Subhrotosh Banerjee at Sapphire and Sage Law Offices
Introduction:
Third-Party funding is the process wherein a third-party party, who is otherwise unconnected with the proceeding, funds the proceedings in a dispute for a party in return for certain financial gain, which can be in the form of the share of damages awarded in the case or settlement reached between the parties. These third-parties can engage with such funding in various forms, such as through insurance companies, investment banks, hedge funds, specialist third-party funders and even law firms. While International Arbitration has its merits as a mode of settling disputes in cross-border transactions, it can be extremely expensive for the parties.
Therefore, if third-party funding can be effectively and properly used in the context of transactions, it can benefit by increasing the access to justice for parties and have the effect of putting parties on a level playing field in the dispute resolution process. However, several issues crop up when discussing the aspect of third-party funding, especially related to enforcement of the award and the validity of the agreement itself. This article will essentially attempt to explain these issues and further, discuss the application of the same in the Indian context.
Judicial and Legislative Perspective:
The validity of third-party funding has been mostly held to be valid and legal. This can be derived from the fact that cases such as Arkin v. Borchard Lines Ltd. have seen the English Court of Appeal indicating a favorable approach towards such third-party funding as a means for seeking access to justice which the party wouldn’t have had access to otherwise. This principle had been echoed by the High Court of Australia in the case of Campbells Cash & Carry Pty Ltd. v. Fostif Pty Ltd. wherein it was held that litigation funding per se was not contrary to public policy or abuse of due process. This is a significant departure in common law jurisprudence from previous attempts to invalidate third-party funding as was the case in the earlier case of Re Trepca Mines wherein Lord Denning in explaining the dangers of third parties in litigation held that such third-party maybe “be tempted, for his own personal gain, to inflame the damages, to suppress evidence, or even to suborn witnesses“.
In India, third-party funding had often been discussed in the context of litigation, civil suits especially. This is evident from the Privy Council decision on an appeal from the Calcutta HC in the case of Ram Coomar Candoo v. Chunder Canto Mukherjee wherein it was held “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“. Moreover, the concept of third-party funding is even statutorily recognized for civil suits under Order XXV Rule 1 of CPC which states that the courts are empowered to secure costs for litigation from a financier by asking it to become a party and disposing of the costs in court. A recent decision of the Apex Court came in the In Re GA Senior Advocate case, wherein the court held that a third-party funding agreement where the returns are made contingent on the outcome of the case is not per se illegal unless the third-party itself is the advocate. Therefore, in effect, the bench prohibited legal practitioners from being the third-party itself that undertakes to finance the process on a contingency fee or a success-based fee.
Application of Third-Party Funding in Arbitration: The specific issues in applying for third-party funding in the context of arbitration are as follows:
- Enforcement of Award:
In order for the award to be successfully enforced in that jurisdiction, it has to be aligned with the public policy of that country. Certain jurisdictions have shown reluctance and have even statutorily prohibited third-party funding. One such regime is Irish law, wherein in the case of Persona Digital Telephony Limited & Sigma Wireless Networks Limited v. The Minister for Public Enterprise, Ireland and the Attorney General the court declared third-party funding to be violative of the public policy of Ireland and therefore, decided to set aside the award rendered in that case. However, within International Arbitration the process of third-party funding is also becoming increasingly accepted. This is evidenced by recent decisions of tribunals such as in the case of Giovanni Alemanni v. The Argentine Republic, wherein it was held “the practice [of third-party funding] is by now so well established both within many national jurisdictions and within international investment arbitration that it offers no grounds in itself for objection“.
Therefore, while this is a positive step towards mitigating hurdles in enforcing awards involving third-party claims, the difficulty in enforcing awards in an anti-third-party funding regime cannot be overlooked. US, UK Australia, Germany, France and Netherlands are regarded as funder-friendly jurisdictions.
- Conflict of Interest:
The stem of this issue is from the increased funding of arbitration claims internationally from only a small number of funders who are willing to undertake such costs and expenses. The concern is especially dire with regard to the repeat appointment of arbitrator by a party with a funder who has already funded an arbitration previously with the same arbitrator, potentially affecting the ‘equality of parties’ and ‘impartiality of arbitrator’ principle in such arbitrations.
For this, the International Bar Association: General Standard 7 of the Guidelines on Conflict of Interest in International Arbitration has mandated the disclosure of any such third-party funding arrangements. Even institutions have addressed this in their rules. The SIAC empowers the Tribunal to order the disclosure of the existence of and, where appropriate, details of the third-party funder’s interest and also whether such third-party funder has agreed to be held liable for adverse costs. HKIAC and SCC are two other institutions that have followed suit and incorporated policy encouraging disclosure of the identity of the third parties that are related/ interest in the outscore of the dispute.
c. Security for costs:
This issue had been considered in a recent English arbitration case, Essar Oilfields Services Ltd. v. Norscot Rig Management the arbitrator considered it reasonable and in the interests of justice to award indemnity costs and included in his costs award almost £2 million in funding costs. The costs were then upheld by the English Court. This decision by the court reaffirmed that the cost of funding can in fact be included in the costs awarded to the successful party. However, this principle had been proposed by the case on a subjective, case-to-case basis. SIAC also take note of the same in Rule 33.1 of the SIAC Investment Arbitration Rules which empowers the tribunal to take into account the third-party funding agreement when deciding on the apportionment of costs, applying the same principle when deciding on any adverse costs as well.
Conclusion:
Given the benefits that third-party bring to widen the use and access to arbitration, the same should not be prohibited. However, there can be issues arising with regard to threats to tenets of arbitration such as confidentiality, impartiality and equality of parties, which is why the need of the hour is to regulate the process of third-party funding, both nationally and internationally. A good framework for implementing this, in the author’s opinion, is to draw reference from the existing statutory framework supporting the same for civil litigation in context of arbitration. This can lead to a win-win situation for both the party arbitrating, by increasing its access to better resources in the dispute resolution process and for the financier, as a tool to accrue financial return. If implemented in India, international parties would be incentivized to enter into further cross-border transactions with Indian parties without skepticism as to the hurdles in enforcing the award.
