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Third-party funding in arbitration: India and the world
In the realm of dispute resolution, it is not always that the parties are able to afford the costs that come with resolving said disputes. Variety of expenses are involved in litigation and arbitration proceedings such as the fee of their lawyer, costs of the court or tribunal, costs of expert witnesses, adverse costs, etc. In a case where the party is unable to bear the expenses of the resolution, third party funding can come as an aid.
Third party funding is the process wherein a party that neither has any connection to the proceeding nor does it have any financial benefits attached with the outcome of the proceedings, agrees to fund the party in their litigation/arbitration costs.
Third parties receive financial gain in the form of a share in the damages awarded in the case or from any settlement that is reached between the parties. They can be specialised third Party Funders, insurance companies, investment banks, hedge funds, or even law firms.
Recognition of third-party funding in common law jurisdictions
- England and Wales follow doctrines of maintenance and champerty. Even after these restrictions of maintenance and champerty, England and Wales are one of the largest funders in the United Kingdom. However, London litigation markets do not prescribe any regulations for the same.
- Third-party funding is less popular in the United States of America (“USA”). In the case of commercial disputes, third party funding is even lesser.
- Singapore has a liberal approach to third party funding. Singapore has even legalised third party funding with regard to international arbitration, court and mediation proceedings.
- Hong Kong also identifies the doctrines of maintenance and champerty and has followed in the footsteps of Singapore for recognizing third party funding. After receiving recommendations of the Law Reform Commission, Hong Kong brought forth the Arbitration and Mediation Ordinance, 2017 which permits third party funding in arbitration.
Recognition of third-party funding in civil law jurisdiction
- The Paris Bar Council has a resolution passed on third-party funding. Similarly, In Italy, the Italian Civil Code contains agreements wherein it can be construed that there is nothing illegal or against public policy in funding a party to a proceeding in exchange for a share in the proceeds.
- Although the Federal Supreme Court of Switzerland rejected a draft law that was proposed to prohibit third party funding but concluded blanket prohibition would violate economic freedom.
- Third party funding is neither prohibited nor expressly regulated in mainland China. The Investment Arbitration Rules of the Chinese International Economic and Trade Arbitration Commission expressly mention third party funding.
Legality of third party funding in Indian scenario
The Arbitration and Conciliation (Amendment) Act, 2015 neither regulates nor restricts third party funding. In Bar Council of India v AK Balaji, the Supreme Court stated that there is no apparent restriction on third parties who are not lawyers from funding litigation and getting their money back through the settlement that the parties receive.
An amendment was made to Order XXV Rule 1 of the Code of Civil Procedure, 1908, by the Bombay High Court and allowed for financing in litigation. Similar amendments were adopted by Gujarat and Madhya Pradesh High Court.
We can construe that third party funding agreements are recognized statutorily under Order XXV Rules 1 and 3 of Code of Civil Procedure. So, third party agreements are not void ab initio unless funded by a lawyer but there is still some criticism under the Indian Contract Act, 1872.
Nonetheless, the Supreme Court of India has made it crystal clear that the rules of champerty and maintenance do not apply in India and that there is nothing against public policy or morals in such a transaction except when a lawyer is involved in the funding. The Rajasthan High Court, while determining the legality of such agreements, observed that if the agreement is made with the intention of gambling, it cannot be upheld.
When a funder is involved in the arbitration process, then the independence of the arbitrators with regard to the funders becomes relevant to avoid any unfavourable orders at the stage of execution or enforcement.
Requirement for third party funding law in India
The Supreme Court of India has assessed the need to promote private international law in Alcon Electronics Private Limited v. Celem S.A. One of the most crucial factors of private international law is the accessibility that parties will have within a foreign jurisdiction, and the enforcement of third-party funding rules within a jurisdiction enables thorough participation for parties with meritorious claims, thus promoting India’s arbitral institutions internationally.
In 2015, the Supreme Court in Bar Council of India v. AK Balaji, clarified the legal permissibility of third-party funding in litigation and observed that “There appears to be no restriction on third parties (non-lawyers) funding the litigation and getting repaid after the outcome of the litigation.”. As on date, there is no legislative instrument that regulates such funding.
However, the (Indian) Code of Civil Procedure, 1908 as amended by a few Indian states including Maharashtra, Karnataka, Gujarat and Madhya Pradesh, expressly acknowledges the role of the financier of litigation costs of a plaintiff and sets out the situations when such financier may be made a party to the proceedings.
Third party funding has also received favourable reference in the report of the High-Level Committee to review the Institutionalisation of Arbitration Mechanism in India (2017).
Although progress has been made, it will be a long time before there is legislated third-party funding in arbitration in India. It is encouraging to see that the emphasis has now shifted to regulating third-party funding.
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