Company, 1994 AIR 860.
[14] Demougin, D., & Maultzsch, F. (2014). Third-Party Financing of Litigation: Legal Approaches and a Formal Model. CESifo Economic Studies, 60(3), 525-553. https://doi.org/10.1093/cesifo/ifu003
[15] Hylton, K. N. (2011). The Economics of Third-Party Financed Litigation. Journal of Law, Economics & Policy, 8(3), 701-741.
[16] Shannon, V. A. (2015). Harmonizing Third-Party Litigation Funding Regulation. Cardozo Law Review, 36(3), 861-912.
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