Making Room for Third-party Arbitration Funding in the Indian Regime

[Oshin Malpani is a penultimate year B.A., LL.B. (Hons.) student at NALSAR University of Law, Hyderabad]

Third-party arbitration funding (“TPAF”) simply stated, is the funding extended to a claimant to pursue arbitration proceedings in exchange for a portion of the award (if) granted to them. It is a subset of the general third-party funding (“TPF”) that similarly funds other litigatory and personal proceedings. Outrightly, the benefit of TPAF is its utility as a tool to bolster access to arbitration for impecunious parties or parties hoping to hedge risks. It is also being accepted as a lucrative investment source for founders. But a lurking detriment of TPAF is that funders could seek to profit from funding vexatious or illegitimate suits. This mercantile exploitation of law is referred to as champerty, which our common law prohibits. TPAF and champerty are two sides of the same coin, differentiated only by legitimate interests. This leads to a certain misalignment of our regime with TPAF, which would have to be resolved using express regulation. 

United Nations Commission on International Trade Law (“UNCITRAL”) recently released its draft policies on TPF in investor-state dispute arbitration. Based on these policies, the post salvages the legitimacy of TPAF in the Indian regime and discusses how TPAF regulation may find room here.

Legitimacy of TPAF in India

Any legitimacy to TPAF would have to be derived from harmonious expounding of the unique interplay of claimant, arbitrators, and funders in funded arbitrations. UNCITRAL has defined TPAF as “any provision of direct or indirect funding or equivalent support by a natural or legal person who is not a party to the dispute”. While this definition adequately captures the essence of TPAF, it talks about neither the nature of the transaction (or “provision”) nor the identity of the funder. These are expounded below.

Nature of TPAF Transaction

If the intention of extending funding is champertous, it would need curbing as it reduces law into a game of mercantile adventurism. As discussed earlier, there is a thin line of difference between TPAF and champerty, a line that commentators have not dealt with. They have fervently argued that champerty’s dead hand be abolished altogether to allow TPAF in India. 

Before such a hasty move, we would need to examine the demise of champerty outside India and the considerations that transpired it. English jurisdiction, in the early days, held champertous restrictions in high regard, seeking to keep the proceedings sacred from the exploits of mercantile adventurism. However, with the trio of ArkinEssar Oilfieldsand Excalibur Venturesa tectonic shift occurred when access to justice concerns overrun those of sacredness. Today, it allows TPAF as long as it is congruent with public policy. Similarly, Hong Kong has not viewed TPAF to automatically translate into champerty, if its effect on public policy can be contained. The position has been the same in the U.S. too, whereby champerty restrictions were viewed as obsolete but were zealously upheld in the interests of equity and public policy. Australian courts in their seminal Campbells v. Fostif have gone as far as to allow any commercial interest in the outcome of cases as long as it is congruent with public policy.

The common buzzword to disable champertous restrictions in these jurisdictions seems to be “public policy”. Indian courts have had no discussion on TPAF or what “public policy” might be in this context. But their general outlook towards TPF (the superset of TPAF) in litigation should be illuminating. Ironically in India, TPF did not do the linear restrictive-to-liberal evolution like in England. The earlier courts were permissive of the TPF arrangements as they bolstered access to justice. Way back in the 1870s, the English tenor towards TPF was generally hostile but the Privy Council in Ram Coomar v. Mookerjee held that laws of champerty did not apply in the same manner as they did in England. It was held that funding transactions were not void per se unless the transaction was “…inequitableextortionate and unconscionable.” To that effect, funds extended to carry on litigation and sharing the subject of litigation thereof were not seen in contravention of public policy. Similarly, an absence of undue bargains, and the “financier risking to lose their money,” were all valid grounds to allow TPF.

These standards for the nature of funding transactions can be considered our conception of “public policy”, a word that has been the ticket for TPAF to be saved from champertous restrictions in other jurisdictions. For practical purposes, this also needs substantiation with accepted standards of arbitration contracts. For this, section 23 (“What considerations and objects are lawful, and what not”) and section 28 (“Agreements in restraint of legal proceeding”) of the Indian Contract Act, 1872 would be key. Similarly, all provisions of the Indian Arbitration Act, 1996 that bar enforcement of awards that are against “public policy” like sections 34(2)(b)(ii), 48(2)(b), 57(1)(e) etc. are also key. 

Read together, this shows that the difference between champerty and TPAF is of legitimate interest and public policy congruence. Since they are different, their simultaneous existence does not require mutual destructions. TPAF could be allowed exemption from champertous restrictions if it does not hit any public policy incongruence and champertous restrictions could continue to protect against funding gone champertous. 

Identity of Funder

The Indian funding plane also saw another simultaneous (rather than hierarchical) development, this time to disallow TPF. Trepidations of public policy being hurt by champertous funding began setting in the minds of courts. They began attacking TPF not on its merits but on the ethical concerns it raises. These were broadly two: that the funder might override the client’s will and steer the case according to its will and that the funder, if also the client’s lawyer, might be ethically biased. 

In the 1900s the court proclaimed that while “TPF is neither expressly recognized nor prohibited in India but India’s tryst with public policy indicates that it should not be encouraged.” The very buzzword that had been key to allowingTPF now threatened to throttle it. TPF per se began to be seen as against public policy and was denied validity. This trend continued for decades across influential cases like Re: Mr G and Sri Sarada Mills. During all this, the courts were blind to the fact that the funder could be a third party too besides the lawyer of the client. Finally, in 2013, the Delhi High Court in Intertoll Ics v. NHAI allowed TPFs that were adequately safeguarded (for public policy) as permissible for non-lawyers. Later in A.K. Balajithe Supreme Court substantiated that, “…advocates in India cannot fund litigation …[But] there appears to be no restriction on third parties funding the litigation.”

This TPF development read purposively for TPAF clarifies that internal parties like arbitrators cannot fund proceedings as it might cast doubts on their integrity and non-biasness. But funding firms often employ arbitrators to access claims they wish to fund. This might lead to their disqualification on a literal reading of the developments in the latter case law. But it is crucial to note that funders and their arbitrators and lawyers are not involved in the proceedings in their professional capacities (of adjudicating or counselling). The fundees are not their “clients” in the traditional sense and they are involved solely in the identity of third parties, having pecuniary/non-pecuniary interest in the dispute. Hence to reconcile the position between the two seemingly contradictory case law developments, funders (even if lawyers and arbitrators, not involved in proceedings in their professional capacities) are allowed to fund arbitrations and are not hit by champerty unless the facts depict an abrogation of public policy. 

Hence for any definition of TPAF that Indian regulation might adopt, it would remain crucial that funders are identified as third parties. If considered parties to the proceedings, we might risk giving them control of the proceedings and claimable rights against claimants (or defendants). And for all this, they might not be ready to assume obligations like claimants in the proceedings. This messy situation best be avoided like UNCITRAL’s draft does. We should however note that funders might still be considered as parties to the dispute to secure costs in civil litigation as contained under Order 25 Rule 1 of the Civil Procedure Code, 1908 (as amended by Maharashtra, Gujarat, Madhya Pradesh and Uttar Pradesh). This is a special and limited purpose inclusion and does not mean they are parties to the proceedings in the traditional sense. 

Regulation Tenor

The last thing that remains to be discussed is the tenor of our regulation. UNCITRAL has proposed two models of regulations: to prohibit TPAF altogether or to conditionally allow TPAFThe former would not be good for us with India aspiring to be a leading seat of international arbitration. But it also remains that, unlike mature European arbitration seats, we cannot let the area remain unregulated when our arbitration markets are nascent and highly asymmetric. Hence, in conclusion, the latter would be best for us whereby we plant regulations in the interest of public policy and observe and adapt accordingly.

– Oshin Malpani

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