Third-Party Funding in Arbitration: Time for India to Regulate?

INTRODUCTION

Arbitration, both domestic and international, is growing to be a costly affair despite the advertised advantage of arbitration being cost effective over litigation. Various expenses such as legal fees, arbitrators’ fee, attendant costs, venue costs and other regular and miscellaneous expenses make arbitration or litigation a questionable avenue for dispute resolution by many parties.

The basic premise of Third-Party Funding (TPF) or litigation financing is when third-party funders finance a litigation or arbitration for a share in the monetary award (if successful) in favour of the claimant / counter-claimant. Any claim with a calculated chance of monetary success can be funded and these include International Arbitrations, Commercial Contracts, tortious claims, class action suits etc. The funder can be any party who is monetarily interested in the claim but has no personal connection to the dispute whatsoever. An often-cited advantage of TPF is improving access to justice to those parties who would not otherwise approach a judicial forum for their disputes.

The ICCA-QMUL Task Force on Third-Party Funding in International Arbitration[1] provides a working definition of TPF as:

“An agreement by an entity that is not a party to the dispute to provide a party, an affiliate of that party or a law firm representing that party,

a) funds or other material support in order to finance part or all of the cost of the proceedings, either individually or as part of a specific range of cases, and

b) such support or financing is either provided in exchange for remuneration or reimbursement that is wholly or partially dependent on the outcome of the dispute, or provided through a grant or in return for a premium payment.”

Major common law jurisdictions like Australia, England & Wales, Hong Kong and Singapore (to name a few) have put TPF on the map of commercial litigation and international arbitration all around the globe. This article aims in giving a bird’s eye view of the regulation of TPF in other jurisdictions and how the same formula can be elegantly applied to an emerging arbitration hub such as India.

It is to be noted that this article does not elucidate the working, procedure or classifications of TPF or funding agreements as the author wants to moot the idea of TPF as a concept in Indian Scenario.

MAINTENANCE AND CHAMPERTY – A BRIEF HISTORY

The archaic common law doctrines of maintenance and champerty prohibited any person or entity from financing litigation to which they had no personal interest. These outdated principles slowly changed when England and Wales passed the Criminal Law Act, 1967 which eliminated the anachronistic bars of maintenance and champerty and went on to facilitate the TPF market in England and Wales. In 2011, the Association of Litigation Funders was established and a voluntary Code of Conduct for Litigation Funders was finalized. This piece of regulation is adopted as a guiding, yet informal (for its voluntary application) tool for better facilitation of TPF.

The Wrongs Act, 1958 in Australia abolished the liability in maintenance or champerty but its legal system did not get its big break in recognition of TPF until its comparatively recent judgment in Campbells Cash & Carry Pty Ltd vs. Fostif Pty Ltd[2], wherein the High Court of Australia had cemented the principle that litigation funding per se is not abuse of process or contrary to public policy and the doctrines of maintenance and champerty have no application.

Singapore, in 2017 passed the Civil Law Amendment Act which lifted the prohibition of TPF for International Arbitrations and its related court proceedings, however, the restrictions of maintenance and champerty still apply for state litigation and arbitrations domestic to the territory of Singapore.

Maintenance and champerty, even today, stand as offences and torts in Hong Kong. In Unruh vs. Seeberger[3], the Court of Final Appeal in Hong Kong decided to ease the rigid view on litigation funding and had stated that a contract cannot be per se set aside on the defense of maintenance and champerty. Following this, the Code of Practice for Third Party Funding in Arbitration, 2019 has been passed as a comprehensive legislation governing TPF with respect to Hong Kong seated arbitrations.

When we take India into consideration, unlike the other 4 jurisdictions previously discussed, there was no bar on maintenance or champerty to begin with, bereft of a law iterating the same. The Privy Council while dealing with an appeal from the Calcutta High Court in Ram Coomar Condoo vs. Chunder Canto Mukherjee[4] held that:

 “a fair agreement to supply funds to carry on a suit in consideration of having a share in the property, if recovered, is not opposed to public policy and not illegal. However, such agreement ought to be carefully watched, when extortionate, unconscionable or made for improper objects, they ought to be held invalid.”

This view was followed subsequently by the Privy Council in Raja Rai Bhagawat Dayal Singh vs. Debi Dayal Sahu[5], wherein, they secured the proposition that English law of maintenance and champerty was not applicable in India.

There is however, one category of champertous agreements that are explicitly prohibited in all the above jurisdictions i.e. litigation financing by lawyers / law firms. No legal practitioner shall fund any litigation or judicial proceeding whatsoever. Accepting contingency fee or success-based fee is vehemently prohibited. A Constitution Bench of 5 Judges Inre, G, A Senior Advocate[6], held that:

 “A contract where one party agrees to fund litigation for certain benefits would be legally unobjectionable if no ‘lawyer’ was involved and it was between third parties.”

This view was followed very recently in B. Sunitha vs. State of Telangana[7] wherein, the court observed that interest in the outcome of proceedings by the advocate is not accepted and agreements on contingency fee is bad in law.

The adumbration above indicates an open platform for India to take another step forward in leading the global market as a hub for International Arbitration.

SINGAPORE AND HONGKONG

India’s Asian neighbours are considered as the point of discussion as they are the two leading Asian hubs for arbitration and they are the two major jurisdictions to have come out with a legislative framework to regulate TPF.

SINGAPORE – Salient Features

The Civil Law Amendment Act, 2017 brought in Section 5A and 5B which abolished the age old common law tort of Maintenance and Champerty, so long as the contract for funding is not contrary to public policy.

Section 5B regulates (to an extent) any TPF as long as they apply only to International Arbitrations and litigation / mediation that may arise out of those disputes i.e. enforcement of award, mediation during or before arbitration etc. There have been amendments made to the Legal Profession Act, 1967 (LPA) and the Legal Profession (Professional Conduct) Rules, 2015 (LPPCR) which discuss about a lawyer’s do’s and don’ts with respect to TPF. Section 107 (3A) of the LPA allows a legal practitioner to refer funders to parties so long as there is no personal benefit / interest involved, to negotiate terms of the funding agreement and appear for the party if there is a dispute in the funding contract. Rule 49A of the LPPCR makes it mandatory for the legal practitioner to disclose the existence and all necessary details pertaining to a TPF agreement and the funder. Rule 49B of the LPPCR reiterates the ‘prescribed requirement clause’ imbibed in Section 107 (3A) of the LPA i.e. barring legal practitioners from having personal involvement or interest with respect to a funding agreement.

This more or less, briefly covers the Singapore model. However, there are certain drawbacks to this model – The mandatory disclosure clause as under Rule 49A, LPPCR is only applicable to legal practitioners registered in Singapore, as is the object of the LPA and foreign counsel who conduct arbitrations / appear in courts are not bound by this Rule. These regulations are restricted to what has been enacted under the above statutes and do not cover a wider range of issues in TPF.

To counter this, the Singapore International Arbitration Centre (SIAC) has brought in modified Investment Arbitration rules wherein the Arbitral Tribunal is vested with the power to order disclosure of TPF, if any, stating interests of the funder, details of involvement etc. SIAC also introduced a practice note in 2017 which entails independence and impartiality of arbitrators, disclosure and order as to costs when TPF is involved.

HONG KONG – Salient Features

The Hong Kong Code of Practice for Third Party Funding in Arbitration, 2019 (HK model) is a comprehensive legislation which regulates TPF of arbitrations seated in Hong Kong. The HK model seems to have picked up on all short comings with respect to the English Code of Conduct for litigation funders and the Singapore model. It acts as an umbrella covering all important aspects of TPF starting from the contents and institution of a funding agreement and goes on to deal with intricate issues such as conflicts of interest, disclosure with respect to funding, issues pertaining to adverse costs and security for costs, extent of control the funder may exercise over proceedings and termination of the funder / funded party, to name a few.

They have rectified Singapore’s foible by including disclosure as part of the mandatory regulatory mechanism applicable for all Hong Kong seated arbitrations. This model gives an opportunity to the parties to avoid disputes as in Davey vs. Money[8], where the Court of Appeals (England & Wales) held that the funder can be made liable for costs exceeding the level of contribution as funding. The HK model prescribes that liability for costs and its extent to be agreed upon in the funding agreement itself so as to avoid disagreements and judicial intervention in the future.

DRAWBACKS OF REGULATING TPF

There are no major reported drawbacks since the HK model’s very recent inception, however, there are certain concerns for such an elaborate regulation to a concept that is yet to evolve and function maturely. First, domestic regulations vary from place to place and this may lead to forum shopping for the sake of convenience. Second, there is always a risk of over-regulating where a rigid structure makes it arduous for navigating through such regulations. As mentioned earlier, the concept of TPF is new and evolving, flexibility in its operation would be smart.

At the same time, I would also not propagandize a system of non-binding rules drawn up by arbitral institutions which can serve as a guide. This would be counterproductive to the concept of arbitration as a whole. If non-binding rules take over third party funding, the practices like non-disclosure becomes a norm thereby making court intervention necessary in between arbitrations. Also, when issues such as impartiality, arbitrator bias, void agreements etc come to light, knocking the doors of courts will strain the whole process. Flexible yet binding regulations can be the way to move forward.

CONCLUSION

As preliminarily discussed, India does not have any obstructions by way of statutory provisions barring TPF from entering full-time, into the commercial market. As long as the contract of funding is not contrary to public policy or in any way illegal, India is already starting on a different footing than its counterparts (with no bar on champertous agreements). It is about time India regulates TPF by following various examples set by leading jurisdictions in arbitration. This would not only facilitate an advancement in India’s consensus to international arbitration but also act as a stepping stone in achieving the South Asian Hub status.