Arbitration cost’s going the litigation way — Is third party funding of arbitrations the way forward in India to curtail huge arbitration costs

Introduction

A well-known example of huge litigation costs is the famous defamation case of super model Naomi Campbell, against the publishers of the newspaper Daily Mirror. The trial court awarded damages of UK £3500. The decision was reversed by Court of Appeal[1] but restored by the House of Lords[2] by a majority of 3:2. While doing so, the House of Lords ordered MGN Ltd., the publishers of the newspaper to pay the costs in the Court of Appeal and in the House of Lords. The solicitors of Naomi Campbell filed a bill of costs of UK £377,070.07 in the trial court, UK £114,755.40 in the Court of Appeal and UK £594,470.00 in the House of Lords totalling a staggering figure of UK £1,086,295.47!

According to a Press Note released by the Government of India in August 2016 the total amount currently tied up only in infrastructure project related arbitrations is estimated at Rs 70,000 crores, one can imagine the costs that would be involved by the time the entire arbitral process fructifies. Today globally, various jurisdictions have recognised the benefits of third-party funding of arbitrations and have legalised the same.

The most common benefits of third-party funding are, it can provide access to justice for under-resourced parties (as is often the case in investor-State disputes), enabling them to pursue proceedings which a lack of financing would otherwise have prevented. For parties that are adequately resourced, funding can offer a more convenient financing structure, allowing capital which would otherwise be spent on legal fees to be allocated to other areas of their business during the proceedings. This article proposes to examine the Indian legal position vis-à-vis third-party arbitration funding.

Legal position in India

In India, third-party funding is expressly recognised in the context of civil suits in States such as Maharashtra, Gujarat, Madhya Pradesh and Uttar Pradesh. This consent to third-party funding can be found in the Civil Procedure Code, 1908, (CPC) Order 25 Rule 1 (as amended by Maharashtra, Gujarat, Madhya Pradesh and Uttar Pradesh) provides that the courts have the power to secure costs for litigation by asking the financier to become a party and depositing the costs in court[3].

Currently, there is no law which expressly bars or allows third-party funding agreements in arbitration. The Arbitration and Conciliation Act, 1996 (1996, Act) governs arbitration in India. As the 1996 Act is silent on this issue, third-party arbitration agreements have been rendered virtually non-existent in India. To date, no precedent on third-party arbitration funding exists and thus these agreements are uncommon.

Debate on common law doctrines of maintenance and champerty

Maintenance refers to funding of legal proceedings by an unconnected third party. Champerty is where a third-party funds legal proceedings for a share in the proceeds.

Although not directly deciding in relation to arbitrations, following are a few decisions which dealt with the issue of maintenance and champerty. A few are as old as passed by the Privy Council:

A constitutional Bench of Supreme Court, in G, Senior Advocate, In re[4], has noted that a champerty contract in which returns are contingent on the success of the case is not per se illegal, except in cases where an advocate might be a party[5]. While making a distinction between litigations that involve lawyers and those that involve non-legal persons, it was observed that in case of the latter, “…there was, nothing against public policy and public morals in such a transaction per se….”

The Privy Council, in Ram Coomar Coondoo v. Chunder Canto Mookerjee[6], while recognising that champertous agreements are void in England, held that this principle is not applicable in India, but would apply to a transaction which is “inequitable, extortionate and unconscionable and not made with the bona fide objects of assisting a claim”. It was observed in this case that the prohibition was not absolute, but restricted to “improper objects, gambling in litigation, or of injuring or oppressing others by abetting and encouraging unrighteous suits”.

In Ram Lal v. Nil Kanth[7] the Privy Council went so far as to hold that “agreements to share the subject of litigation, if recovered in consideration of supplying funds to carry it on, are not in themselves opposed to public policy”.

In Lala Ram Sarup v. Court of Wards[8], the Privy Council observed that given the uncertainties of litigation, the financier “may be allowed some chance of exceptional advantage”.

In Vatsavaya Ventaka Jagapati v. Poosapati Venkatapati[9], the validity of a charge on the probable decretal amount in favour of the financier was upheld by the Privy Council on the ground that the financier did not derive an undue benefit and was trying to recover only the amount loaned.

Additionally, if a third-party funding agreement contains an extortionate or unconscionable objective or consideration (e.g. recovery of a gambling debt), the agreement would be rendered unenforceable under the Contract Act, 1872.[10]

Projected risks of third-party funding

Despite the benefits highlighted above, there are concerns about third-party funding of arbitration and there is a level of projected risks involved. Clear insight into the potential downsides and sufficient risk preparation are therefore essential when making a decision on funding.

Under the 1996 Act, the claimant company would have to disclose any third-party funding agreement to verify the absence of any connections between the financier and the arbitrator[11]. There are primary risks that arise out of this disclosure for claimant companies. A respondent might use knowledge of the third-party funding to block the arbitration[12] at the outset, or if the arbitration proceeds, to challenge it on grounds of it being against Indian public policy[13] or the Contract Act.

Further, the claimant company is likely to face risks such as dilution of autonomy, conflict of interest, breach of confidentiality and discouragement of settlement as part of the third-party funding agreement because of the financier’s involvement.

As mentioned above these are merely projected risks, as neither the legislature nor the executive has provided an opinion on the issue of third-party funding agreements and the courts have not had a chance to verify their validity due to the absence of these agreements in relation to arbitration.

Assuming that third-party funding agreements are rendered legal for arbitrations, the risks would be best managed by legislating strict rules regarding: (a) the financier’s right to interfere; (b) penalties for duress and threat; (c) the right to terminate the funding agreement; and (d) rules regarding confidentiality and disclosures.

Conclusion

Arbitration funding is becoming increasingly prevalent around the world with funders who are legally sophisticated and understand a wide breadth of claim types, with each funder having a varying risk profile and appetite.

The International Council for Commercial Arbitration (ICCA), working with Queen Mary University of London, has created a taskforce that has examined third-party funding in international arbitration. Public consultation on the draft report ran from 1-9-2017 to 31-10-2017, with a view to adopt the final report in April 2018 at the ICCA Congress.

American Jurist Oliver Wendell Holmes Jr. had famously quoted:

The life of the law has not been logic; it has been experience. The felt necessities of the time, the prevalent moral and political theories, intuitions of public policy, avowed or unconscious, even the prejudices which Judges share with their fellowmen, have had a good deal more to do than the syllogism in determining the rules by which men should be governed.

In keeping with the felt necessities of the time and to keep pace with current economic scenario and the global developments in international commercial arbitration, it is essential that India considers legalising third-party funding of arbitration albeit, with external regulation in the form of statutory guidelines in order to set out the parameters within which a third-party funding agreement may apply. The proposed regulation should seek to maintain uniformity in relation to these agreements, which would further assist in regulating them. Further, it would prevent unscrupulous agents from misusing third-party funding agreements by establishing the necessary limitations and penalties.

 

* M. Rishi Kumar Dugar, Advocate, Madras High Court.

[1]  Compbell v. MGN Ltd., 2003 QB 633 : (2003) 2 WLR 80.

[2]  Compbell v. MGN Ltd., (2004) 2 AC 457 : (2004) 2 WLR 1232.

[3]  Or. 25 of CPC was amended for Maharashtra by Bombay High Court Notification P. 0102/77 dated 5-9-1983. This same amendment has been adopted by Gujarat and Madhya Pradesh. Allahabad has added only R. 2 of Or. 25, which states that costs may be secured from the third-party funding of litigation.

[4]  AIR 1954 SC 557 : (1955) 1 SCR 490.

[5]  R. 20, Bar Council of India’s Standards of Professional Conduct and Etiquette, Ch. II, Part VI, Bar Council of India Rules, 1975 [read with S. 49(1)(c) of the Advocates Act, 1961 read with the proviso thereto].

[6]  1876 SCC OnLine PC 19.

[7]  1893 SCC OnLine PC 7.

[8]  1939 SCC OnLine PC 55 : AIR 1940 PC 19.

[9]  1924 SCC OnLine PC 22.

[10]  Ss. 27 and 28 of the Contract Act,1872.

[11]  Under S. 12, read with Sch. 5 of the 1996 Act even affiliates of parties are covered.

[12]  It may be argued that the arbitration agreement (inextricably linked to the third-party funding agreement) is not prima facie a valid arbitration clause.

[13]  S. 34(2)(b)(ii) of the 1996 Act.

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