Technological Innovations in Third-Party Funding: A Key to Unlocking India as a Potential International Arbitration Hub

- by Prateek Hemanth, student at Christ University. This is the 2nd winning entry of the National Article Writing Competition organized by CBLT.

I. Introduction to Third-Party Arbitration Funding

In the recent years, there has been a visible change in how users perceive Third-Party Funding (TPF) as a source of financing arbitration proceedings. Parties were earlier quite reluctant to accept TPF; however, with time, users have begun to accept it increasingly[1].  For the purpose of this article, Third-Party Arbitration Funding (TPAF) is defined as a mechanism whereby a party to an arbitration agreement enters into a contract with an unrelated third party, who is not a party to the arbitration agreement, to finance the arbitration proceedings. The third party assumes the risks associated with paying or receiving the proceeds, costs, or awards decided against or in favour of the funded party. The growing trend of TPF in India has gone hand in hand with significant legal developments, such as the Arbitration and Conciliation (Amendment) Act, 2019 and the restructuring of liquidation laws through the introduction of the Insolvency and Bankruptcy Code, 2016[2] which has resulted in the market for TPF to increase by more than 500%[3].

We currently see a drastic increase in the use of TPF by large solvent corporations across the world that seek a funding option allowing them to share risks while maintaining liquidity. The increasing demand for dispute funding can be attributed to several factors such as enhanced access to justice, global market instability and uncertainty, funding of bankrupt companies to obtain cash flow to service their operations[4]. Unfortunately, Indian arbitration practices have not embraced third-party funding to the same extent, despite the scope for returns on investment and party benefits being similar to litigation[5]. This becomes highly necessary in arbitration in light of the widely known high expenses involved in arbitral proceedings which often become one of the biggest disincentives against legal redress for financially limited people or organizations. This article examines how the introduction of Third-Party Funding in the Indian dispute resolution system can bring in a much-needed change putting it on the path to becoming a global arbitration hub.

II. Benefits of having a Third-Party Arbitration provision

The foremost benefit of TPF is that it increases access to justice making it open to parties of all suits who otherwise cannot afford to maintain meritorious claims[6]. This gets aggravated in cases of international arbitration where the proceedings tend to be more tedious and expensive on the parties. The parties are heavily burdened by the costs involved in arbitration processes, including the arbitrators’ salaries, expert testimony, attorney fees, administrative expenses of the arbitral institution, and a host of other costs. TPF gives parties the opportunity to engage in arbitration proceedings involving claims worth crores of rupees to transfer the risk of loss and the associated expenses to the TP funder[7]. Accordingly, TPF particularly appeals to two categories of parties: financially stable entities and impoverished parties. On the surface, TPAF could help parties to an arbitration agreement who are poor or underprivileged. Without a doubt, a battle of equals can occur when disputants are in a balanced position with respect to the quantity of money at stake as well as the amount of money in the disputants’ possession. On the flip side, the battle may turn into one in which one side is at a disadvantage because they lack the means and money that the other side does, and the former must start arbitral proceedings to recoup his rights[8]. In these situations, TPF promotes access to justice by enabling the underprivileged party to level up and face off against his opponent. When examining funding arrangements in these kinds of circumstances, it is obvious that TPF arrangements support access to justice because it is better for the impoverished party to receive a portion of the damages rather than none at all; in other words, it is better to share the pie with the funder than to have none at all.

Only after conducting due diligence on the claim’s potential to yield the desired outcome can the funder decide to invest his money in the funded party's claim[9]. The funder in order to view a favorable outcome will most likely provide top notch skill sets, experience and legal assistance which many times might not be available to the disadvantaged party. This might in return help level the playing field by allowing access to equal opportunities. TPF might also be advantageous for organizations with ample funds that choose to finance their arbitration process through other means. By looking for outside financial assistance, entities with enough cash and business flows hope to handle the high level of risk associated with arbitration in a reasonable manner. The reason for this is because the arbitral process is a very unpredictable occurrence that could result in a drawn-out battle to recoup claimed damages. The claimant can shift the risk and financial weight of the claim sought in the arbitration proceeding to the funder by enlisting TPF's aid. Because of its capacity to manage risk and provide financial support, TPF is therefore a compelling choice for an established company.

 

III. An Indian perspective of Recommended Policy Framework

To establish India as a global hub for arbitration, a comprehensive policy framework addressing third-party funding (TPF) must be implemented. This would remove any doubt about the legitimacy of TPF and provide a chance to address public policy-based objections. Such a clause would boost stakeholder confidence and lessen doubt about the legality of TPF agreements, especially as courts have a propensity to construe public policy exceptions more broadly[10]. Second, it is essential to create a consolidated database for funders. By providing comprehensive details about funders' industry-specific experience, total funds supplied, business expenses, profitability metrics, and historical success in the industry, this database should help parties and funders make well-informed decisions. Such measures would enhance competition among funders and provide parties with tools to select the arrangement best suited for their needs[11]. The Law Commission of India will play a crucial role in ensuring a transparent consultation process in order to assess regulatory requirements for TPF. The outcome should be holistic regulatory framework taking inputs from industry specialists including legal practitioners, academics, funders, and arbitration institutions to put forward the global best practices, fostering confidence in the system while taking up any objections raised during the recommendatory process.

In order to stay on par with international practices, India must abolish the practice of imposing civil and criminal liability for champerty, an agreement in which a person with no previous interest in a lawsuit finances it with a view to sharing the disputed property if the suit succeeds, as it stands to be a practice of the past and is irrelevant in a modern arbitration setting[12]. The policy framework should also address the issue of security for costs and adverse cost awards. TPF should not automatically be considered a basis for assessing a claimant’s financial inability to satisfy adverse cost awards, as this could disadvantage weaker parties. Limiting security for cost application to exceptional circumstances would help adopt a balanced approach, upholding ethical standards to regulate the relationship between funders and the claimants will allow the access of material for due diligence further pushing the cause of confidentiality and attorney-client privilege.  Finally, the regulatory framework must prevent funders from withdrawing financial support during ongoing arbitration proceedings, except under well-defined circumstances. Drawing inspiration from The Association of Litigation Funders [ALF] Code of Conduct[13], explicit standards should govern the termination of TPF agreements to balance the interests of funders with the need for stability in arbitration.

IV. Disclosure requirement of TPF arrangements in Arbitration

The disclosure of the existence of TPF agreements in arbitration has been a relevant issue. In India and around the world, opposing views have been expressed on the matter. Both sides of the table present reasonable arguments. One group contends that these disclosures are essential to preserving the arbitral process’s transparency, while the other group contends that the issues surrounding parties’ funding are outside the purview of arbitration tribunals and, as a result, they are not necessary to preserve the process's fairness and transparency[14].

a. Should disclosure be made mandatory?

On an international scale, there is a growing consensus on mandatorily disclosing the TPF agreements in international arbitrations. It is essential to note that Asian countries, like Singapore and Hong Kong, have enacted domestic legislations requiring disclosure of TPF arrangements in arbitrations. While the Singapore law places the onus on domestic lawyers of the parties to make such disclosures, the Hong Kong law requires the parties itself to disclose such TPF arrangement[15]. The Indian arbitration law would expectedly require such disclosures by its operation, especially since the arbitrators have a statutory duty to disclose. In order for the arbitrators to make such disclosures in line with Section 12(1)[16], it would be necessary for the parties to reveal the existence of any such TPF arrangement. Failure to do so could result in the arbitrator’s appointment being contested. Additionally, the arbitrator’s failure to disclose such links should be interpreted as a de facto inability to carry out the arbitrator’s duties as defined by Section 14(1)(a)[17].

Present-day discussions on the subject generally point to the following benefits of TPF arrangement disclosures: Firstly, with no such disclosures, the other party would essentially have no way to find out that the claims had TPF arrangements in place. A strong and genuine claim may draw third-party funders because of its increased likelihood of success[18]. Because of these TPF arrangements, the claimant’s financial strength has a significant impact on any dispute settlement procedures[19]. Second, these disclosures guarantee that any potential conflicts of interest between the arbiter and funder are highlighted[20].

b. Threat to Confidentiality of the Funder and potential solutions

The TPF process inherently requires that the party present his claim to a possible funder, which clearly calls for significant information disclosure, endangering the confidentiality of the complete case file. Further should the funder take the case, they will need frequent updates on how the proceedings are going, which could further jeopardize the privacy of the opposing party. Usually, the party looking for funding protects this by entering into non-disclosure agreements (NDAs) with the funder. This is a basic principle of TPF agreements, which prevents the funder from disclosing the information or any portion of it to any other party and establishes a contractual liability that binds the funder and may be used in the event.  Redacting sensitive material, particularly that supplied by the opposing party, and restricting the quantity of information shared with the funder are additional solutions. The tribunal would discuss and issue an order for the necessary redaction after giving the opposing party a chance to identify and submit its case regarding the sensitive information that needs to be removed[21]. A TPF regulatory framework must include specific preventative measures in order to encourage better confidentiality in TPF. Both litigation and arbitration funders would gain equally from the introduction of a voluntary Code of Conduct that would govern funding in arbitration cases in India.

An approach to tackle the issue of disclosure obligations as well as inclusion of “funders” within the arbitrator conflict would be the introduction of involving voluntary codes of conduct which may also help in promoting a sustainable growth of TPF in India. The arbitrators shall seek such conscious information about the parties prior to making their disclosures. Current trends in India sees a trend in moving from an ad hoc to an institutional arbitration regime, it may also be worthwhile for Indian arbitral institutions to consider including mechanisms ensuring confidentiality of TPF structure and sanctity of arbitral process at the same time.

V. Conclusion and Future Outlook

Third-party funding, in India, may be seen as one of the most effective means of taking forward public policy objectives for justice delivery in relation to enhancing access to justice, effective legal representation, and ensuring efficient and timely resolution of cases. Indian companies account for about 30% of all London Court for International Arbitration and SIAC cases referred there for resolution. Despite the vast available opportunities, the lack of a well-established arbitration culture and a concrete regulatory framework for TPF has been an obstacle to the growth of financiers in India. The involvement of a third-party funder undoubtedly affects the integrity of arbitral proceedings, and it is precisely for this reason that the fabric of arbitration must remain well-structured without any conflict of interest between the arbitrator, the funder, or the funded party. According to existing market norms, whenever an associate or a partner of a big law firm gets appointed as an arbitrator, an email would be sent internally in the firm asking members whether they are acting or are in business with either side involved in the arbitral proceedings[22]. Taking inspiration from corporate practises and inculcating them into the domestic system would allow to steer clear of any potential conflict of interest in advance[23].

Jurisdictions such as Singapore and Hong Kong have taken the path of express regulation on TPAF, whereas jurisdictions like the United Kingdom, France, and Switzerland prefer the route of self-regulation. The majority opinion of scholars and jurists exists in the belief that TPAF should be regulated through rules or regulations but to what degree and intensity could differ from jurisdiction to jurisdiction. The disclosure of the TPF agreement can help avoid adverse consequences while maintaining the independence and impartiality of the arbitrator, thereby avoiding delays and the inconvenience of finding a replacement arbitrator[24]. Similarly, for the requirement to disclose the relationship between the funder and arbitrator at either the appointment or in the course of the proceedings to avoid any objections to the independence or impartiality of the arbitrator.[25] This does away with the risk of actual or apparent conflict of interests. As high-value claims are increasingly on the rise, provisions for TPF should also be included in India's investment dispute framework as TPF will become even more important for an investor who, otherwise, will find it unbearable to compete against the economic power of the State. In light of the commercial potential attached to TPF, India is well positioned to put in place a complete regime of regulation that would help Indian citizens benefit from an efficient justice delivery system, which in turn would enhance India's standing in the global arbitration community

[1] V Messina, 'Third-Party Funding: The Road to Compatibility in International Arbitration' (2019) 45(1) Brooklyn Journal of International Law 433.

[2] International Bar Association, IBA Guidelines on Conflicts of Interest in International Arbitration (Explanation to General Standard 6, October 2014).

[3] J Delaney, 'Mistakes to avoid when approaching third-party funders' (Global Arbitration Review, 15 April 2014).

[4] V Mansinghka, 'Third Party Funding in International Commercial Arbitration and its Impact on Independence of Arbitrators: An Indian Perspective' in Michael Pryles and Philip Chan (eds), Asian International Arbitration Journal, Volume 13, Issue 1 (Kluwer Law International) 97.

[5] D R Richmond, 'Other People's Money: The Ethics of Litigation Funding' (2005) 56 Mercer L. Rev. 652.

[6] S Khouri, K Hurford, and C Bowman, 'Third-Party Funding in International Commercial and Treaty Arbitration – A Panacea or a Plague? A Discussion of the Risks and Benefits of Third-Party Funding' (2011) 8(4) Transnational Dispute Management 1.

[7] A Coomber, 'Access to Justice in the 21st Century: A Reality Check' in Summer 2017 Harbour View – Access to justice (Harbour Litigation Funding 2017) 5.

[8] J V Goeler, Third-party funding in international arbitration and its impact on procedure (Kluwer 2016).

[9] K H Shahdadpuri, 'Third Party Funding in International Arbitration: Regulating the Treacherous Trajectory' in Michael Pryles and Philip Chan (eds), Asian International Arbitration Journal, Volume 12 Issue 2 (Kluwer Law International 2016) 77.

[10] Renusagar Power Co Ltd v General Electric Co (1994) Supp 1 SCC 644. Shri Mahal v Progetto Grano Spa (2014) 2 SCC 433.

[11] M Estevao, 'The Litigation Financing Industry: Regulation to Protect and Inform Consumers' (2013) 84 University of Colorado Law Review 467.

[12] A Wadia and S Rawat, 'Third-Party Funding in Arbitration-India's Readiness in a Global Context' (2018) TDM 2.

[13] Association of Litigation Funders, Code of Conduct (2018), https://associationoflitigationfunders.com/code-of-conduct/ 

[14] Tian-Yu Du, 'Research on Conflicts of Interest Arising from Third-Party Funding in International Investment Arbitration' (2018) 281 Advances in Social Science, Education and Humanities Research 422.

[15] Singapore Civil Law Act (Cap 43) s 98-U, ss 5-A, 5-B; Hong Kong Arbitration Ordinance (Ord 6 of 2017).

[16] Arbitration and Conciliation Act 1996, s. 12(1)

[17] Arbitration and Conciliation Act 1996, s. 14.

[18] Nathalie Allen Prince & David Hunt, 'Increasingly mandatory disclosure of third-party funding in arbitration' (Financier Worldwide, November 2018).

[19] N Hadiimanovid, 'Third-Party Funding in Arbitration: A Case for Mandatory Disclosure?', in Z Meskid, I Kunda, D Popovid, and E Omerovid (eds), Balkan Yearbook of European and International Law 2019, vol 2019.

[20] Meenal Garg, 'Introducing Third-Party Funding in Indian Arbitration: A Tussle between Conflicting Public Policies' (2020) 6(2) NLUJ Law Review 71.

[21] Kaira Pinheiro & Dishay Chitalia, 'Third-Party Funding In International Arbitration: Devising A Legal Framework For India' (2021) 14 NUJS L. Rev. 2.

[22] M Stoyanov and O Owczarek, 'Third-party funding in international arbitration: Is it time for some soft rules?' (2015) 2(1) BCDR International Arbitration Review 171.

[23] A Fuchs and L Richman, 'The arbitration agreement and arbitrability, third-party funding in international arbitration: A comparative analysis' in C Klausegger et al (eds), Austrian yearbook on international arbitration (Manz’sche Verlags und Universitätsbuchhandlung 2020) 73.

[24] J Beechey, ‘The pandora’s box of third-party funding: Some practical suggestions for arbitrators in light of recent developments’ in J E Kalicki and M A Raouf (eds), Evolution and Adaptation: The Future of International Arbitration (International Council for Commercial Arbitration 2019) 558.

[25] S Brekoulakis, W W Park, and C A Rogers, Draft report for public discussion of the ICCA-Queen Mary task force on third-party funding in international arbitration (International Council for Commercial Arbitration 2017).