This article is written by Sonali.
Table of Contents
Introduction
Third-Party Funding is a scheme under which a party independent of a legal claim provides funds to a claimant side or defence side to pursue their legit claims. This is also known as Litigation Financing. It is not expressly barred under any act of the Indian jurisprudence but undisputed enforcement is also on the fence because it may go wrong against the public policy of India. But since Independence, we have come a long way in this journey of Litigation Financing and an analysis of the current situation is done hereunder.
Maintenance and Champerty
This doctrine finds its origin in the Law of Torts in India which itself originated in the United Kingdom. Maintenance is when a person having no interest in the claim or connection with the claim provides financial assistance to either party of the dispute to pursue a legitimate suit in the court and Champerty is when the same person demands a financial share in the outcome of the legal proceedings. This is a common-law jurisdiction doctrine and was considered opposed to public policy due to moral and ethical concerns. Champerty is a species of Maintenance. In litigation financing, the parties commit Champerty because the investors are usually business enterprises who are interested in the returns in the form of damages.
The law relating to Maintenance and Champerty has already been settled in Ram Coomar Coondoo and Anr. V. Chunder Kanto Mookerjee. The court held that there is no specific law in India banning such arrangements. A fair agreement to supply funds to carry on a suit in consideration of having a share in the suit property on recovery is not per se opposed to public policy. If the suitor had no property other than the suit property then such assistance would be in furtherance of right and justice. But these agreements should be carefully watched.
On being found that they are extortionate and unconscionable and are made for improper objects such as gambling in litigation and oppressing others by encouraging unrighteous suits should be held to be contrary to public policy. In BCI V. A.K. Balaji, the court reiterated this principle and held that advocates in India cannot fund litigation on behalf of their clients but there appears to be no such restriction on third parties funding the litigation and getting repaid for it.
Applicable Laws
The law on champerty has been settled in India but there is no decision passed by the apex court specifically allowing Third-Party Funding in Arbitration. But relevant changes have been brought in by the states of Maharashtra, Gujarat, Madhya Pradesh and Uttar Pradesh in their respective Civil Procedure Code, 1908 under Order XXV Rules 1 and 3 to recognise the third party funded litigation.
An arrangement is basically a contract between the litigant and funders therefore it shall be governed by the Indian Contract Act, 1872. Also, any foreign funding transaction is scrutinized under the provisions of the Foreign Exchange Management Act, 1999 (FEMA). Other than these laws any arrangement shall be governed by the sector or industry-specific laws or compliances applicable to that foreign investment.
Need of Third Party Funded Arbitration In India
The post-Covid world is witnessing a plethora of commercial disputes in the form of breach or frustration of contracts amongst parties. The majority of the disputes are bound to arise in the fields of infrastructure, energy, construction, insolvency and ventures of companies because the Government of India is expanding investment in the infrastructure and energy sector under which multiple contractual agreements will happen.
India will spend 1.4 trillion $ for the infrastructure sector in over five years to become a $ 5 trillion economy and it is forecasted that by 2022-2023 India shall become the third-largest economy in the Construction sector. Development Finance Institution (DFI), a lending portal is also being set up by the government of India to fund Rs. 5 Lakh Crores to Infrastructure projects within 3 years.
With these huge investments, the government may even land itself into multiple arbitration disputes with foreign entities and get their investments stuck into litigation. A sophisticated business entity that works on a risk-return basis may prevent Investment Companies or Public Sector Undertakings from fastening their investments in arbitration and allow them to keep doing their intended job without losing on their capital.
In the private sector too, if Corporates can find somebody to fund their lawsuits then they should definitely go for it. Taking loans or other kinds of debt might be a bad idea because they are an expensive way of funding and fall on the internal cost of business. Due to companies’ blocked resources, there will be a stay on expansion plans. Litigation Financing helps the business in using its profit for its organic growth. It does not impact the business of the company and risk is transferred to a third party at a lower cost.
How to approach Third-Party Funded Arbitration in India?
Economic Analysis
An ideal scenario will be when parties can fix a budget of the arbitration or there is a capping on budget. If a budget keeps on changing then it may not be viable for the funders to invest. The budget should be realistic, comprehensive, futuristic and detailed. Majorly it will depend on the merits of the case. But the reality is far from ideal situations. One cannot anticipate in advance what can be the outcome of a dispute.
A party can roughly estimate the costs of litigation because variations are bound to happen. Here the funders have to be accommodating and help to make changes in the pre-decided budget. Simultaneously the litigant must keep a check on the packaging and negotiation cost of the funding agreement because this occurs before any arrangement is entered into between the parties and the cost is the sole concern of the litigant.
Independence of Arbitral Tribunal
One of the important considerations in the fruitful execution of arbitration proceedings is the independence of the arbitrator. The Arbitration and Conciliation Act, 1996 via 2015 amendment introduced a new provision in sub-section 5 under Section 12 as per the recommendation of the 246th Report of Law Commission of India wherein the Arbitrator is required to give a disclosure regarding any past, present, direct or indirect relation with any of the parties of the arbitration.
Any relation if not disclosed earlier or not been allowed by the parties in writing may frustrate the arbitration proceedings as a whole. The award obtained can be challenged and set aside due to the presumption of influence of the related party over the arbitrator and the proceedings itself. Therefore, it should be bear in mind that the funding party should not be related to the Arbitration Tribunal or must receive a declaration from the Arbitral Tribunal and consent of other parties.
Disclosure requirements
There is no specific law requiring disclosure of the scheme of the funding arrangement or of the fact that the claim or defence is funded by anyone. The IBA Guidelines on Conflicts of Interest in International Arbitration issued by the International Bar Association provides that the funders are on the same level as the parties due to “direct economical interest in the award”. These guidelines are not mandatory in India and are merely recommendatory but following them may reap benefits to the funded party. Firstly, there will be no challenge to the award in terms of impartiality of arbitrators in future. Secondly, the claimant can prove that it has the financial capacity and a strong case (because a high level of due diligence is undertaken by the funder before investing) to pursue its claim.
In similar lines, the ICC introduced a new Article 11 which imposes an express obligation on the parties to disclose the existence and identity of any non-party which has entered into an arrangement for funding of claims and defences. In Singapore, legal practitioners are under strict obligation to disclose such arrangements to Arbitrators u/s 49A and 49B of Singapore Legal Professional Rules.
Also, in Hong Kong, Article 98A of the Hong Kong Arbitration Ordinance states that the funded party must disclose in writing about such an arrangement. This is going to be the new norm within the developing arbitration hubs such as India. Therefore, the party should ideally disclose the fact of Litigation Financing voluntarily to prove neutrality in the proceedings. There is no requirement to disclose the whole funding agreement.
Seat of Arbitration
It is of paramount concern to check what is the seat of the arbitration. If the local laws of a country do not allow litigation financing at all then one cannot proceed with this. Singapore has recently abolished its law of champerty for arbitration proceedings only. In litigation, third party funding is still not permitted. In many common law jurisdictions, including India, it has already been abolished.
The silence of laws on Third-Party Funding does not make them expressly barred. In such jurisdictions, TPF shall work. Also, the place of enforcement should be kept in mind while choosing TPF because enforcement may be refused on the grounds of the Public Policy of the country. In India, there is little uncertainty for the time being because several challenges are pending before Indian courts against arbitration awards on the ground of being against the public policy of India. Nothing can be presumed in advance but looking at the pro-arbitration of Indian courts, positive results may ensue.
Confidentiality of Documents
An investor is required to do exhaustive due-diligence work to find out the viability of the claim. Plenty of documents need to be scrutinized to arrive at a decision. In this course of the investigation, confidential information will be shared by the claimant. Therefore, a non-disclosure agreement must be signed amongst the parties at an early stage. The investor may also want to sign an exclusivity agreement. But exclusivity should be given at the end of the whole due-diligence process. If there are chances of investors backing out from the deal then another investor can be approached as soon as possible.
Autonomy
The funding arrangement should prescribe the scope of influence or interference of investors in the proceedings and settlement matters. Funder’s usually follow a ‘light-touch approach’ and remain at arm’s length in the proceedings but defining the scope of the autonomy will save the arrangement from many disputes. It shall also include a mechanism to decide on how to enter at a consensus when both of them cannot arrive at a common settlement agreement.
Assessment date of damages
The funders are interested in claims where the remedy is in the form of damages. They get a pre-decided portion of damages for the risk assumed by them. Here it becomes of utmost important to decide from which particular date the damages must be assessed. An award commonly grants damages from the date of the breach of agreement in dispute and tries to put the claimant in the position they would have been in if the breach had not occurred.
The calculation of damages will be from back to the date of the breach. The real issue is that this date should be agreed upon amongst the parties properly. An expert analysis may be required due to the complex nature of transactions and the industry involved. If there is no consensus between the funder and the funded party there might be disputes regarding the quantum of return the investor must get.
Regulation of Litigation Financing
Presently, there are no specific guidelines or provisions in India to regulate Third-Party Funding. This concept is still in its nascent stage in India so an elaborate regulation is not feasible and called for. Sophisticated countries around the world are creating provisions to self-regulate this concept and are allowing businesses to grow by investing on a risk-return basis. India is along the way to become a developed country as projected by the recent announcements of the Government. Therefore, a self-regulation path will be more practicable in its infant stage.
On 11th February 2021, Indian Association for Litigation Financing was launched and signed by several law firms, practitioners and third party funders. This association aims to self-regulate and spread knowledge about Litigation Financing in the country. The initiative is the first of its kind in the TPF field in India and it displays that the future is nearer than expected.
Conclusion
Covid situation has accelerated the pace of progress in the country and thereby TPF is no longer a foreign concept for India. In a pre-covid scenario, it is a boon for businesses when already many contractual disputes are going around and nobody has sufficient resources to fight for their legit claims. Therefore, parties may, after taking into consideration the above factors, decide to choose TPF.
Initially, the judges may be wary of funded claims. There is a pre-existing notion that litigation will become business and there might be a rise in frivolous litigation too. That is why the use of this concept in Arbitration is far cry from its use in Traditional Litigation. Arbitration is a modern world concept and judges are more open to adapt to foreign concepts. But in litigation, unless badly required Third-Party Funding should be avoided. Also, in Arbitration too, TPF is only self-regulated. Relevant legal, economic and commercial aspects should be taken care of.
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