Regulatory Oversight on Third-Party Arbitration Funding in India: The Deserted Path

Written by Nakul Chengappa [i] and Sthapitha Thangamma [ii]

[i]Fifth year [ii] Third year students of School of Law, Christ (Deemed to be University)


Disclaimer: Please note that the views expressed below represent the opinions of the article's author. The following does not necessarily represent the views of Law & Order.


Introduction:


Third-party funding ["TPF"] has become an inevitable concept given the exorbitant costs of international and domestic arbitrations. TPF in litigation has previously been considered illegal throughout most common-law jurisdictions, due in part to the archaic doctrine of maintenance and the doctrine of champerty. Arbitration hotspots like Singapore and Hong Kong have recently introduced a legislative framework to recognize and acknowledge TPF in arbitration, effectively marking an end to such antiquated doctrines. Despite the criticism surrounding its ethical, economic, and legal considerations, regulating this funding mechanism fosters access to justice, allowing meritorious claimants to advance their claims. The authors of this article intended to examine the benefits and potential consequences of TPF while referring to a conventional regulatory regime across jurisdictions. The article's authors discuss the need for a regulatory framework in India, as the lack of prohibition on this funding model makes India a lucrative segment for TPF. The Indian market may still be prone to severe risks due to a lack of regulatory oversight. Mandating the filling of this legal void could help India become an arbitration hub.


The world of today is subjected to a multitude of dispute resolution processes. Litigation and arbitration persist in being the most prevalent routes. Litigation is the method of resolving a legal dispute through the courts. On the other hand, arbitration is a departure from the traditional dispute resolution mechanism in courts. It has become prevalent primarily due to procedural adaptability, which also lessens the substantial amount of time consumed by the litigation process.[1] Although entities prefer the arbitral route to avoid the rigorous formalities, they can fall into the same trap as litigants when the associated costs are considered.[2] The pricing of arbitral proceedings as a dispute resolution mechanism has been acknowledged as a repulsive characteristic, as disclosed in a Queen Mary University of London questionnaire on advancements to dispute settlement.[3] As a byproduct, the concept of financing costs was introduced to overcome the disparagement due to high costs. Third-party funding (hereafter referred to as 'TPF') is an arrangement in which an independent party agrees to finance a dispute or proceedings in which he has no prior interest or correlation.[4] The benefactor can be an insurance company, a bank, a hedge fund, or any other type of organization, or it could be an individual. According to a Queen Mary University survey, arbitration financing has become more prevalent in arbitration hotspots, including Geneva, London, and Hong Kong.[5] The article aims to discover the need for TPF legislation in India and optimize access to justice in this context. The article goes on to describe the flaws in the current legislative framework, taking TPF into account. In addition, the article compares India to other jurisdictions and proposes a regulatory structure for TPF legislation in India.


Does TPF Enhance Access to Justice?:


The UN resolution explicitly fosters access to justice and recognizes that all institutions shall adhere to reasonable, fair, stable, and equitable rules.[6] This has been a pivotal justification for the development of TPF since it allows a party with insufficient financial resources to overcome the obstacles of exorbitant costs if it has a legitimate claim.[7]

Since the reliance on arbitral proceedings as a dispute resolution mechanism has increased exponentially over the years, the market for TPF has evolved from a small and niche market to an extensively used one.[8]

While the parties to a dispute resolution proceeding think differently on many vital points, individuals are helpless and powerless to reach a consensus. The resolution proceedings can become entirely unreasonable. Complex issues, the need for qualified experts, the length of time it takes to complete the proceedings, and the hiring of legal counsel are all likely to increase the costs.[9] Even though acquiring third-party funds reduces the burden on the funded parties, the assertion that it enhances access to justice for legitimate parties has gained traction, prompting calls for legislation to acknowledge third-party financial support.[10] The ability of plaintiffs (or even defendants) to finance their costs through a funder significantly reduces the constraints on pursuing the merits of their case.


According to an Australian study on access to justice and class action lawsuits, the availability of third-party funding has led to the analysis of cases that would not have been issued elsewhere due to cost and financial constraints.[11] While the advantages of financing access to justice may appear self-evident, the justifications against it are compelling. It has been claimed that funders preferentially fund slam dunks and high-stakes cases; however, there is no evidence to support these assertions.[12] On the other hand, arbitration and litigation financing are said to offer cost certainty, expanding the number of frivolous lawsuits filed. As an outcome, it will be considered systemic abuse. However, there is a solution to this concern since most arbitrations operate on the "losers pay" premise, which strikes a balance of the liability.[13]


A Perspective on the Existing Gaps in Third-Party Funding:


The potential benefits of TPF in the arbitral process were extensively discussed in several academic works.[14] The access to justice granted through the funding mechanisms to the impoverished parties is undoubtedly admirable.[15] Moreover, while TPF is not regulated, it constructs specific disparities between claimants and respondents, most noticeably information asymmetry, since there is no obligation to divulge specific funding received from a third party and the "arbitral hit-and-run" dichotomy.[16] The aim at which the expenditures of arbitration are becoming irreparable as a result of frivolous and disproportionate claims is a critical issue to consider before attempting to control it. The subsequent subsections address the impediments to a proficient TPF regulation regime and viable approaches to the explicitly outlined shortcomings.

  1. Potential for Abuse: The proponents of TPF claim that it restricts the extent of frivolous cases.[17] This would be valid if we assume that specific institutional funding structures in multiple jurisdictions would only invest in claims that have the potential to succeed. In the midst of this, a recent report by the United Nations Conference on Trade and Development noted that TPF corporations have an economic incentive to invest even in dire cases in which they have a chance of acquiring a substantial monetary reward by constituting a "portfolio" of claims.[18] However, as in an investor-state dispute, this enables speculation and is a plausible stain on a respondent government's faith. TPF has been juxtaposed to oil drilling, a risky business because a single breakthrough after drilling dozens of dry gaps can differentiate between success and failure.[19] The ambiguity about recovering fees from initial investment claims enhances the overall "costs" of the arbitral process. Furthermore, more pertinently, if a respondent obtains adverse costs award against a low-income claimant who relied on TPF[20] and because the financier is not a direct party to the dispute between the respondent and the claimant, the respondent cannot secure execution of the award. As a result, the privity of the contract between the funder and the claimant being supported arises. The term "arbitral hit-and-run" is commonly used to describe such a predicament.[21]

  2. The 'Public Policy' Dilemma: Australia and India, had indelibly inherited the doctrines of maintenance and champerty. Nonetheless, in the current climate, litigation funding in Australia is a growing industry, especially in comparison to India's untapped market.[22] In the cases of Campbells Cash & Carry Pty. Ltd. v. Fostiff Pty. Ltd.,[23] and Mobil Oil Australia Pty Ltd. v. Victoria,[24] there was disagreement on the involvement of third-party funders who deemed a proceeding to be antithetical on the ground of public policy. In both of these cases, the Australian High Court noted that challenges of illegality and public policy might emerge concerning the fairness of the agreement.[25] It is also worth noting how no objective standard was established in either of these cases to determine the agreement's fairness.


Comparative Study of the Global Scenario:


The concept of TPF gained traction in the international arbitration realm before it was envisioned for debate in domestic litigation and arbitration scenarios. As a result, the authors seek to examine the positions of numerous countries in terms of TPF growth, recognition, and regulation. The countries were chosen based on their international ranking, as well as those with a statutory or other regulatory framework in place were also included. The authors aim to draw comparison to these jurisdictions in terms of their framework in regulating TPF, the judiciary's approach, and the historical development:

  1. Australia: Australia has a vibrant and rapidly expanding TPF market. Nevertheless, the country's legal system was initially skeptical of TPF due to the prevalence of common law doctrines such as of champerty and of maintenance.[26] Prior to expanding into other areas of arbitration and litigation, TPF was initially sought in insolvency proceedings and is extensively used in class action suits in Melbourne. TPF agreements have been recognized over judicial precedents.[27] Furthermore, Australia has no committed legislation or procedural guidelines in place to govern TPF. Despite this, the Australian Securities and Investment Commission published regulatory guidelines in 2013 to help TPF stabilize potential conflicts of interest. TPF development in Australia could be reshaped by a pragmatic legislative framework blended with judicial commitment.

  2. England and Wales: In today's society, empirical research is essential since most individuals accept only what they observe, hear, or experience. It is used to test multiple hypotheses and expand human knowledge. The Queen Mary University of London's International Arbitration Survey (QMUL Survey), one of the most empirical studies the university has ever conducted is used to test various propositions and enlarge human understanding, but it is used to move forward in multiple areas constantly and it ranks London as the most preferred seat in international arbitration.[28] This explains how England and Wales were included in the study. England regulates TPF in a pretty distinct way. TPF is governed by the Code of Conduct for Litigation Funders[29] and, secondly, a voluntary association called the Association of Litigation Funders.[30] The government also supports one such voluntary regulation mechanism. The Code of Conduct applies to all association members and establishes guidelines to guarantee capital adequacy, mandates disclosure, and other prerequisites such as audit arrangements. The progress of this mechanism is mirrored in London's status as the most preferred international arbitration venue and the rate of growth of the TPF market.[31]

  3. Hong Kong: TPF seemed to successfully establish tortious or criminal liability in Hong Kong and several other common law jurisdictions, focusing on the doctrines of champerty and maintenance, and it was conferred legal recognition in 2017. The Amendment Legislation was managed to be pass by the Hong Kong Legislative Council, which revised several guidelines of the Arbitration Laws,[32] and all of the amendments came into effect on 1st of February, 2019. This is preceded by the Hong Kong International Arbitration Centre's rules, which either seek to accommodate a lawmaking arrangement for TPF in arbitration. The International Arbitration Survey of Queen Mary University of London (QMUL Survey)[33] places Hong Kong in fourth place in terms of preferential treatment in international arbitration, which illustrates the need for Hong Kong to uphold a legislative framework to sustain market competitiveness, particularly in the southeast Asian region.[34]

  4. Singapore: Singapore is regularly ranked third in the world for international arbitration hubs.[35] Previously, TPF agreements were not enforceable on public policy grounds. Although they acquired legal recognition for international arbitration in 2017, the growing demands of the emerging market and the regulatory and legislative framework for TPF have undergone significant changes. Specific categories of TPF agreements are legally recognized and enforced under the Civil Law Act, as amended, and the Civil Law (Third Party Funding) Regulations, 2017.[36] Singapore's regulatory framework comprises several mechanisms, but it is only pertinent to Singapore-based lawyers and law firms. In addition, the Singapore International Arbitration Centre has issued a Practice Note on Arbitrator Conduct in Cases Involving External Funding, 2017, and the SIAC Investment Arbitration Rules 2017, both of which include TPF provisions.These modifications in Singapore have been very beneficial to international arbitration, and the market has seen an influx of funders, resulting in a rapidly changing economy.[37]

Proposal for a Regulatory Framework for Third-Party Funding in India:


A High-Level Committee, chaired by Justice B.N. Srikrishna released a report[38] that recognized the operating TPF regulatory regimes in arbitration-friendly jurisdictions like Singapore, Hong Kong, and Paris. Further, the systematic shift away from TPF prohibition and its regulatory oversight was recognized as a significant factor in the growth of these jurisdictions as arbitration hotspots. TPF guidelines may be beneficial to litigants, third-party funders, and the economy because they will open a window of opportunity for investments in India. The 2019 Amendment Act aims to make India a regional and international arbitration center.[39]

In fact, as recently as 2018, the Supreme Court has recognised third party funding while clarifying that there is no bar on members outside the legal field to act as funders of litigation and receive remuneration post the litigation.[40]

Many Indian states have imbibed costs for litigation by asking the financing party to become a party and depositing the costs in court.[41] However, it fails to address the contentious issue of TPF regulation. In the case of Suganchand v. Balchand[42], an agreement to share half the property in case of success was held to be champertous, opposed to public policy, and void, subsequently in Nuthaki Veukataswami v. Katta Nagireddy[43], the quantum of the share to which the financier was entitled was considered an essential consideration in judging the validity of a funding agreement.


The formidable intentions of the Parliament will require several obstacles to be overcome before India can achieve its goal of becoming a global arbitration hub. To achieve this goal of becoming an arbitration hub shortly, the authors of this article propose a holistic regulatory framework that governs TPF of arbitration, as recently adopted by the governments of Singapore and Hong Kong, be incorporated into the Arbitration Act. Adopting such a regime would undoubtedly increase India's appeal as a center for dispute resolution.[44]


In this context, the authors of this article presume that a legal framework for TPF in India should include the following characteristics:


  1. A provision for purchasing "security for costs," and the possible repercussions of failing to comply with such an order;

  2. Access to TPF and the identity of the third-party funder must be disclosed, though the specifics of the funding agreement may not be considered necessary;

  3. Arbitral tribunals must have discretionary power to order the disclaimer of funding agreements to ensure that there is no abuse of discretion and that funders do not exhibit excessive control over the funded party; and

  4. Adopting a code of conduct that almost all third-party funders should adhere

The authors of this article acknowledge that a proposal for a code of conduct for third-party funders is currently ambiguous. The authors have also left an open-ended bid in this regard, as the formulation of a code of conduct could be done while emulating specific provisions from the code of conduct adopted by the United Kingdom and Hong Kong, subject to the State's policy and the parameters that the State would prefer to adopt for allowing and validating this funding mechanism. A code of conduct such as this would change over time to ensure that third-party funders never use coercive strategies against public policy.


Conclusion:


While highlighting the global growth of the TPF market, the authors intended to suggest ways to close the gaps in India through strict legislative regulation. It should be noticed that the possibilities for the TPF market to have a far-reaching impact in India necessitate the implementation of the Task Force's suggestions, with some tailored modifications, which extensively communicate the procedural, ethical, and policy issues relating to TPF in international arbitration.



[1] Joanna M. Shepherd, Ideal versus Reality in Third-Party Litigation Financing, 8 J.L. ECON. & POLY 593, 594 (2012). [2] G.B. Born, International Commercial Arbitration, 185, (2009). [3] International Arbitration Survey: Improvements and Innovations in International Arbitration, Queen Mary University of London, 14, (2015) available at http://www.arbitration.qmul.ac.uk/docs/164761.pdf , last accessed on 06.10.21 [4] S. Sahani & B.Nieuwveld, Third Party Funding in International Arbitration, 3-18, (2012) [5] International Arbitration Survey: Improvements and Innovations in International Arbitration, Queen Mary University of London, 14, (2015) available at http://www.arbitration.qmul.ac.uk/docs/164761.pdf , last accessed on 06.10.21 [6] G.A. Res. 67/1, Declaration of the High-Level Meeting of the General Assembly on the Rule of Law at the National and International Levels, 2 (Nov. 30, 2012). [7] Tara Santosuosso & Randall Scarlett, Third-Party Funding in Investment Arbitration: Misappropriation of Access to Justice Rhetoric by Global Speculative Finance, 60(9) B.C. L. Rev. 8, 10 (2019). [8] Lisa B Nieuwveld & Victoria Shannon Sahani, Third-Party Funding in International Arbitration 1 (2d ed. 2017) [9] CJC, Improved Access to Justice - The Future Funding of Litigation: Alternative Funding Structures (June 2007). [10] Andrew Watson & Michael Donelly, Financing Access to Justice: Third-Party Litigation Funding and Class Actions in Australia, 55 Can. Bus. L.J. 17 (2014). [11] Michael Legg. L. Travers, E. Park & N. Turner, "Litigation Funding in Australia," P. 2, University of New South Wales Law Review (2017). [12] Sarah Field, 'Shark Tank' Casting: Producer's Advice for the Perfect Pitch, INQUISITR (2014). [13] Radek Goral, The Law of Interest versus the Interest of Law, or on Lending to Law Firms, 29 GEO. J. LEGAL ETHICS 253, 303 (2016). [14] Courtney Barksdale, All That Glitters Isn't Gold: Analysing the Costs and Benefits of Litigation Finance, 26 REV. LITIG. 707 (2007); See generally Nieuwveld & Sahani; See also Rachel Denae Thrasher, The Regulation of Third-Party Funding: Gathering Data for Future Analysis and Reform 11 (L. & J. Ams., Working Paper No. 9, 2018) [in the future "Thrasher"] [15] Nadia Darwazeh & Adrien Leleu, Disclosure and Security For Costs or How To Address Imbalances Created By Third-Party Funding, 33(2) J. INT'L ARB. (2016). [16] RSM Prod., ICSID Case No. ARB/12/10, Decision on Saint Lucia's Request for Security for Costs, (Aug. 13, 2014). [17] Susana Khouri et al., Third-Party Funding in International Commercial and Treaty Arbitration- a Panacea or a Plague? A Discussion of the Risks and Benefits of Third-Party Funding, 4 TRANSNAT'L. DISP. MGMT. 5 (2011).

[18] Recent Developments in Investor-State Dispute Settlement (ISDS), U.N. CONF. ON TRADE & DEV. 25 (May 2013), available at https://unctad.org/en/PublicationsLibrary/webdiaepcb2013d3_en.pdf , last accessed on 06.10.21 [19] George Kahale, III, Is Investor-State Arbitration Broken?, 7 TRANSNAT'L. DISP. MGT. 33 (2012). [20] William Kirtley & Koralie Wietrzykowski, Should an Arbitral Tribunal Order Security for Costs When an Impecunious Claimant is Relying upon Third-Party Funding?, 30 J. INT'L ARB. 17, 19 (2013). [21] Supra note 20 [22] Litigation Funding – Australian Market Research Report, IBISWORLD, available at https://www.ibisworld.com.au/industry-trends/specialised-market-research-reports/advisory-financial-%20services/litigation-funding.html , last accessed on 06.10.21 [23] (2006) 229 CLR 386, ¶¶ 146-149 (Austl.) [24] (2002) 211 CLR 1 (Austl.). [25] (2006) 229 CLR. 386 [26] Margaret McCaffery, Litigation as an Asset Class , National Post, Mar. 26 2008 [27] Dugal v. Manulife Financial Corporation, [2011] O.J. No. 1239 (S.C.J.), Camille Cameron, Australia, in The Costs and Funding of Civil Litigation 195, at 212 (2010). [28] International Arbitration Survey: Improvements and Innovations in International Arbitration, Queen Mary University of London, 14, (2015) available at http://www.arbitration.qmul.ac.uk/docs/164761.pdf , last accessed on 06.10.21 [29] Code for Litigation Funders, available at, see http://www.judiciary.gov.uk/about%20the-judiciary/advisory-bodies/cjc/third-party-funding , last accessed on 06.10.21 [30] Code of Conduct for Litigation Funders, ASSOC. OF LITIG. FUNDERS (Jan. 2018), available at http://associationoflitigationfunders.com/wp-content/uploads/2018/03/Code-Of-Conduct-for-Litigation-%20Funders-at-June-2020-FINAL.pdf , last accessed on 06.10.21 [31] Rachael Mulheron, England's Unique Approach to the Self-Regulation of Third Party Funding: A Critical Analysis of Recent Developments, 73(3) CAMBRIDGE L. J. 570-97 (2014). [32] HK TPF Ordinance, No. 6, (2017) (H.K.) [33] International Arbitration Survey: Improvements and Innovations in International Arbitration, Queen Mary University of London, 14, (2015) available at http://www.arbitration.qmul.ac.uk/docs/164761.pdf , last accessed on 06.10.21 [34] Victoria Shannon Sahani, Judging Third-Party Funding, 63 UCLA L. REV. 388, 440-45 (2016).

[35] International Arbitration Survey: Improvements and Innovations in International Arbitration, Queen Mary University of London, 14, (2015) available at http://www.arbitration.qmul.ac.uk/docs/164761.pdf , last accessed on 06.10.21 [36] Civil Law (Third-Party Funding) Regulations, 2017. [37] Singapore International Arbitration Centre Investment Arbitration Rules, r. 24, Jan. 1, 2017. [38] Department of Legal Affairs., Report of the High Level Committee to review the institutionalization of Arbitration Mechanism in 43 (2017). [39] Changes in law needed to make India hub of arbitration: Ravi Shankar Prasad, FIN. EXPRESS, Jul. 18, 2019, available at https://www.financialexpress.com/india-news/changes-in-law-needed-to-make-india-hub-of-arbitration-ravi- shankar-prasad/1648775 ; 2019 Amendment, Arbitration and Conciliation (Amendment) Act, No. 33 of 2019, Statement of Objects and Reasons. [40] Bar Council of India v. A K Balaji (2018) 5 SCC 379 [41] https://www.scconline.com/blog/post/2021/04/20/third-party-funding/ , last accessed on 06.10.21 [42] 956 SCC OnLine Raj 127 [43] 1962 SCC OnLine AP 100 [44] Peng Hou, Financing arbitration in mainland China: Hong Kong's Legislation as a model, 34(4) ARB. INT'L 593, 597 (2018).


BIBLIOGRAPHY


Books:

  1. FOUCHARD GAILLARD GOLDMAN “International Commercial Arbitration

  2. Frank Garcia “Third Party Funding as Exploitation of the Investment Treaty System”

  3. Douglas R. Richmond “Other People’s Money: The Ethics of Litigation Funding”

  4. Gian Marco Solas Third Party Funding: Law, Economics and Policy”

  5. Beibei Zhang“Third Party Funding for Dispute Resolution: A Comparative Study of England, Hong Kong, Singapore, the Netherlands, and Mainland China”

Articles:

  1. Lisa Bench Nieuwveld, Third-Party Funding – Maintenance and Champerty – Where is it Thriving?, KLUWER ARB. BLOG

  2. Nadia Darwazeh & Adrien Leleu, Disclosure and Security For Costs or How To Address Imbalances Created By Third-Party Funding/

  3. Duarte G. Henriques, Arbitrating Disputes in Third-Party Funding, 85(2) INT’L J. ARB., MEDIATION & DISP. MGMT. 171 (2019).

  4. George Kahale, III, Is Investor-State Arbitration Broken?, 7 TRANSNAT’L. DISP. MGT. 33 (2012)

  5. William Kirtley & Koralie Wietrzykowski, Should an Arbitral Tribunal Order Security for Costs When an Impecunious Claimant is Relying upon Third-Party Funding?, 30 J. INT’L ARB. 17, 19 (2013).

Reports:

  1. BURFORD ANNUAL REPORT 2018

  2. DEP’T OF LEGAL AFF., REPORT OF THE HIGH LEVEL COMMITTEE TO REVIEW THE INSTITUTIONALIZATION OF ARBITRATION MECHANISM IN INDIA 43 (2017)


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