Adv. Vandana Tiwari
Introduction
The growing importance of international commercial transactions has highlighted arbitration as a key method for alternate dispute resolution. This rise has brought attention to “third-party funding in arbitration,” where an entity finances a party in arbitration in exchange for a share of the award. Third-party funders, unlike traditional investors or banks, play a crucial role by investing in litigation and arbitration for profit. Given this, it is essential to regulate third-party funding in Indian arbitration to maintain competitiveness and prevent other countries from gaining an advantage.
A brief history of third-party funding in India
In India, there is currently no statutory framework regulating third-party funding (TPF) in arbitration or the funding itself. This issue, often overlooked, has recently begun to attract attention. The High-Level Committee to Review the Institutionalisation of Arbitration Mechanism in India reviewed various policies on third-party funding from different jurisdictions and suggested that adopting similar measures with appropriate adjustments for India could enhance arbitration practices in the country. They noted that regulating third-party funding could significantly help establish India as a major arbitration hub, comparable to Singapore’s status. The Code of Civil Procedure (CPC), through Order XXV[1], acknowledges third-party litigation funding in civil cases. The Supreme Court’s decision in Re: Mr. ‘G’, A Senior Advocate Of … v Unknown[2] clarified that there is no moral or public policy objection to third-party funding, provided the funders are not lawyers and the funding does not contravene public policy. Since such funding is allowed in litigation, it should also be regulated in arbitration. The Court has previously invalidated third-party financing arrangements when they involved receiving a large portion of the final stake, ruling such cases as violations of public policy. While it’s difficult to enumerate all possible violations, they should be assessed on a case-by-case basis.
An analysis of India’s future course
The author argues that third-party funding should be introduced in Indian arbitration, though with restrictions to ensure it does not breach public policy. India has consistently supported arbitration, and regulating third-party funding could enhance its accessibility and popularity, especially given the current judicial backlog that has highlighted arbitration’s importance. This funding could address disparities in access to arbitration, making it a tool for more equitable dispute resolution rather than a privilege for the wealthy[3].
The Arbitration and Conciliation Act, 1996, does not address third-party funding, which means it remains unregulated. Since arbitration is essentially a form of litigation, the provisions for third-party funding under the CPC should also apply to arbitration. However, the definition of a ‘party’ in Section 2(h) of the Arbitration Act, which is limited to those involved in the arbitration agreement, may create challenges. Thus, introducing third-party funding would require collaborative efforts from the legislature, executive, and judiciary.
Drawing on Hong Kong’s Law Commission Report[4], which proposes a phased approach to regulating third-party funding. This approach involves initial non-binding regulations tested over five years, followed by a comprehensive review. Establishing ethical standards for third-party funded arbitration could be achieved through a dedicated Code of Conduct or by amending the Arbitration Act.
India must also balance the regulations with the benefits of third-party funding. It should decide whether to permit a narrow (stricto sensu) or broad (lato sensu) scope of funding. The author recommends starting with a stricto sensu approach, similar to Singapore’s, and gradually expanding to a lato sensu approach, as seen in Hong Kong.
Additionally, regulations must address cross-border transactions involving international parties or funders. The Foreign Exchange Management Act, 1999 (FEMA), does not classify third-party funding clearly, leading to conflicts with the Arbitration Act.
Not permitting third-party funding could put India at a disadvantage in international arbitration, complicating the enforcement of foreign awards. International tribunals, such as in Giovanni Alemanni v. The Argentine Republic, recognize third-party funding as well-established and non-objectionable. This discrepancy could create difficulties for enforcing foreign awards in India, as highlighted by the Supreme Court’s pro-enforcement stance in Government of India v. Vedanta Ltd. & Ors[5].
Lastly, the court in India have a ‘minimum intervention’ approach in arbitration, advocating for third-party funding to be managed privately by the parties involved but regulated. Denying access to third-party funding would be a denial of justice and a violation of fundamental rights.
Conclusion
Even while TPF is currently relatively minor in India, it is increasingly becoming an essential component of international arbitration processes due to its widespread acceptance in other areas of the world. The costs associated with arbitration have gone up along with the rise in demand for it. Therefore, it is essential that India approve third-party funding and make it easier by developing clear legislation. Small firms would particularly benefit from such laws since they lack the resources to set aside money specifically for legal fees. Moreover, arbitration has been increasingly well-known worldwide throughout time, especially in cross-border conflicts where it is the favoured means of resolving disputes through international arbitration. Similar to other countries, India has embraced and promoted a tendency in favor of institutional arbitration. Furthermore, Indian courts have rendered significant rulings on issues pertaining to the scope of public policy and the theory of severability in the implementation of arbitral awards, including those from other countries. This gives India a set of well-established legal concepts that it can employ to provide safeguards against the improper use of financial arrangements from other parties. Furthermore, the expenses connected with arbitration are rising along with the demand for it. Specifically, international arbitration procedures can be extremely expensive, often costing millions of dollars. The parties investigate funding options prior to examining the substance, legitimacy, and strength of their claim due to the financial burden. TPF has become an indispensable tool in this regard.
Finally, it’s imperative to address and close the current gaps in identify and close the current financing shortages from third parties. Due to the lack of requirement to disclose TPF’s existence or any specifics, if any, TPF may be held accountable for certain information asymmetry that arises between the parties in a proceeding. Additionally, there’s a chance of an arbitral hit-and-run, in which exaggerated and baseless allegations render arbitration expenses unrecoverable. As a result, India must take the initiative and implement TPF legislation. In addition to improving India’s reputation as a centre for international arbitration, this action will promote the transparent and equitable development of the TPF sector in India.
Notes:-
[1] The Code of Civil Procedure 1908.
[2] Re: Mr. ‘G’ A Senior Advocate Of … v Unknown [1955] 1 SCR 490 (SC.)
[3] Prakash Pillai and Umer Chaudhary, ‘Law Commissions Report Reinforces the Pro-Arbitration Trends in India’ (Kluwer Arbitration, 9 October 2014) accessed 7 August 2024.
[4] The Law Reform Commission of Hong Kong, Third-party Funding for Arbitration – Report, (Law Reform Com 2016), accessed 7 August 2024.
[5] Government of India v Vedanta Ltd. And Ors [2020] SCC Online SC 749 (SC).
