August 03 2017
Third-party arbitration funding can benefit both under-resourced growing businesses as well as established and profitable companies, allowing them to cover the legal costs of potentially complex proceedings. However, companies should be aware of its potential risks and downsides, such as concerns over confidentiality and privilege of sensitive information, the funder’s self-interest in returning a profit on its investment and potential conflicts of interest between funders and arbitrators. A number of jurisdictions and arbitration institutions are considering introducing external regulation of third-party arbitration funding.
Is third-party arbitration funding common in your jurisdiction?
In India, third-party funding is expressly recognised in the context of civil suits in states such as Maharashtra, Gujarat, Madhya Pradesh and Uttar Pradesh. This consent to third-party funding can be adduced from the Civil Procedure Code 1908, which governs civil court procedure in India. Order XXV Rule 1 of the code (as amended by Maharashtra, Gujarat, Madhya Pradesh and Uttar Pradesh) provides that the courts have the power to secure costs for litigation by asking the financier to become a party and depositing the costs in court.(1)
No law expressly bars or allows third-party funding agreements in arbitration. The Arbitration and Conciliation Act 1996 governs arbitration in India. The legality of third-party funding in arbitrations cannot be adduced from the select group of Indian states which allow third-party funding in civil suits. However, a constitutional bench of the Supreme Court has noted that a champerty contract in which returns are contingent on the success of the case is not per se illegal,(2) except in cases where an advocate(3) might be a party. Needless to say, if a third-party funding agreement contains an extortionate or unconscionable objective or consideration (eg, recovery of a gambling debt), the agreement would be rendered unenforceable under the Contracts Act 1872.(4)
As the 1996 act is silent on this issue, third-party arbitration agreements have been rendered virtually non-existent in India. To date, no precedent on third-party arbitration funding exists and thus these agreements are uncommon.
What terms and conditions are generally associated with third-party arbitration funding in your jurisdiction? Does this type of funding usually include punitive measures in the event of an adverse outcome for the claimant company?
As stated above, third-party funding agreements are virtually non-existent in arbitration. Further, there are no known precedents and the 1996 act offers no guidance in this regard. Thus, the above two questions cannot be conclusively addressed.
Third-party arbitration funding can involve potential risks for claimant companies. What measures can be taken to avoid or minimise such risks?
Under the 1996 act, the claimant company would have to disclose any third-party funding agreement to verify the absence of any connections between the financier and the arbitrator.(5) There are primary risks that arise out of this disclosure for claimant companies. A respondent might use knowledge of the third-party funding to block the arbitration(6) at the outset, or if the arbitration proceeds, to challenge it on grounds of it being against Indian public policy(7) or the Contract Act. Further, the claimant company is likely to face risks such as dilution of autonomy, conflict of interest, breach of confidentiality and discouragement of settlement as part of the third-party funding agreement because of the financier's involvement.
Needless to say, the above are merely projected risks, as neither the legislature nor the executive has provided an opinion on the issue of third-party funding agreements and the courts have not had a chance to verify their validity due to the absence of these agreements. Assuming that third-party funding agreements are rendered legal for arbitrations, the risks would be best managed by legislating strict rules regarding:
How does third-party funding affect the confidentiality and privilege of sensitive material in arbitration proceedings?
In an arbitration proceeding, the involvement of a third-party financier may cause loss of sensitive, confidential and privileged information. Since there is no information in the public domain regarding instances of third-party funding agreements being enforced in India, the extent to which information may be compromised is unknown. However, should such agreements be executed, there is a legitimate risk of loss of confidentiality. The party seeking the funding may be under economic duress to share information with the financier. However, the financier's access to information may itself be regulated by the terms of the third-party funding agreement or law.
In light of the above, strict rules must be set out for maintaining the confidentiality of the arbitral proceedings, to avoid any unfair influence or unlawful use of relevant information which may affect the parties adversely or render the agreement invalid on the grounds of a violation of public policy. To date, no legislation nor executive direction has been released regarding third-party funding agreements for arbitration.
Given the significant legal and ethical issues associated with third-party arbitration funding, such as potential conflicts of interest and questions regarding impartiality, is external regulation needed in your jurisdiction?
To keep pace with the global developments in international commercial arbitration, it is important to have an external regulation in the form of statutory guidelines in order to set out the parameters within which a third-party funding agreement may apply. The regulation should also seek to maintain uniformity in relation to these agreements, which would further assist in regulating them. Further, it would prevent unscrupulous agents from misusing third-party funding agreements by establishing the necessary limitations and penalties.
Order XXV of the Civil Procedure Code was amended for Maharashtra by Bombay High Court Notification P 0102/77, dated September 5 1983. It reads as follows:
"3. (1) Where any plaintiff has for the purpose of being financed in the suit transferred or agreed to transfer any share or interest in the property in the suit to a person who is not already a party to the suit, the Court may order such person to be made a plaintiff to the suit if he consents, and may either of its own motion or on the application of any defendant order such person, within a time to be fixed by it, to give security for the payment of all costs incurred and likely to be incurred by any defendant. In the event of such security not being furnished within the time fixed, the Court may make an order dismissing the suit so far as his right to, or interest in the property in suit is concerned, or declaring that he shall be debarred from claiming any right to or interest in the property in suit.
(2) If such person declines to be made a plaintiff, the Court may implead him as a defendant and may order him, within a time to be fixed by it, to give security for the payment of all costs incurred and likely to be incurred by any other defendant. In the event of such security not being furnished within the time fixed, the Court may make an order declaring that he shall be debarred from claiming any right to or interest in the property in suit.
(3) Any plaintiff or defendant against whom an order is made under this rule may apply to have it set aside and the provisions of sub-rules (2) and (3) of rule (2) shall apply mutatis mutandis to such application."
This same amendment has been adopted by Gujarat and Madhya Pradesh. Allahabad has added only Rule 2 of Order XXV, which states that costs may be secured from the third-party funding of litigation.
For further information on this topic please contact Rajat Jariwal or Suriti Chowdhary at Khaitan & Co by telephone (+91 22 6636 5000) or email (firstname.lastname@example.org or email@example.com). The Khaitan & Co website can be accessed at www.khaitanco.com.
(1) Please see Schedule 1 to this questionnaire. Apart from these four states, no other states recognise third-party funding. Hence, this recognition does not cover the remaining states or demonstrate the pan-India view on the issue.
(3) Rule 20, Bar Council of India's Standards of Professional Conduct and Etiquette, Chapter II, Part VI, Bar Council of India Rules 1975 (read with Section 49(1)(c) of the Advocate's Act 1961, read with the proviso thereto).
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