Pavni Tuli
Mumbai Centre for International Arbitration, Mumbai

Introduction

Third party funding is an upcoming feature in the arbitration landscape in several jurisdictions. In India, the last few years have seen a marked increase in funding activity; this was initially focused on investor–state arbitration but now seems to be spreading to commercial international arbitration. This article gives an insight into the scope of third-party funding in India.

Short description of models for funders’ return

There are three common structures of a third-party funding transaction:

• the claimant holds the proceeds from its claim(s) in a trust, in which the third party funder is one of the beneficiaries;
• the claimant assigns the proceeds from its claim(s) to the third party funder; or
• the claimant assigns the claim(s) in itself to the third party funder.

In addition to specialised third party funders, other parties who invest in legal claims as an asset class include investment banks, hedge funds, insurance companies, family offices, private equity funds, group companies and pension funds. While the large global funders are yet to establish a local presence in India, today there is at least one technology-enabled crowdfunding platform for litigation financing –namely, a legal tech startup called advok8.

The non-recourse nature of the funding is its most distinguishing part. Third-party funding is the panacea for a claimant, where it amplifies the odds of acquiring compensation for legal wrongs and enables the creation of a financially level playing field between disputing parties. We have seen assignment of a large portfolio of claims in the Indian landscape wherein two public domain companies, Hindustan Construction Company Limited (HCC) and Patel Engineering, transferred the entire portfolio of claims to third-party funding either by creating a subsidiary along with the fund or by following the SPV route.

The Indian third-party funding scenario

Historically third parties were prohibited from funding an unconnected party’s litigation in a number of jurisdictions under the doctrines of maintenance and champerty. While maintenance is assistance from an unconnected third party providing financial assistance to maintain litigation, champerty as a form of maintenance allowed an unconnected third party to pay some or all of the litigation costs in exchange for a share of the profits.

In India, there was no bar on maintenance or champerty to begin with, bereft of a law reiterating the same unlike England and Wales, Australia, Hong Kong and Singapore. The Privy Council in Ram Coomar Condoo v Chunder Canto Mukherjee watered down the standard of champertous agreements being hit by the public policy principle in common law, and held that such agreements would possibly repudiate the public policy of India in the event that they were inalienably discriminatory, inappropriate and not made with malafide objects of supporting a claim. This view was subsequently trailed by the Privy Council in Raja Rai Bhagawat Dayal Singh v Debi Dayal Sahu, wherein it was secured that English law of maintenance and champerty was inapplicable in India.

In B. Sunitha v State of Telangana, the Supreme Court of India relied on the decision in Mr. ‘G’, A Senior Advocate,. It observed that a personal interest in the outcome of proceedings by the advocate is unacceptable and unequivocally precluded in all the above jurisdictions, and the agreements on contingency fee are prohibited in law where an advocate is a party. In Spentex Industries Ltd v Quinn Emanuel Urquhart & Sullivan, the Delhi High Court did not address the question of whether the law pertaining to contingency fee charged by Quinn Emmanuel was legal under the Indian law, as their governing agreement did not depend on Indian law.

Rule 2 (share or interest in an actionable claim), Rule 18 (fomenting litigation), Rule 20 (contingency fees) and Rule 22 (participating in bids in execution, etc.) in The Bar Council of India Rules demonstrates that advocates in India cannot fund the litigation for their clients. More recently, the Supreme Court of India in Bar Council of India v AK Balaji reaffirmed the lawful admissibility of non-lawyer third party funding litigation and recouping the due amount after the outcome of the dispute. The Bombay High Court’s order in Jayaswal Ashoka Infrastructure (P) Ltd. v Pansare Lawad Sallagar (in appeal) has effectively held that law graduates may engage in the business of litigation finance, provided they are not advocates registered under the Advocates Act 1961 and thus can enter into damages-based agreement otherwise barred under the Bar Council of India Rules.

Certain legal developments in the Indian landscape have recently prompted an increase in instances of third-party funding. A recent amendment to the Specific Relief Act 1963 has made specific performance of a contract a compulsory relief, as opposed to a discretionary relief that may be conceded by the court if there is no financial remedy accessible. Further, in infrastructure project contracts, the court shall not accord an injunction in a suit where it would deter or delay the continuance or completion of the project. Even though the Arbitration Act makes no particular mention of third-party funding, the recent amendments to the Arbitration and Conciliation Act 1996 have introduced fast-track arbitrations, as well as stricter and shorter deadlines for the passing of awards. Critical reforms such as a robust framework for dispute resolution, an overhaul of the arbitration regime, enforcing contracts and setting up of commercial courts can insure smooth implementation of third party funding in India.

Lastly, if an arbitration is being funded by a foreign third-party funder or if the funder is seated in India – whereby there is remittance of foreign exchange from India – then the provisions of the Foreign Exchange Management Act 1999 (FEMA) will be pulled in. This does not explicitly classify third-party funding as either a current or capital account transaction. There is uncertainty regarding how such funds will interact with the regulatory regime, particularly since both these transactions are seen distinctively under FEMA rules and regulations. The Delhi High Court, in NTT Dokomo Inc v Tata Sons Ltd. and Cruz City 1 Mauritius Holdings v Unitech Limited observed that – in contrast to its archetype rule, the Foreign Exchange Regulation Act (FERA) 1973 – FEMA itself neither restricts foreign exchange transactions, nor does it render them void if there should be any procedural non-compliance. In these commercial times, it is inalienable that awards passed by foreign seated arbitral tribunals are honoured. Regardless of whether there is a lay regulation that provides some sort of hindrance in execution, it ought not be called as opposed to the public policy of India. In both these cases, awards were enforced by the Indian Court.

Third-party funding in the EPC and insurance sector

A common practice worldwide, the Indian version of the funding accompanies a catch. In the current Covid-19 scenario, a key sector which may witness a significant surge in disputes is engineering, procurement and construction (EPC). As a result, large conglomerates in the EPC sector are entering into third-party funding arrangements in an attempt to deal with the problem of stressed assets and the ongoing high-end litigations. The enactment of the Insolvency and Bankruptcy Code 2016 (IBC) has made it progressively fundamental for conglomerates in the EPC sector to resolve their litigation claims for two reasons:

• they are tedious and not resolved in the short term, thereby affecting short-term liquidity; and
• the threat of the corporate insolvency resolution process (CIRP) under the IBC is a looming reality in the event of an ineffective claim.

There will be a further noticeable influx of arbitration proceedings in relation to insurance coverage as many corporates are adversely affected on account of lockdowns. Given the unprecedented circumstances flowing from Covid-19, recovery of insurance cover has significant elements of uncertainty for both insurers and insured. The endurance of companies may depend solely on recovery from insurance, even if the proceedings that may precede such payout could either be unaffordable or add great financial strain on the policyholder. Third-party funding can assume a pivotal role in such cases as the insured can receive funding collateralised by the insurance pay-out if successful.

Conclusion: the need to regulate third-party funding in India

The advent of third-party funding of disputes in India needs to be explored, as encouraging such a system to thrive establishes a new asset class for investors to not only gain outsized returns but also possibly generate additional liquidity. There are surely concerns about such an intricate regulation and concept to evolve and mature in India. As domestic regulations vary from place to place, this may lead to forum shopping for the sake of convenience. Second, there is a consistent risk of over-regulation, where an unbending structure will make it arduous to navigate through such regulations. Since the concept of third-party funding is new and evolving, adaptability in the operation is unmistakably proposed.

India does not have any deterrents by way of statutory provisions barring third-party funding from entering into the commercial market. As long as third-party funding contracts are not opposed to public policy or in any capacity unlawful, India should manage third-party funding by following different models set by leading jurisdictions in arbitration. The Report of High Level Committee to Review the Institutionalisation of Arbitration Mechanism in India stated that: 

‘The enactment of supporting legislation has contributed significantly towards the growth of these jurisdictions as arbitration hubs. For instance, Singapore has recently passed amendments to its Civil Law Act legalising third party funding for arbitration and associated proceedings. Similarly, Hong Kong recently legalised third party funding for arbitrations and mediations. The Paris Bar Council has also indicated its support for third party funding.’ 

Comparative measures adopted with appropriate modifications for the Indian context would not just encourage a headway in India's consensus to international arbitration but also act as a keystone in India achieving South Asian Hub status.