Delhi High Court: The Division Bench of Vibhu Bakhru* and Amit Mahajan, JJ. allowed the appeal and had set aside the impugned order of a Single Judge, to the extent it directed the appellant to disclose its assets and to furnish security for the amount awarded in terms of the Arbitral Award and restrained it from alienating or encumbering its assets. The Court further opined that “a party was funded by a third party was a relevant fact in considering whether an order for securing the other party needs to be made. However, permitting enforcement of an arbitral award against a non-party which had not accepted any such risk, was neither desirable nor permissible”.
The appellant had filed the present intra-court appeal under Section 37 of the Arbitration and Conciliation Act, 1996 (‘Act’) impugning an order passed by the Single Judge in a petition filed by Respondent 1 SBS Holdings Inc. (‘SBS’) under Section 9 of the Act. SBS had filed the petition, inter alia, praying that the appellant and Respondent 2 to 4 be directed to disclose details of their assets and bank accounts. In addition, SBS sought an order restraining the appellant and Respondent 2 to 4 from creating any third-party interest/right/title in respect of unencumbered movable or immovable assets. SBS sought the interim measures to secure the amount awarded to SBS in terms of an arbitral award delivered by an arbitral tribunal pursuant to arbitral proceedings conducted under the rules and aegis of the Singapore International Arbitration Centre (‘SIAC’).
The appellant was not a party to the arbitral proceedings, and it had funded the Claimants (Respondents 2 to 5) to pursue the arbitral proceedings but was not a party either to the arbitration agreement or the arbitral proceedings. Moreover, the appellant was not a party to the Arbitral Award. It was not directed against the appellant and the amount awarded in favour of SBS was not against the appellant. Thus, the appellant claimed that it was not liable to pay any amount to SBS and the impugned order directing it to disclose its assets and restraining it from transferring or alienating any assets, was flawed.
SBS contended that since the arbitral proceedings were instituted with the support of the funds provided by the appellant, it was also liable to pay the amount awarded notwithstanding that it was not a party to the arbitral proceedings. In addition, SBS claimed that the appellant had full control of the arbitral action and had funded it to derive benefits of the Arbitral Award if the Claimants were successful in their claims.
Analysis, Law, and Decision
The issue for consideration before this Court was “whether a person who was not a party to the arbitral proceedings or the award, rendered in respect of disputes inter-se the parties to the arbitration, could be forced to pay the amount awarded against a party to the arbitration”.
The Court relied on Chloro Controls (India) (P) Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641 wherein the Supreme Court applied the Group of Companies doctrine to compel a non-signatory to be bound by the arbitration agreement. The Supreme Court noted that the “Group of Companies” doctrine “had developed in international context, whereby an arbitration agreement entered into by a company, being one within a group of companies, could bind its non-signatory affiliates or sister or parent concerns”. Under the said principle “a non-signatory party could be subjected to arbitration provided these transactions were within group of companies and there was a clear intention of the parties to bind both, the signatories as well as non-signatory parties”.
This Court opined that “a third party might be bound by the arbitral award only if it had been compelled to arbitrate and was a party to the arbitration proceedings. The Court further opined that “the principle of binding non-signatories to an arbitration, was not well founded. Further, consent was fundamental to arbitration. Thus, the principles on which non-signatories might be held bound by the arbitration agreement, had no application where the signatories to an arbitration agreement had expressly agreed to the contrary”.
The Court noted that in the present case, SBS and the Claimants had agreed that the arbitration proceedings would be conducted under the SIAC Rules and thus, SBS was bound by the said SIAC Rules, and it was impermissible for SBS now to claim to the contrary. The Court further noted that as per Practice Note dated 31-3-2017, issued by SIAC, the funding arrangements were required to be disclosed to the Arbitral Tribunal. The Court opined that the Arbitral Tribunal also had the power under the SIAC Rules to order disclosure regarding the existence of any funding relationship and this was to enable the Arbitral Tribunal to consider the same while awarding costs. Although the Arbitral Tribunal might allocate costs amongst the parties, it could not award costs against a third-party funder.
This Court further opined that the appellant could not be joined as a party to the arbitral proceedings under the SIAC Rules and that the appellant had no obligation to pay any amount under the Arbitral Award and the Arbitral Tribunal had awarded the costs in favour of SBS and against the Claimants and not against the appellant.
The Court also opined that Section 9 of the Act provided for interim measures and recourse to Section 9 of the Act was available in aid of enforcement of the arbitral award. However, the Arbitral Award in this case was not against the appellant and could not be enforced under Section 36(1) of the Act. The Court noted that SBS had also not instituted any action for determining the liability of the appellant and thus, in the present case, an application under Section 9 of the Act, for securing the amount in dispute against the appellant, was not maintainable.
This Court did not agree with the decision of the Single Judge that the appellant was obliged to pay costs according to the Bespoke Funding Agreement (‘BFA’). The Court noted that none of the Clauses of the BFA provided any obligation for the appellant to fund an adverse award. The Court further observed that there were no rules applicable to proceedings in this Court for awarding costs against third parties and there was no procedure for impleading third parties for the limited purpose of determining the costs.
The Court observed that Order XXA of the Code of Civil Procedure, 1908 contained provisions for costs and Rule 2 of Order XXA provided that the costs should be in accordance with the rules as the High Court might make in that behalf and this Court had not framed any rule which contemplated recovery of costs from persons who were not parties to the suit/action. Therefore, it was difficult to accept that the procedure contemplated under Civil Procedure Rules, 1998 in the United Kingdom, for the purpose of imposing costs on non-party(ies), was applicable to civil proceedings in India.
The Court noted that SBS sought interim measures in aid of enforcement of the Arbitral Award and not costs against third parties in a suit. Thus, the Court observed that the powers of the courts to award costs in a trial would have no relevance for determining whether the awarded amount could be recovered from a person who was not a party to the arbitral proceedings or the arbitral award.
The Court opined that it was necessary to ensure that there was transparency and that the party funding was not exploitative. The Court further opined that “a party was funded by a third party was a relevant fact in considering whether an order for securing the other party needs to be made. However, permitting enforcement of an arbitral award against a non-party which had not accepted any such risk, was neither desirable nor permissible. Whilst there was no cavil that certain rules were required to be formulated for transparency and disclosure in respect of funding arrangements in arbitration proceedings, it would be counterproductive to introduce an element of uncertainty by mulcting third party funders with a liability which they have not agreed to bear”.
The Court allowed the appeal and had set aside the impugned order, to the extent it directed the appellant to disclose its assets and to furnish security for the amount awarded in terms of the Arbitral Award and restrained it from alienating or encumbering its assets.
[Tomorrow Sales Agency (P) Ltd. v. SBS Holdings, Inc., 2023 SCC OnLine Del 3191, decided on 29-5-2023]
Advocates who appeared in this case:
For the Appellant: Shashank Garg, Aman Gupta, Atharva Koppal, Nishtha Jain, Advocates;
For the Respondents: Gautam Narayan, Asmita Singh, Ranjith Nair, Altamash Qureshi, Akriti Arya, Harshit Goel, Advocates.
*Judgment authored by: Justice Vibhu Bakhru
Refer to the book on ‘Third Party Funding on Dispute Resolution’ by Kritika Krishnamurthy and Anuroop Omkar HERE