Understanding Third-Party Arbitration Funding in India

Introduction

“The idea behind all forms of risk shifting is that risks are shifted to the party best able to bear them though its wealth and its ability to pool risks.”

Kenneth J. Arrow¹

Third-party funding (hereinafter, “TPF”) may be understood as the financial support provided by a non-party to a dispute, typically to cover legal costs in return for a share of the proceeds from a successful claim. The transaction generally includes a non-party funder agreeing to underwrite a claimant’s costs in exchange for a share of potentially recoverable proceeds. TPF has emerged to be a transformative mechanism in international arbitration, for both the parties involved.

Many jurisdictions, including UK and Singapore, have built robust frameworks around TPF. Whereas, in India this seems to be an unregulated avenue. But there also seem to be caveats regarding conflicts over case strategy, risk of “champertous”² or frivolous claims, and concerns over confidentiality when funding agreements must be disclosed. Also, it may be argued that parties that lack “skin in the game”, may pursue weak claims simply because the financial risk has been externalised.

In India, the discourse over TPF is in a nascent stage thereby we do not have clear legislative or precedent guidelines to regulate TPF business in India. The courts have treated TPF under broad contract-law principles or by analogy to prohibitions on champerty and maintenance. While increasingly common in international commercial arbitration, its legal and regulatory framework in India remains underdeveloped. Against this backdrop, a critically evaluated introduction to TPF in India must ask: How can policymakers and the judiciary strike the optimal balance between fostering access to justice and safeguarding the integrity of India’s dispute-resolution ecosystem?

This paper examines the status of TPF under Indian law, key judicial pronouncements, challenges related to enforceability and liability, and the need for a formal regulatory structure.

Concept of third-party funding

The CIArb in their proposed guidelines for TPF have proposed the definition for TPF as “A contractual arrangement in which an external entity (the funder) finances some or all of a party’s legal fees and expenses to pursue or defend a claim. In exchange, the funder is entitled to either a share of any financial recovery or a multiple of its invested amount if the claim is successful. If the claim fails, the funder typically bears the loss.”³

TPF is a type of funding arrangement where someone who is not part of the dispute (called the funder) agrees to pay for the legal costs of a party involved in the case. In return, the funder gets a part of the money awarded or settled, if the case is successful. Mostly, this kind of funding is non-recourse, meaning if the party loses the case, the funder does not get anything back. Funders are usually hedge funds, banks, or companies that only deal with litigation finance. In India, there is no special law for TPF, so it is mostly controlled by the Contract Act, 1872⁴. This kind of funding is more common in civil cases and arbitration matters, especially when the dispute is related to business.

The parties

Usually, it is the claimants (even the ones making counterclaims) who get TPF, since they are the ones who might receive money if the case goes well.⁵ TPF works on the idea that the funder gets a share from that money. But nowadays, there are also new methods like insurance or other risk transfer tools being used, even by defendants. The funders are not just litigation funding companies anymore — investment banks, hedge funds, insurance firms, and even pension funds are putting money into legal disputes as a kind of financial investment. Some funders already have the money to invest, while others collect money for specific cases. Funders mostly want to hide their identity from the opposite party and also from the Tribunal because they want to keep the funding agreement terms private and safe⁶. Also, if the arbitrator has any kind of connection with the funder, it might cause a conflict of interest, which can delay the arbitration process. Such conflict can also lead to someone challenging the arbitrator’s appointment, which funders want to avoid.⁷

The Supreme Court has also emphasised that:

38. In India, funding of litigation by advocates is not explicitly prohibited, but a conjoint reading of Rule 18 (fomenting litigation), Rule 20 (contingency fees), Rule 21 (share or interest in an actionable claim) and Rule 22 (participating in bids in execution, etc.)⁸ would strongly suggest that advocates in India cannot fund litigation on behalf of their clients. There appears to be no restriction on third parties (non-lawyers) funding the litigation and getting repaid after the outcome of the litigation.⁹

Thereby highlighting that TPF by advocates is illegal, whereas there appears to be no bar for non-advocates to fund litigation (hence, also arbitration).

The coverage

TPF does not just cover lawyer fees — it can also pay for court or tribunal charges, expert witness fees, predeposits, even the cost orders from the other side, and other expenses related to the dispute.

Legal status of TPF in India

Permissibility of TPF in India

Under Indian law, TPF is generally considered permissible so long as it does not violate public policy. The seminal decision in Ram Coomar Coondoo v. Chunder Canto Mookerjee¹⁰ (1876) by the Privy Council made clear that agreements funding a litigant in return for a portion of recovery are lawful — so long as they are not extortionate or unconscionable. The Council observed that “a fair agreement to supply funds to carry on a suit in consideration of having a share of the property, if recovered, ought not to be regarded as being, per se, opposed to public policy”.

All through subsequent judicial pronouncements — like Ram Sarup v. Court of Wards¹¹ (1940), Vatsavaya Venkata Jagapati v. Poosapati Venkatapati¹² (1924), Shankarappa Kotrabasappa Harpanhalli v. Khatumbi Kom Jamaluddinsab Nashipudi ¹³ (1932) — Indian courts have reiterated that the torts of champerty and maintenance are not applicable by default, and TPF agreements survive scrutiny under principles of equity and contractual freedom. Recent scholarly works, like those by Payal Chawla¹⁴, further emphasise that funding agreements are void if they are unconscionable, thereby emphasising the need of TPF as a tool for access to justice.

While India does not yet include TPF within the Arbitration and Conciliation Act, 1996¹⁵, arbitration institutions like Singapore International Arbitration Centre (SIAC) or International Chamber of Commerce (ICC) require disclosure of funding agreements under their institutional rules, demonstrating an informal recognition of TPF’s legitimacy and need for transparent governance.

Enforcement rights of funders

Funders — who are non-signatories to the arbitration agreement — do not have standing under Section 48(1)(a)¹⁶ of the Arbitration and Conciliation Act, 1996 to seek enforcement or oppose enforcement of awards. In Gemini Bay Transcription (P) Ltd. v. Integrated Sales Service Ltd.¹⁷ (2022), the Supreme Court made it clear that non-signatories can only be involved in enforcement proceedings in very limited circumstances allowed by Section 48(2), where they may rely on defences available through Explanation 1(iii). But broadly, enforcement rights under Section 48 remain exclusive to signatories.

Hence, funders cannot initiate enforcement or challenge awards. Their role remains financial and supportive unless they are expressly made party to the arbitration agreement.

Liability of funders under arbitral awards

In the notable case Tomorrow Sales Agency (P) Ltd. v. SBS Holdings Inc.¹⁸ (2023), the Delhi High Court held that the funder (Tomorrow Sales Agency or TSA) cannot be made liable to satisfy an adverse award if they are not a party to the arbitration agreement or a judgment-debtor under the award.

Facts and finding

TSA funded the arbitration under a bespoke funding agreement (BFA) with non-recourse terms. When the funded party lost and an award for costs was issued against them, SBS sought to enforce against TSA. The Delhi High Court’s Division Bench held that¹⁹:

(1) TSA had no express obligation to cover adverse costs.

(2) Under SIAC Rules, TSA was not a party, and no steps were taken to add them as such.

(3) Enforcement under Section 36(1)²⁰ of the Arbitration and Reconciliation Act, 1996 read with Civil Procedure Code, 1908 (CPC)²¹ applies only to judgment-debtors; TSA did not qualify as one.

(4) Imposing unwarranted liability would deter TPF and restrict access to justice.

The Court emphasised that TPFs promote access to justice by enabling under-resourced litigants to pursue substantive claims.²² Without them, many cases would never see the light of court or tribunal.

Key issues and challenges

Lack of regulation

India does not yet have a dedicated regulatory structure governing TPF. Issues such as conflicts of interest, disclosure obligations, confidentiality, and undue funder influence on proceedings remain largely unaddressed. For instance, funders might wield undue control over decision-making without any statutory constraints. Notifications required under Section 12²³ of the Arbitration and Conciliation Act, 1996 — where arbitrators must disclose any ties that might create bias — are not clearly extended to funders, leaving unresolved questions around tribunal impartiality.²⁴ Moreover, prevailing institutional rules (e.g., SIAC, ICC) do require disclosure of funding arrangements, but there is no domestic law requiring public or tribunal disclosure in Indian arbitrations — resulting in opacity and scope for potential funder influence.

Enforceability concerns

Under current legal interpretations, funders cannot initiate enforcement actions or be targeted in enforcement proceedings unless they are explicitly added as a party to the arbitration. The Supreme Court’s judgment in Gemini Bay²⁵ underscored this: only signatories to the arbitration agreement can challenge or enforce awards under Section 48. This limitation breeds uncertainty not only for financed claimants — who cannot rely on their funder to uphold an award — but also for award-holders unable to collect from a funder unless they are contractually bound or joined in the case.

Ethical and public policy concerns

Though classic doctrines of champerty and maintenance are technically defunct in India, their underlying public policy rationales — such as guarding against commodification of litigation — remain relevant. Courts will still strike down or refuse to enforce TPF agreements that are deemed “unconscionable” or made in bad faith.²⁶ Further, there is a genuine concern about funders exerting undue influence on case strategy or settlement decisions, which may undermine party autonomy and tribunal integrity. Confidentiality too is a pressing issue: funders, often strangers to the proceedings, may gain access to privileged information, yet are not legally bound by Indian privilege rules — thus creating risk of misuse or leaks.

Together, these deficiencies show that, without specific statutes or regulatory mechanisms, TPF in India operates in a largely unregulated grey zone — generating risks not just for funders and funded parties, but also for the integrity and fairness of arbitration as a dispute-resolution mechanism.

The way forward for India

India must adopt a balanced regulatory framework that:

(1) Legalises and legitimises TPF in arbitration.

(2) Mandates disclosure of funding arrangements to Arbitral Tribunals and courts.

(3) Prevents conflicts of interest by codifying ethical standards.

(4) Protects funders and funded parties via contractual safeguards and limited liability clauses.

(5) Encourages institutional arbitration centers in India [like Mumbai Centre for International Arbitration (MCIA), India International Arbitration Centre (IIAC)] to issue guidelines on TPF.

The Indian court system has progressed to accepting TPF so long as the contract is clearly drafted and not exploitative. The judiciary has smartly balanced the interests of claimants and funders on the one hand, and the need for transparency and autonomy of tribunals on the other. Interestingly, the Delhi High Court also hinted that a regulatory framework requiring transparency and minimum disclosure norms may help guard against abuse — while preserving TPF’s critical function in promoting access to justice.

TPF holds immense potential to democratise access to justice and increase India’s competitiveness as a hub for international arbitration. However, in the absence of a statutory framework, stakeholders operate in a legal vacuum. Judicial decisions like Gemini Bay²⁷ and Tomorrow Sales²⁸ clarify some aspects, but a comprehensive regulatory regime remains the need of the hour.