Third-Party Funding of Domestic Arbitration in India — Key Technical Barriers, Plausible Solutions and the Way Forward

Disputes have become a significant component of the balance sheets of corporates in India, posing financial challenges and impeding their ability to allocate resources efficiently. A substantial backlog exists in the Debts Recovery Tribunals, consumer courts, motor accident claims, and insurance cases demanding urgent attention and resolution. Fortunately, third-party funding¹ (TPF), commonly practised in countries like the United Kingdom, Singapore, and Australia, can effectively fund these disputes and provide an easy recourse.

TPF refers to a financing method in which an external entity, not directly involved in a particular dispute, provides financial support by covering legal fees or paying an order, award, or judgment issued against one or both parties involved.

However, for India to establish itself as a viable market for TPF, particularly in domestic arbitration, it is essential to re-evaluate certain aspects of the Arbitration and Conciliation Act of 1996² (“the Act”). The main concern surrounding the implementation of TPF in India is the regulatory ambiguity on the subject, owing to the need for clear regulations and guidelines governing its practices. Therefore, although legal in India³, issues such as confidentiality, disclosure requirements, arbitrator bias and conflict of interest will have to be read along with the Act to understand the extent of its impact on the implementation of TPF.

In the book Third Party Funding of Dispute Resolution — with special emphasis on Business Models, Arbitration and Mediation⁴ (“the Book”), the authors have rightly pointed out the nuances of TPF and the scope of its application in a country like India.

Key technical barriers

Conflict of interest

One of the primary challenges in adopting TPF in India is ethical considerations and potential conflicts of interest that may arise from such TPF arrangements. The involvement of a third-party funder (the “funder”) often raises questions about their influence on decision-making, the independence of arbitrators, and the integrity of the arbitration process. Section 12 of the Act requires the arbitrators to maintain independence and impartiality throughout the arbitration process. The standard set for ensuring the same is such that there should not be justifiable doubts in the minds of any party involved regarding the level of independence maintained by the arbitrator.⁵

When TPF is involved, the arbitrator’s ability to remain unbiased and independent may be questioned due to the influence or perceived influence of the funder. This may be due to various reasons, such as the arbitrator or the arbitral institution having a direct or indirect relationship with the funder involved in the TPF arrangement; the funder has engaged the arbitrator in other matters or may seek future engagements; the arbitrator may have financial interests or connections that could be affected by the outcome of the arbitration in relation to the TPF arrangement which can include investments, ownership stakes, or other financial arrangements; or the arbitrator may have personal or professional connections with any of the parties involved in the TPF arrangement. Any of the mentioned instances can lead to justifiable doubts about the impartiality and independence of the arbitrator, and the potential conflict of interest could undermine the fairness and objectivity of the arbitration proceedings.

Notably, the Fifth Schedule (“the Schedule”), which has been incorporated via an amendment to the Arbitration and Conciliation (Amendment) Act, 2015⁶, provides a list of grounds which may be considered as situations that may give rise to justifiable doubts on the neutrality of the arbitrator.

Additionally, Section 12 of the Act sets an obligation on the arbitrator to disclose any such relationships in a specified format at the time of the arbitrator’s appointment to avoid any challenge later in the arbitration proceedings.⁷ While the Schedule offers general guidelines for maintaining independence and impartiality, it does not specifically address conflicts of interest arising from TPF in domestic arbitrations.

In the Book, the authors have discussed this issue at length. In Chapter 4, “Issues Specific to Arbitration in India”, the authors have rightly discussed the aspect of disclosure.

The Schedule primarily focuses on the duties and obligations of arbitrators, including impartiality, independence, disclosure of conflicts, and avoidance of undue influence. However, TPF-related conflicts of interest can be nuanced and may require specific provisions to address the unique challenges posed by funding arrangements.

To effectively deal with conflicts of interest related to TPF, it may be beneficial to supplement the Schedule with additional measures such as clear guidelines on acceptable relationships between an arbitrator and a funder and enhanced disclosure requirements requiring the parties to disclose the existence and identity of the funder, as suggested in the ICCA Report on Queen Mary Task Force on Third Party Funding⁸ concerning international arbitration.

Implementing robust disclosure requirements regarding the existence and terms of TPF agreements can enhance transparency and help maintain impartiality and integrity of the arbitration proceedings even when TPF arrangements exist.

Confidentiality and disclosure requirements

Another significant challenge when adopting a TPF arrangement is the question of confidentiality. Confidentiality is a fundamental aspect of arbitration proceedings incorporated under Section 42-A of the Act. It states that the arbitrator, arbitral institution, and parties involved in the arbitration agreement are obligated to keep all details of the arbitration confidential. The only exception to this requirement is that the arbitral award may be disclosed, if required, to ensure the proper implementation and enforcement of the award.⁹

The presence of a funder introduces challenges to the maintainability of this provision, as the disclosure of sensitive information to the funder may undermine the confidentiality of the arbitration process.

Party to an arbitration agreement — What is the significance?

Under Section 2(1)(h) of the Act¹⁰, party means a party to the arbitration agreement, and this suggests that a funder is a non-party to the arbitration agreement. Although there have been many discussions regarding the inclusion of various related entities within the definition of a “party” for the purpose of invoking an arbitration clause,¹¹ there is a lack of sufficient judicial precedents to suggest that TPF may be considered as a “party”.

Furthermore, categorising TPF as a “party” in arbitration may not be practical or advisable, as it could grant them equal footing to the parties involved. This is not desirable as it may compromise the integrity and balance of the arbitration process, which should primarily focus on the rights and obligations of the disputing parties themselves.

In Chapter 4, “Issues Specific to Arbitration in India” of the Book, the authors have shed light on the question of whether funders can be made a party to arbitration proceedings.

It is interesting to note that in a recent Delhi High Court judgment¹², where the issue of whether a funder can be made a party to an arbitration proceeding was raised, the Delhi High Court observed that even if the Singapore International Arbitration Centre (SIAC) Rules¹³ allowed the funder to be added as a party to the arbitration, the same is not plausible under the provisions of the Act in India. Thus, remarking that a funder cannot be added as a party to an arbitration proceeding in India as of now. The judgment, however, was silent on the definition of the “party” under the Act, thus implicating that a party here only means a party to an arbitration agreement.

In most cases, funding agreements are also confidential in nature.¹⁴ So, if confidentiality as a clause is imposed in the strictest sense, it may inhibit the potential conflicts of interest between the parties. In light of the fact that there is no specific regulation on TPF or any mandate on disclosure of identity and existence of TPF, the party being funded can also avoid providing information regarding the funding agreement at the time of arbitration on account of confidentiality.

However, to ensure that TPF as a mechanism is grounded on the principles of fairness and justice, it is recommended that the funder in TPF arrangements adhere to the same confidentiality obligations as the parties to the arbitration agreement. Additionally, the level of confidentiality applicable to the parties themselves, along with the privileges granted to legal representatives or lawyers, should extend to TPF entities.

This may be done by entering into non-disclosure agreements and establishing stringent protocols that clearly outline the disclosure conditions. This approach can safeguard the privilege and confidentiality of all parties involved in the arbitration agreement from being compromised due to the involvement of TPF.

Funder’s involvement and control — Challenge to party autonomy?

Another significant technical barrier is the level of involvement and control the funder may have in the arbitration proceedings. This issue raises concerns about the potential interference of the funder in the decision-making process and the parties’ autonomy.

TPF arrangements typically involve the provision of financial support by a funder in exchange for a share in the proceeds of the arbitration. While this can provide access to justice for financially constrained parties, it also raises questions about the extent of control and influences the funder may exert over the arbitration process.

One of the fundamental principles of arbitration is party autonomy, which allows the parties to have control over the selection of arbitrators, the procedural rules, and the overall conduct of the proceedings. However, the funder’s involvement may impact this principle by introducing external interests and potential conflicts of interest. Further, it is necessary to ascertain the legality of the funding agreement as jurisdictions have differing attitudes towards TPF. For example, even though the doctrine of champerty and maintenance is not applicable in India,¹⁵ certain agreements in the past that a third party has financed have been read void by stating that it is against public policy.¹⁶ Therefore, it is imperative to conduct adequate due diligence to ensure that the funding agreement entered does not allow a disproportionate amount of power to the funder and, thereby, negate the level of control and essentially reduce the power of the actual party to the dispute.

Both the Hong Kong Code of Practice for Third Party Funding in Arbitration¹⁷ (“HKC”), released by the Government of Hong Kong in 2018, and the Code of Conduct for Litigation Funders¹⁸ (“the CoC”) developed by the Association of Litigation Funders (ALF) of the United Kingdom recognise the importance of ensuring that the funded party or their legal representatives are not unduly influenced or controlled by the funder.

While the HKC emphasises the need to incorporate clear statements in the funding agreement that the funder shall not impose any pressure on the funded party or the funded party’s legal representative during the course of arbitration, the CoC states that the funder should not engage in a manner to impose control over the legal counsel representing the funded party, thereby safeguarding the integrity of the arbitration proceedings. The CoC also addresses the issue of providing inputs to the funded party regarding settlements. It emphasises that the funding agreement should outline whether the funder is entitled to provide inputs on settlements and specifies what process is to be followed when providing such inputs. This helps ensure transparency and clarity in the decision-making process.

What could be the way forward for TPF in India?

Considering TPF is still considered to be at its nascent stage in India, it is crucial to establish clear guidelines and limitations on the level of involvement and control the funder can exercise. This would ensure that the funder does not interfere with the decision-making process, compromise on the impartiality of the arbitrators, or cause an undue influence on the arbitration outcome.

Another possible approach could be requiring full transparency and disclosure of the extent of control or influence the funder may have over the proceedings. Such disclosure would help the parties and the arbitrators assess potential conflicts of interest and make informed decisions about the acceptability of the funding arrangement.

For instance, the Supreme Court of the United Kingdom, in R. (PACCAR Inc.) v. Competition Appeal Tribunal¹⁹, held that litigation funding agreements (LFAs) fall within the express definition of “claim management services” and, therefore, such LFAs are nothing but damages based agreements (DBAs) by statutory definition, and thus when they do not comply with DBA requirements, they are unenforceable. It is pertinent to note here that now that the Court has held that LFA based on damages sharing arrangements are DBAs and refrained from defining it in a narrower manner, it may now impact existing LFAs as the parties will review the arrangements and the legal compliances thereto.

Additionally, it may also be beneficial to impose restrictions on the ability of the funder to communicate with the arbitrators directly or to influence the choice of arbitrators. This would help maintain the independence and impartiality of the arbitrators and prevent any perception of bias or undue influence.

It is also essential to ensure that the parties to the arbitration retain ultimate decision-making authority and control over the key aspects of the proceedings. This can be achieved by explicitly stating in the funding agreement that the funder’s role is limited to providing financial support and that the parties have the final stand on matters such as the selection of arbitrators, the presentation of evidence, and the settlement negotiations.

India can strike a balance between promoting access to justice and safeguarding the integrity and autonomy of the parties involved. This would build trust and confidence in using third-party funding in domestic arbitration and ensure that the process remains fair, transparent, and independent.

Despite the existing technical barriers, TPF has already gained traction in India, with companies embracing this financing method. For instance, the recent success of LegalPay, an Indian third-party funder in the Sare Gurugram case²⁰, is one interesting case study to read. With the proposed amendments and a proactive approach, there is tremendous potential for TPF to flourish in the Indian market. To fully integrate TPF into the domestic arbitration landscape, developing a comprehensive legal framework that addresses the specific concerns and challenges associated with TPF is crucial. While working towards establishing such a framework, it is beneficial to draw insights from judicial precedents and international best practices in countries like Hong Kong, Singapore, and the United Kingdom. These references can serve as valuable resources in formulating effective practices for conducting TPF in India.