Navigating the Third-Party Funding Conundrum: A Regulatory Blueprint – Part 1
This article has been authored by Arnav Roy & Harshil Shriwas, 3rd year law students at National Law University, Delhi.
Introduction
Third-Party Funding (TPF) refers to the practice where an external financier covers the legal expenses of a disputant in arbitration without being directly involved in the dispute. This financial assistance might include covering the legal fees or settling any awards or judgments against the funded party.[1] This funding model is attractive to clients because it allows them to pursue claims without bearing the financial risks and costs directly; these are instead transferred entirely to the third-party funder. The funder, in return, receives a portion of any favorable settlement or award, or nothing at all if the claim fails.[2]
The arrangement though being facilitative to impecunious parties comes with its own regulatory costs. The emergence of the arrangement in India, and the lack of regulatory provisions surrounding it has led to host of problems to growth of arbitration and TPF in India. The article in the subsequent sections analyses the issues posed by unregulated Third-party funding and proposes probable solutions in the Indian context.
Historical Context and Present Scenario
Historically, TPF finds its roots in the practices of Maintenance and Champerty—traditional English legal concepts where a third-party supports a legal action in exchange for a share of the proceeds. Although such arrangements were deemed contrary to public policy and illegal under English law, they have never been explicitly outlawed in India.[3] The Indian legal system, guided by the Privy Council’s ruling in the Ram Coomar Condoo case of 1876,[4] has permitted such funding agreements, provided they do not involve attorneys directly funding litigants.[5]
Though currently India lacks any legislative promulgation acknowledging Third-Party Funding (TPF), recent judicial pronouncements, pioneered by the Delhi High Court verdict in case of Tomorrow Sales Agency (P) Ltd. v. SBS Holdings Inc,[6] have affirmed its legal status. Nevertheless, this judgment has certain constraints that merit further exploration in the regulatory domain. The judgement stems from a series of verdicts where courts have recognised litigation financing. The Supreme Court of India in the case of Bar Council of India v. AK Balaji[7], upheld the legal soundness of TPF in litigation, noting that there seemed to be no legal barriers preventing non-lawyers from financing litigation and recovering their costs following the resolution of the case. Presently, there is no statutory framework governing such funding. However, the Code of Civil Procedure, 1908, as modified by several Indian states,[8] explicitly recognizes a financier’s role in covering a plaintiff’s litigation expenses and outlines circumstances under which the financier can be involved in the lawsuit.
The 2019 Amendment to Indian arbitration law underscores the legislative intent to establish India as an arbitration-friendly jurisdiction.[9] The growing relevance of TPF in India’s legal landscape suggests the need for formulation of specific regulations governing the financial mechanism. Such regulations would not only ensure fairness and accountability but could also position India competitively on the international arbitration stage, akin to jurisdictions like Hong Kong, Singapore and England where funding regulations are relatively transparent due to the presence of necessary regulations[10] ensuring convenience to the parties.
The current situation however, leaves a dispute susceptible to ‘Arbitral Hit and Run’,[11] where an impecunious funded respondent is unable to pay the cost of the award and due to the lack of funder liability, the claimant is left bereft of recourses.[12] This leads to an asymmetrical situation where the funders do not hold any liability while also fall outside the control of the tribunal.[13] The situation is exacerbated with the lack of clarity around the funding process and regulation and control over the funder, which forms the premise of the subsequent parts of the article.
Regulatory Approaches: Balancing the Interests
The emergence of TPF in a developing jurisdiction like India has led to the twin faceted challenge of ensuring regulation while still promoting the access to arbitration. While the presence of the funder complicates the bipolar contractual arbitration and needs regulation,[14] the regulatory regime must not be cumbersome to limit the proliferation of TPF, thus hampering the access to justice.[15] This necessitates striking a fine balance between the regulatory regime and the demands of the funders to ensure an arbitration-friendly jurisdiction in India.
The B.N. Srikrishna Committee,[16] recognized the role of existing regulatory regime in arbitration friendly jurisdictions in promoting their role as dispute resolution centres. The jurisdictions across the globe allow differing degrees of recognition and impose different regulatory schemes for funders, ranging from self-regulatory associations to soft laws and statutory mandates.
Common Law arbitration hubs such as Hong Kong, and Singapore, have adopted a ‘light touch’ approach to TPF regulation.[17] For instance, the Singapore parliament permitted TPF under certain conditions by passing the Civil Law (Amendment) Act.[18] These regulations impose statutory obligations such as disclosure of presence of funder, paid up capital requirement and minimum asset amount, mandating self-compliance from the funder and regulation by the tribunal.
Hong-Kong followed a similar scheme and passed the Arbitration and Mediation (Third Party Funding) (Amendment) Ordinance, 2017 permitting Third-Party Funding in Arbitrations.[19] The ordinance was accompanied by regulatory guidelines by China International Economic and Trade Arbitration Commission (CIETAC ) on TPF which are binding on all parties and applies to all funding agreements.[20] The regulatory guidelines on similar vein as its Singapore counterpart warrants a minimum capital requirement, prohibits extensive control and provides procedures for managing conflict of interest to ensure self-compliance and accountability on the part of funders.[21]
Australia follows a similar regulatory paradigm, but posits the Australian Securities and Investment Commission (ASIC) as the regulator and requires the funders to hold an Australian Financial Services License (ASFL).[22] The presence of a statutory regulator and its close observation has led to concerns of over-regulation[23] the viability of which in jurisdictions such as India forms the premise of subsequent section.
Finally, the last of the major approaches for regulation can be seen in the case of England and its introduction of the Association of Litigation Funders (ALF). The association and its code of conduct follows similar regulations as present in Singapore, Hong Kong, and Australia but the Code applies only to funders who are members of the ALF.[24] The ALF has facilitated regulation to an extent, but exclusive dealings with the association members have led to allegations of competition concerns.[25]
Thus jurisdictions around the world have found some common ground to qualify the funders through statutory requirements on par with the banking and financial regulatory standards such as capital adequacy for funders, and a code of conduct. This would inevitably squeeze the absolute quantity of funders but on the other end would ensure quality of services to eventually promote the jurisdiction as a market for arbitral dispute resolution.
Reference:
[1] Maria Choi, ‘Third-Party Funders in International Arbitration: A Case for Protecting Communication Made in Order to Finance Arbitration’ (2016) 29 Georgetown Journal of Legal Ethics 883.
[2] Jennifer A. Trusz, ‘Full Disclosure: Conflicts of Interest Arising from Third-Party Funding in International Commercial Arbitration’ (2013) 101 Georgetown Law Journal 1649.
[3] Srivastava S, ‘Third Party Funding in Arbitration in India’ (American Review of International Arbitration, 21 March 2022).
[4] Ram Coomar Condoo v. Chunder Canto Mukherjee (1876) L.R. 4 I.A. 23.
[5] B. Sunitha v. State of Telangana 2018 (1) SCC 638.
[6] Tomorrow Sales Agency (P) Ltd. v. SBS Holdings Inc., 2023 SCC OnLine Del 3191.
[7] Bar Council of India v. A.K. Balaji, (2018) 5 S.C.C. 379 (India).
[8] CODE CIV. PROC. 1908, No. 5 of 1908, o. XXV, r. 3 (as amended in Gujarat, Maharashtra and Madhya Pradesh) (India).
[9] Arbitration and Conciliation (Amendment) Act, No. 33 of 2019, Statement of Objects and Reasons.
[10] Arbitration and Mediation (Third-Party Funding) (Amendment) Ordinance, No. 6 (2017) (H.K.).
[11] Jean Kalicki, ‘Security for Costs in International Arbitration’ (2006) 3(5) Transnatl. Dis. Mgt. 1.
[12] Maxi Scherer, ‘TPF in Arbitration: Out in the Open?’ (2012) Com. Dis. Res. 57-58.
[13] Philippe Pinsolle, ‘Third Party Funding and Security for Costs’ (2013) 2 Paris J Int’l Arb 399.
[14] Jonas von Goeler, ‘Third-Party Funding in International Arbitration and its Impact on’ (2016) International Arbitration Law Library, vol 35, Kluwer Law International.
[15] Tomorrow Sales (n 6).
[16] Department of Legal Affairs, Report of the High Level Committee to Review the Institutionalization of Arbitration Mechanism in India (2017) 43.
[17] Tomorrow Sales (n 6).
[18]Civil Law (Amendment) Bill 38-2016<https://www.nas.gov.sg/archivesonline/data/pdfdoc/20161107001/Civil%20Law%20(Amendment)%20Bill%2038-2016.pdf accessed 10 May 2024.
[19] Arbitration and Mediation (Third Party Funding) (Amendment) Ordinance 2017 (Hong Kong).
[20] Code of Practice for Third-Party Funding of Arbitration, (2018) G.N. 9048, para 1.2 (H.K.)
[21] Melody Chan, ‘Hong Kong’ in Leslie Perin (ed), The Third-Party Litigation Funding Law Review (2018) 81.
[22] The Hon Josh Frydenberg MP, ‘Litigation funders to be regulated under the Corporations Act’ (22 May 2020)
[23] Mike Taylor, ‘AFSLs and ASIC oversight not for us say litigation funders and lawyers’ (Money Management, 12 June 2020)
[24] R Mulheron, ‘England’s Unique Approach to the Self-Regulation of Third Party Funding: A Critical Analysis of Recent Developments’ (2014) 73 CLJ 570, 574-580.
[25] Institute of Independent Insurance brokers v. Director-general of Fair Trading [2004] CAT 4.