Arbitration in India: The Merits of Third Party Funding

[The following post is contributed by Gourav Mohanty, who is a lawyer in
Mumbai]
Introduction
The
effort at improving India’s arbitration sentiment by the creation of the Mumbai
International Arbitration Centre (“MIAC”)
has received applause, although many in the legal industry, for example Mr.
Nishith Desai, do not think of it as a game changer. The MIAC has a lot going
for it, from eminent jurists like Mr. Fali Nariman being an integral part of
the drafting of the institutional rules to well-known arbitration practitioners
like Ms. Pallavi Shroff as members of the Council. The rules themselves are elegant
and helpful, but they fail to make any revolutionary change, which was needed
to catch eyeballs and break the justified stereotype of a tardy arbitration
process in India.
One
revolutionary mechanism that could have been used is a provision for Third
Party Funding [‘TPF’]. Despite being
unflatteringly dubbed as Gambler’s Nirvana due to its “heads-I-win-tails-I-do-not-lose”
frame, the role of TPF in international arbitration is continuously gaining
traction. The MIAC could do wonders for its reputation if it pulled up its
sleeves and drafted provisions for the same. Now, TPF is neither expressly
recognized nor prohibited in India. But the prohibition against lawyers
charging contingency fees and India’s tryst with public policy can indicate
that it might not have encouraged it at least in litigation.[1]
But it doesn’t necessarily follow that the same yardstick would be applied to
commercial arbitrations. This is especially considering how so many issues
relating to rights in rem (e.g. fraud
and corruption) that were non-arbitrable in the past have been brought under
the jurisdiction of the arbitrator. Moreover, with new strides being taken in
arbitration in India and in TPF provisions around the world, one wonders if a
carve out might have been made for arbitration as has been done in popular
arbitration centres. For example, in Hong Kong, TPF is allowed in arbitration
even if not in litigation per se, or in
Singapore which prohibits TPF in litigation but in a case last year[2]
allowed TPF in the context of insolvency in appropriate circumstances.
International
arbitration as a whole has become an expensive affair. The 2015 Queen Mary
Arbitration Survey has noted how “cost is seen as arbitration’s worst feature”.[3]
The problem is particularly acute in India owing to how arbitration is mostly
the first step to litigation. That is where TPF steps in, aiding a public
policy objective of redressal of grievance and allowing the pursuit of measures
allowed under law without being crippled financially. The IBA Guidelines for
Conflicts of Interest released in 2014 were the first to inaugurate guidelines
on TPF in which entities contributing funds to support a party in a case in
which it has a “direct economic interest” in or a “duty to indemnify a party
for, the award” were classified as third party insurers and funders.[4]
Prohibition against Champerty and Maintenance
An
ancient Greek concept, the prohibition against champerty and maintenance (“C&M”) was to “weaken the hold of
gangster barons” and provide for equal justice and due process of law.[5]  But
the Magna-Carta era law has been significantly undone in the West. The United
Kingdom (“UK”) and Australia allow litigation financing to a certain
extent.[6] The
United States of America (“USA”) gives
a free reign to speculative litigation financing and
has gone so far to
hold that even “reprehensible” purpose behind litigation funding is fine.[7]
Asia, however, has been reluctant in this regard, and most jurisdictions
prohibit litigation financing.
The
public policy driven prohibition against C&M is understandable. Taking a cue
from the jurisdiction of Hong Kong (which prohibits funding of litigation, but
not of arbitration), the funding or support of a party in a litigation by a
person “who has neither an interest in the action nor any other motive
recognised by the law as justifying his interference”
is maintenance[8] while champerty is the “maintenance
of an action in consideration of a promise to give to the maintainer a share of
the subject matter or proceeds thereof, if the action succeeds”
.[9]
The
doctrine of C&M prohibits it with certain exceptional circumstances that
are more or less the same across jurisdictions.
But many of these
very countries are using a sieve to differentiate C&M agreements from TPF,
at least in arbitration, and there is considerable jurisprudence for the same. For
example, there are various judgments in international arbitration jurisprudence
that have ruled that the doctrine of champerty does not equate to TPF in
arbitration and has to be balanced against other public policy concerns.[10]
From an Indian scenario, if the MIAC does not wish to be as bold as Hong Kong, it
could probably allow insolvency as an exception to the prohibition on TPF in
arbitration wherein a liquidator or a trustee could be allowed to join in an
arbitration funder.
The
fact that there is an English Association of Litigation Funders’ Code of
Conduct is ample evidence of how the laws against C&M have evolved in
common law. The MIAC has projected its emergence as a contender against
arbitration centres in London, Hong Kong and the Singapore International
Arbitration Centre (“SIAC”). But the
MIAC in its institutional laws has not experimented with solutions for any of
the current issues that international arbitration faces, which could have set
it apart from and ahead of, the other institutions. Hong Kong has gone ahead
and adopted an entire model of awarding indemnity costs as a rule against any
appeals over an award to preserve arbitral aloofness from courts.[11]
Singapore has already solved its pendency issues in the 1990s, and SIAC is
considered a star in the motley crew of arbitral institutions around the world.
But, with the MIAC’s cautious approach and associated troubles with the new
amendments in the Arbitration & Conciliation Act, 1996 (“A&C Act”) including the Court
approval for time extension in Section 29A show how Mr. Nishith Desai may be
correct in his sum up.
Hence,
while the world is debating on the scope of obligations to disclose TPF
Agreements, we are far behind in even knowing it, let alone acknowledging it.
If the MIAC wants to be taken seriously, only competitive pricing wouldn’t do.[12]
It needs to create a wave in the arbitration community by offering clear cut
liberal guidelines that aim not only at dispute resolution but also facilitation).
Trouble with TPF
Many
difficulties can emerge in the realization of such a revolutionary change. One will
have concerns regarding capital adequacy of a funder, the requirement of formal
Arbitration Funding Arrangement (“AFA”),
issues of conflict of interest, and more importantly the bandwidth of the
control exercised by the funder over the proceedings which, on a brief perusal
of common law, has witnessed shifting interpretations.. For example, if a third
party exercises slightly more zealous influence on the arbitration process than
would be otherwise ordinarily accepted in the arm’s length context, the court
will hold it as C&M, rendering the funding agreement void, as has been seen
in jurisdictions like the UK.[13]  On the other hand, if it does not carry out a
cost benefit analysis of funding the litigation by using its own lawyers, then
a potential third party funder can never identify a good case to place its bet
on. Thus, the third party funders have a thin margin of error, which has to be
carefully assessed with sound legal advice.
What
could be done by MICA is to allow TPF to walk on a tight rope by narrowing its
scope. We can have stringent requirements for qualifying as a ‘third party’,
exclude any success fee arrangements which can irk India (prohibition against contingency
fees), requirements of institutional funding rather than individual funding and
the mandatory requirement of being paid a ‘share’ in the arbitration fruits: be
it costs or award, depending on the outcome of the proceedings.
Technical
difficulties arise as well. Though the law on non-signatory to arbitration is
developing (awaiting clarification on amended Section 8 of A&C Act)[14],
its application to TPF would have to be thought through in the context of costs
inasmuch as whether the arbitrator can direct the third party to pay a portion
of costs considering that it is a non-signatory to an arbitration agreement.
One way would be to have the arbitrator see whether the AFA between the party
and its TPF is strong enough to require mandatory compliance from the third
party or not, when it comes to costs. The other route would be to have
arbitrators apply alter ego or implied consent theories to snare the TP in by
extending the arbitration agreement. ICSID has tried to find some clarity in
the AFA area but with limited success.[15]
Conclusion
The
EU-Vietnam Free Trade Agreement released in January 2016[16]
as well as the investment chapter of the draft Transatlantic Trade and
Investment Partnership sent by it to the USA in 2015[17]
require disclosure of TPF presence in cases. The revised version of Comprehensive
Economic and Trade Agreement between Canada and the European Union released in
February 2016 contains TPF provisions. The EU is currently negotiating FTAs
with India and it seems the right opportunity for the country to open its doors
to TPF to enhance the effectiveness of arbitration as an alternative dispute
resolution despite its price and cost. Recently in May 2016, the HKAC released draft
Guidelines for TPF for public consultation in pursuance of their recent
initiatives to clean the air on TPF which included a Law Reform Commission
consultation paper in 2015. The MIAC can do the same and the reception it
receives. The MIAC can tread the same path and develop clear ethical and
financial standards to govern TPF framing an effective framework that addresses
the issues laid out above. After all, Mumbai deserves a top notch arbitration
centre.
– Gourav
Mohanty


[1] Ganga Ram v. Devi Das,
61 P.R. (1907)
; rule 20 Part Vi, chapter
II, section II (Rules Governing Advocates) Bar Council of India Rules.

[2] Re Vanguard Energy Pte
Ltd [2015]
SGHC 156, at http://www.supremecourt.gov.sg/docs/default-source/module-document/judgement/re-vanguard-energy-pte-ltd.pdf
.
See also
http://www.bloombergquint.com/business/2016/08/27/will-this-made-in-india-arbitration-centre-become-the-next-global-arbitration-hub.

[3] The 2015 Survey ‘Improvements and Innovations in
International Arbitration
, Queen Mary, University of London, at http://www.arbitration.qmul.ac.uk/docs/164761.pdf.

[4] General Standard 6(b), IBA Guidelines on Conflicts of
Interest
 in
International Arbitration 2014, at

http://www.ibanet.org/Document/Default.aspx?DocumentUid=e2fe5e72-eb14-4bba-b10d-d33dafee8918.

[5] Lord Neuberger, From Barretry, Maintenance and Champerty to
Litigation Funding, Speech at Gray’s Inn, May 8, 2013, 
at http://www.supremecourt.gov.uk/docs/speech-130508.pdf.

[6] Belated ‘Clean Up’ for Litigation
Funders in Australia
, U.S. Chamber
of Commerce, (Sept. 17, 2014), at
http://www.instituteforlegalreform.com/resource/belated-clean-up-for-litigation-funders-in-australia/.

[7] Trust for the Certificate Holders of the Merrill Lynch Mortgage
Investors, Inc. v. Love Funding Corp.
, 591 F.3d 116 (2d Cir. 2010).

[8] Massai Aviation Services v Attorney General [2007] UKPC 12, quoted in Winnie Lo v HKSAR (2012)
15 HKCFAR 16
, at para. 10.

[9] Winnie Lo v HKSAR (2012)
15 HKCFAR 16
.

[10]  Cannonway Consultants Ltd v Kenworth Engineering Ltd [1995] 2 HKLR 475, Siegfried Adalbert
Unruh v Hans-Joerg Seeberger and Another
 [2007] HKEC 268.

[11] Gourav Mohanty
& Shruti Raina, ‘Use of Indemnity Costs to Combat Dilatory Tactics in Arbitration:
Advocating the Hong Kong Approach
’ 3(1) IJAL 101 (2014), at Indian
Journal of Arbitration Law, at http://www.ijal.in/sites/default/files/IJAL%20Volume%203_Issue%201_Gourav%20Mohanty%20%26%20Shruti%20Raina.pdf.

[12] To file a case at the MCIA, a party has to pay INR 40,000 which is non-refundable.
To do the same at SIAC, a non-Singaporean party needs to spend over INR 100000.
At the LCIA, one would have to spend over INR 1,50,000 for the same http://www.bloombergquint.com/business/2016/08/27/will-this-made-in-india-arbitration-centre-become-the-next-global-arbitration-hub.

[13] Hughes v. Kingston Upon Hull City
Council
[1998]EWCA Civ 1731. However, some jurisdictions like Australia
allow third party funders more control than the UK currently permits. See Campbell Cash & Carry Pvt Ltd. v. Fostif
[2006] HCA 41.

[14]  See Chloro
Controls
 India (P) Ltd. v.
Severn Trent Water Purification Inc., (2013) 1 SCC 641,
Sukanya
Holdings
 (P) Ltd v Jayesh H
Pandya AIR 2003 SC 2252.

[15] Muhammet Çap & Sehil Inşaat Endustri ve Ticaret Ltd. Sti. v. Turkmenistan
I
CSID Case No. ARB/12/6.

[16] http://trade.ec.europa.eu/doclib/docs/2016/february/tradoc_154210.pdf.

[17]http://trade.ec.europa.eu/doclib/docs/2015/september/tradoc_153807.pdf.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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