Late last month, the Delhi High Court delivered a significant judgement with the potential to alter India’s arbitration and/or litigation landscape. Dealing with complex questions surrounding the concept of third-party financing of court processes (litigation or arbitration) and the extent of it vis-a-vis the arbitration proceedings, courts have generally adopted a measured ‘wait and watch’ approach over the years.
There are barely a handful of judgments dealing meaningfully with the complex issue. In that context, the judgement in Tomorrow Sales Agency Pvt. Ltd. v. SBS Holding & Ors. of the Delhi High Court is especially refreshing with an explicit recognition of and engagement with the concept of ‘third-party funding’ in India.
Scope and Ambit of Third-party Funding
Over the years, the backlog of cases has kept increasing and the overall court process has become even more time-consuming. As an alternative, arbitration has become the go-to option for the corporate world. Although less time-consuming and tedious, it can also be quite costly with a substantial number of individuals/parties that would ideally want to opt for it unable to do so because of affordability concerns.
These parties ordinarily require and seek financial support from funds or donors to be able to further their case. Though most common law jurisdictions across the globe have invoked the principles of champerty and maintenance in disallowing such third-party funding; Indian courts have had the foresight to permit the same on the grounds of promoting access to justice.
However, such permission is naturally subject to careful scrutiny and may be withdrawn in case any such agreement towards providing third-party funding is found to be unconscionable, inequitable, extortionate, unrighteous, injurious or contrary to public policy. In addition, lawyers are not permitted to partake in any such financing either. While those terms may seem broad and somewhat vague, the stance of Indian courts to not outrightly reject the idea but instead scrutinise it on a case-by-case basis has ensured that those with legitimate rights but limited financial capacity may still get the opportunity and the level-playing field to seek such rights in a substantial manner.
Of course, this recourse does not come without its fair share of risks. Encouraging third-party funding entails within itself the risk of commercialising access to justice in a way that may not be beneficial in the long-run with funds and donors looking to make quick bucks off claims that have the possibility of yielding large returns vis-a-vis principled claims with little or no monetary returns. However, disallowing or discouraging third-party funding would not lead to a better situation either, when it comes to more principled and legitimate rights-seeking claims.
The Global Situation
Balancing the risks attached and benefits that could accrue, it is not surprising that many jurisdictions across the globe have begun embracing the idea of third-party funding in arbitration and litigation with open arms.
Common law jurisdictions like Singapore, Hong Kong and the United Kingdom have legalised the concept albeit via different approaches and to varied extent as well.
Singapore has taken the route of legalising such funding for arbitrations provided they are not against public policy, prescribe rights of funders and exceptions to such rights. Hong Kong has expressly listed three exceptions to the prohibition on champerty and maintenance: third party establishing legitimate interest in the outcome of litigation, party obtaining permission to obtain funding on the basis of accessibility of justice and insolvency proceedings.
At the same time, Hong Kong has ensured that such financing is mandatorily disclosed at the outset along with details pertaining to conflicts of interest, adverse costs, extent of control by funders, liability for costs, etc. to avoid disagreement and litigation down the road.
On the other hand, the United Kingdom has allowed for third-party costs to be awarded by the arbitrator subject to their satisfaction that such funding was obtained solely for the purpose of pursuing the proceedings while being regulated by a private body of litigation funders instead.
Long Path Ahead for India
Despite the enthusiasm elsewhere, third-party funding in India finds itself in a tricky place with the lack of regulation to govern it, not many precedents to understand the scheme of awarding damages and no credible data for policymakers to understand whether litigation/arbitration-financing firms exist and/or are feasible in the current legal setup of India.
Therefore, the judgement by the Delhi High Court comes at an opportune moment to clarify that adverse costs awarded by courts cannot be enforced against third-party funders if the same is not specifically provided for in the financing agreement between parties.
Other factors pointing to whether the third-party funder was a party to the arbitration agreement, proceedings or award and/or whether it was added as a party during such arbitration proceedings have also been clarified by the court.
Amidst the increasing clarity on the same, there is immense potential of developing third-party funding into a more structured framework through which those with legitimate rights could take their cases to logical conclusions without worrying about a paucity of financial resources. While the recent judgement is a step in the right direction, contributing to the limited jurisprudence on the same would not be sufficient to bring about positive changes.
A thorough analysis of different models of third-party funding (as applicable in other common law jurisdictions), study of regulations that would best suit India’s arbitration/litigation landscape and meaningful deliberations with as many stakeholders as possible is the way forward to propel an arbitration-friendly landscape in India.
(Kumar Ritwik is an advocate practising in the High Courts of Delhi and Patna. This is an opinion piece. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)
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