Sometimes, people or companies who don't have enough money to fight a legal case in arbitration need help from other people or companies who do have money. This is called 'third-party funding'. It's like having someone pay for your lawyer and court costs. This help is really important because it lets people who might not otherwise be able to get justice, actually fight for what they believe is right.

However, as more and more people use this type of funding, it's creating some tricky legal problems. For example, should everyone know who is paying for the case? If the case goes badly, should the person who paid be responsible for any costs? And, are there any rules to make sure everyone behaves fairly?
Because arbitration, which is like a private court system, is becoming more common around the world, countries are starting to make clearer rules about third-party funding. They're trying to find a balance: making sure people can get the help they need to fight their cases, while also being fair to the people who are paying for it and the other side in the argument.

The increasing prevalence of third-party funding (TPF) in international arbitration signifies a major shift in dispute resolution, enabling entities external to the core disagreement to finance litigation or arbitration in return for a share of any resulting settlement or award. This mechanism has demonstrably expanded access to justice for parties who might otherwise lack the resources to pursue their claims.

However, the advent of TPF simultaneously introduces complex legal considerations, notably concerning the potential liability of these third-party funders when the funded claim is unsuccessful and an adverse award is rendered. The Delhi High Court's judgment in Tomorrow Sales Agency Ltd v SBS Holdings Inc, delivered on 29 May 2023, is a significant development in this evolving area of law, offering valuable clarification regarding the scope and potential limitations of third-party funder liability in such circumstances.

The Delhi High Court's Ruling in Tomorrow Sales Agency Ltd v SBS Holdings Inc:

In a significant ruling concerning the responsibilities of third-party funders in arbitration, a Division Bench of the Delhi High Court, consisting of Justices Vibhu Bakhru and Amit Mahajan, clarified the extent of their potential liability. The court unequivocally stated that a third-party funder, absent specific involvement, cannot be held accountable for an unfavourable arbitral award.

Specifically, the Justices asserted that such funders are shielded from liability if they are not directly party to the arbitration agreement underpinning the dispute, were not participants in the arbitral proceedings themselves, and are not explicitly named in the resulting arbitral award.

The core reasoning behind the court's decision rested on the fundamental principle that imposing a financial burden stemming from an arbitral outcome on an entity that had neither assumed nor been cognizant of any such obligation would be legally unsustainable and run contrary to established principles of contractual and arbitral jurisprudence. The court underscored that the funder's lack of direct involvement and contractual privity are key factors in protecting them from such liability.

Key Legal Observations:

The decision hinges on the bedrock legal concept of contractual privity. Arbitration proceedings derive their binding force from the mutual consent of parties, formalized in an arbitration agreement, which establishes their respective obligations and liabilities. Because the third-party funder in question was neither a signatory to the arbitration agreement nor an active participant in the arbitration itself, holding them responsible for an unfavourable arbitral award would violate well-established legal principles.

The Court's decision emphasized the following critical legal considerations:

• Absence of Contractual Relationship: Third-party funders, lacking a direct contractual link via an arbitration agreement with either claimants or respondents, cannot be compelled to adhere to the agreement's stipulations, including potential liability for an award.
• Passive Financial Role: Simply providing financial support does not translate into acceptance of liability for any eventual arbitral award, especially in the absence of the funder exercising control or influence over the conduct of the arbitration.
• Avoiding Unjust Burdens and Promoting Access to Justice: Holding third-party funders liable would create an unjust burden and disincentivize the practice of litigation funding, ultimately hindering access to justice for potential claimants.

Implications for Arbitration and Third-Party Funding

• The decision is a significant win for third-party funders, confirming they are not legally liable unless specifically stated in an agreement, allowing litigation finance investors to operate without worry of unexpected financial duties.
• This judgment, consistent with international legal norms on third-party funding, promotes investor confidence in the Indian legal framework and is likely to stimulate increased third-party funding in Indian arbitration, especially for substantial commercial conflicts.
• Despite offering protection to third-party funders, this ruling highlights the necessity of clear and specific contractual terms that outline the funding's scope, rights, and obligations between funders and recipients in order to prevent uncertainty and possible disagreements.
   

International Perspectives on Third-Party Funder Liability

• United Kingdom:
  • The UK recognizes TPF, primarily governed by common law principles and self-regulation through bodies like the Association of Litigation Funders (ALF).
  • The landmark case of Excalibur Ventures LLC v Texas Keystone Inc (2016) established that a third-party funder could be held liable for adverse costs if they exercised significant control over the proceedings or engaged in improper conduct.
  • Mere financial support, without active involvement in the litigation strategy, does not typically result in funder liability.
• United States:
  • The US adopts a more flexible approach, permitting TPF in both litigation and arbitration.
  • While funders are generally shielded from liability, doctrines like champerty and maintenance may be invoked in specific cases to challenge TPF agreements.
  • Some states impose disclosure requirements to ensure transparency and fairness in legal proceedings.
• Singapore and Hong Kong:
  • As leading arbitration hubs, Singapore and Hong Kong have formalized TPF through legislation.
  • The Singapore Civil Law (Amendment) Act 2017 and Hong Kong's Arbitration and Mediation Legislation (Third-Party Funding) (Amendment) Ordinance 2017 outline disclosure obligations but do not impose liability on funders for adverse awards unless explicitly stipulated in the funding contract.
  • This approach aims to attract international arbitration by providing legal certainty to funders.
• Australia:
  • Australia has a well-established litigation funding industry, largely operating without specific regulatory oversight.
  • Funders may be held liable for adverse costs under the doctrine of fairness, particularly if they exert undue influence over the litigation process.
     

Impact of Tomorrow Sales Agency Ltd v SBS Holdings Inc. on Indian Arbitration and Third-Party Funding

• Protection of Third-Party Funders:
  • The judgment provides crucial legal certainty to TPF providers, affirming that financial support does not automatically translate into legal liability for adverse arbitral awards.
  • This ruling is expected to bolster investor confidence and encourage the growth of the TPF market in India.
• Stimulation of Litigation Funding in India:
  • By aligning with global jurisprudence on TPF, the decision fosters a more favourable environment for TPF arrangements in India.
  • This is particularly relevant for high-value commercial disputes where access to funding can be a critical factor.
• Emphasis on Contractual Clarity:
  • While protecting funders, the ruling underscores the necessity of well-defined contractual terms between funders and funded parties.
  • Explicit provisions regarding funding scope, rights, and obligations are essential to mitigate potential disputes.
     

Policy Implications and the Way Forward for India

• Establishment of a Regulatory Framework:
  • India currently lacks specific legislation governing TPF in arbitration.
  • Developing clear guidelines, including disclosure obligations, permissible funding structures, and ethical standards, would create a more predictable and transparent legal environment.
• Mandatory Disclosure Requirements:
  • To ensure fairness and prevent conflicts of interest, India should consider implementing mandatory disclosure of TPF arrangements in arbitration proceedings.
  • Balancing transparency with confidentiality is crucial to protect sensitive commercial information.
• Addressing Cost-Shifting Mechanisms:
  • While the Delhi High Court ruling protects funders from liability, it does not address the issue of cost-shifting in cases where funders exert significant control over the arbitration process.
  • Future legal developments should explore cost-shifting mechanisms similar to those in the UK to address this issue.
• Adoption of International Best Practices:
  • India can benefit from adopting best practices from jurisdictions like Singapore, Hong Kong, and the UK.
  • This includes establishing clear regulatory standards, promoting transparency, and ensuring ethical conduct in TPF arrangements.

Conclusion:
The Delhi High Court's Tomorrow Sales Agency Ltd v SBS Holdings Inc. ruling marks a pivotal moment in India's arbitration landscape, aligning with global trends by safeguarding third-party funders from unwarranted liability and reinforcing the principle of contractual obligation; however, this protection simultaneously highlights the pressing necessity for a robust, comprehensive regulatory framework in India.

To ensure the fair and ethical evolution of its arbitration practices, India must draw upon international best practices, including mandatory disclosures and clearly defined contractual obligations, establishing transparent guidelines that balance the interests of funders, litigants, and arbitral institutions. This approach will not only provide greater clarity and certainty to all stakeholders but also solidify India's position as a reliable and respected global arbitration hub, fostering confidence and attracting international commercial disputes.

Written By: Md.Imran Wahab, IPS, IGP, Provisioning, West Bengal
Email: imranwahab216@gmail.com, Ph no: 9836576565