Abstract: In this article, the author reflects upon the growing businesses in the country, with huge economic ambitions at hand and how this growth in businesses will parallelly scale up the finances involved in commercial arbitration, making third party funding more common and preferable mode of financing the process of arbitration in the near future. Third party funding in India, though not unlawful, is not backed by any specific legislations. The article eventually highlights the need to regulate third party funding through legislative changes, ensuring its flexibility, to invite and encourages investments and hence making third party funding a legal and regulated doorway to the ease of business in India.

INTRODUCTION

In recent decades, on the one hand, India has emerged as the hub for start-ups and has seen a flux of foreign investors investing in businesses in India. While on the other hand, the benefits of choosing arbitration over litigation has been realised by the business entities all over the country. The circumstances are thus a clear indicator of the bright future of arbitration in India.

Accordingly, amendments have been made to the Arbitrations and Conciliations Act 1996[1] to level up with the prevailing legislations of countries like Singapore and Hongkong that have become a hub for international commercial arbitration across the globe. The amendments seek to ease as well as regulate the process of arbitration in the country. Though emerging trends across the world reflects that there are still many grey areas in the legislation around arbitration in India.

One such area is the concept of ‘Third Party Funding’ in arbitration. Third party Funding in a layman’s language means that a party which is neither related nor benefitting, funds the parties in dispute in the process of arbitration in return for profit out of the award.’ The growing trend of third-party funding in arbitration, owing to, it being a potential tool for inviting investments and businesses in the country, stresses the need to study the laws and regulations around it, identifying the legislative gap vis-à-vis the stance of the judiciary on the given concept.

THIRD PARTY FUNDING AND THE OPPORTUNITIES AHEAD

India has come out among the five economies[2] around the globe, but at the same time, the covid-19 pandemic hit hard on the growing economy of the country. It produced dual effects on the business culture, firstly, this remains an unbeatable fact that several start-ups and business ideas are the brain child of the adversities that the pandemic brought to mankind, secondly, the finances of even the huge conglomerates and multinationals came crashing down. While, the first effect supports the reason for the growth of arbitration in India realizing the fact that arbitration is considered a successful and efficient method of dispute resolution over litigation specifically in the domain of commercial disputes, the second effect is the indicator of the fact that parties opting for arbitration may find it difficult to fund the process.

Commercial disputes in the post covid era are plenty, in the form of breaches or frustration of contracts between parties. The bulk of conflicts is likely to develop in the categories of infrastructure, energy, construction, bankruptcy, and corporate ventures, as the Indian government plans to expand investment in the infrastructure and energy[3] sectors, which will further result in many contractual agreements. The data released by the Government of India in 2016 indicates that the finances involved in infrastructure related arbitration disputes were sky-rocketing to USD 9.2 billion approx.[4]

Third Party Funding

India will invest 1.4 trillion dollars in infrastructure over the next five years to grow into a $5 trillion economy, and it is expected that by 2025, India would be the world’s third-largest construction industry[5]. The government of India is also establishing a Development Finance Institution (DFI), a lending portal, to fund Rs. 5 lakh crores in infrastructure projects within three years.

With these massive investments, the government may find itself embroiled in several arbitration cases with foreign firms, putting its interests in jeopardy. Here, the role of third-party investors come into play. It provides a good opportunity for funders to make investments.

Third-Party Funding serves to improve access to justice and supports the out-of-the-court settlement of disputes based on the merits of a claim at a macro level. It ensures that lawful rights are not jeopardized owing to a lack of financial means by providing a level playing field for both parties.

THE INDIAN LEGISLATION ON THIRD-PARTY FUNDING IN ARBITRATION

There is no law in India that governs third-party funding. Third-party funding is not, however, illegal in India[6].  Third-Party Funding as a whole came to be perceived as anti-public policy, and its validity was questioned. This pattern was evident in landmark cases such as Re: Mr G[7] and Sri Sarada Mills[8] for decades. Eventually, in Intertoll Ics v. NHAI, the Delhi High Court ruled that Third-Party Fundings that were appropriately safeguarded (for public purpose) were permitted for non-lawyers.

Various quarters have proposed that Third Party Funding be regulated and even legislated in India. Even current Third-Party Funding mechanisms provided by arbitration-friendly jurisdictions were recognised in 2017 research on institutional arbitration in India. However, just enacting legislation to regulate Third-Party Funding in India would be missing the forest for the trees.

This is due to systemic issues in the justice-delivery system[9], the most significant of which is the judicial system’s tardiness and unpredictability in concluding a case. While Third-Party Funding would be a novel and inventive technique to streamline commercial dispute resolution in India, the largest impediment to its development would be the delay and unpredictability of the justice-delivery system at various stages of litigation.

There have been several debates around the conflict of interest that may arise if third party funding is legalised and executed, in case the funder may be related to any member of the Arbitral Tribunal which may affect the transparency of the process and bring in biasness.

Such instances though can always be allowed to be challenged when the concerned arbitration institution or the opposite party comes to know about it. On similar lines to a Judge not being allowed to proceed with a case in which he is related or has an interest, the regulations must mandate a certain degree of detachment of the third party to the tribunal if they wish to take part in the funding.

The Foreign Exchange Management Act of 1999 (commonly known as “FEMA”) and the laws and regulations that follow could also be examined in relation to the practicality of establishing Third-Party Financing systems within and outside of India.

CONCLUSION AND SUGGESTION

The emergence of third-party funding of disputes in India should be investigated, as allowing such a system to exist creates a new asset class for investors to obtain outsized returns while also potentially generating extra liquidity. There are undoubtedly doubts regarding India’s ability to create and mature such a complex policy and concept. As, first, domestic rules differ by location, this may lead to forum shopping for convenience’s sake. Second, there is a constant risk of overregulation, in which a rigid structure makes navigating such restrictions difficult. Third-party funding being a novel and changing idea, flexibility in the operation is plainly recommended.

Third-party funding is not prohibited from entering the commercial market in India because of regulatory provisions. India can manage third-party funding contracts by following diverse methods set by leading jurisdictions in arbitration as long as they do not violate any existing laws or public policies.

In order to strengthen Third-Party Financing infrastructure in India and resolve the ambiguities that exist in the current regulatory environment, it is hoped that the government will collaborate with stakeholders to establish a strong system.

Comparative measures, with suitable adaptations for the Indian situation, will not only help India achieve international arbitration consensus, but also serve as a keystone for India to achieve South Asian Hub status in the field of arbitration and thus proving Third-Party funding, a doorway to the ease of business in India.

[1] Arbitration and Conciliations Act 1996. – https://www.indiacode.nic.in/handle/123456789/1978?sam_handle=123456789/1362.

[2] World Economic Forum, These are the 10 Largest Economies in the World. https://www.weforum.org/videos/these-are-the-world-s-10-largest-economies-406510c515.3

[3] Niti Ayog, GOI portal. https://indiainvestmentgrid.gov.in/national-infrastructure-pipeline.

[4] Press Release dated 31 August 2016 issued by Press Information Bureau on the reform passed by the Cabinet Committee on Economic Affairs.

[5] The Economic Times, India to be world’s 3rd largest construction mkt by 2025. https://economictimes.indiatimes.com/india-to-be-worlds-3rd-largest-construction-mkt-by-2025/articleshow/20856489.cms?from=mdr.

[6] Bar and Bench, Third Party Funding: India’s Time is Now. https://www.barandbench.com/columns/third-party-funding-indias-time-is-now.

[7] 1955 1 SCR 490. https://indiankanoon.org/doc/248671/.

[8] 1973 SCR (2) 484. https://indiankanoon.org/doc/1106580/.

[9] India CorpLaw, Making Room for Third-party Arbitration Funding in the Indian Regime. https://indiacorplaw.in/2021/07/making-room-for-third-party-arbitration-funding-in-the-indian-regime.html.

Author Bio

Qualification: Student- Others
Company: N/A
Location: Bihar, Bihar, India
Member Since: 08 Jun 2023 | Total Posts: 4
The author is a 4th year BBA LLB student at National Law University Odisha. View Full Profile

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