THIRD PARTY FUNDING IN ARBITRATION
Author: Sanjay Sellen, IV Year of BBA.,LLB(Hons), from Government Law College Kozhikode, Kerala.
Co-author: Amritha S, V Year of BBA.,LLB(Hons), from Government Law College Kozhikode, Kerala.
Arbitration has become the most important mechanism for resolving international disputes in the last 50 years. Arbitration is a private process, tailored to the needs of the contracting parties. The object or arbitration is ordinarily to resolve the entire controversy out of court without the formality and expense normally attached to a judicial process. In a binding arbitration, the arbitrator’s decision is final and binding on the parties. The arbitrator bears evidences from each side and renders a decision that is normally binding at the parties.
An arbitrator’s award is enforceable in the same manner as a court judgment. Though arbitration is more efficient and time-saving procedure, the exorbitant costs attached with it cannot be ignored. The concept of the third-party funding agreements has helped financially weaker claimants to successfully pursue their legitimate interests without putting their business at economical risk, whereby an entity that is not party to a dispute and the proceedings, finances all or part of a party’s costs of proceedings, in return for a percentage of recovery made under the judgment or award.
India lacks a statutory mechanism to provide validity to third-party funding in arbitration proceedings although many common laws have given legal sanctity to the third-party funding concept abolishing the doctrines of ‘Maintenance and Champerty’ and enacting statutes and guidelines for facilitating the concept of third-party funding. Many courts in India still recognise the doctrine of maintenance and champerty in their decisions. In this paper, we assert the need to adopt a better and suitable framework for the third-party funding in India.
WHAT IS THIRD PARTY FUNDING?
Third party funding is a financing method whereby an entity that is not party to a dispute and the proceeding arising there from, finances all or part of a party's cost of proceeding, in return for a percentage of recovery made under the judgement or award. This is a process where funder's fees are repaid only upon success. That is, in case of a favorable award, the third-party funder is generally remunerated by a previously agreed percentage of the amount of the award.
In case of unfavorable award, the funder’s investment is lost. Unlike in national litigation, where disputes are decided by court-appointed judges, the use of third-party funding in private arbitration, with party- appointed arbitrators, has given rise to various ethical and procedural issues. Basically, the funding will cover the funded party’s legal fees and expenses but the funder may also agree to pay the other side’s costs if the funded party is so ordered and provide security for the opponent’s cost. Funding includes the costs of proceedings, attorney fees, evidentiary hearing, arbitrator fees, administrative fees, evidentiary hearing, arbitrators’ fees, administrative fees, payment under judgment or award or others.
The third-party funding is appropriate in the following situations;
Funding is only available to claimants or defendants with a counterclaim. Funders are unlikely to provide funding for cases that do not involve any damages.
The funders make proper analysis of the case and only invest if they have confidence in the case.
Funders make sure if the respondents are able to meet the claim, costs and interest.
The funders make sure the seat of arbitration permits funding under local law.
Although TPF may appear to be of recent development, but on close perusal of history it could be discerned that the litigation funding has been occurring for a millennium.1
Ancient Athens was regarded as one of the most litigious societies in the primitive era. Lawyers did not exist, and the litigants were expected to represent themselves. However, there were professional speech writers who aided these litigants. In addition to this, there existed sophists who were trained orators and in return of a fee. At those times these two professions were regarded as the nest service providers pertaining to the legal regime.
Subsequently, a group known as ‘hetaireia’, came into existence whose business revolved around politics and litigation. The group started winning claims through hiring witnesses and accusers. Later a social devise was introduced known as the sycophant, considered a ‘persona non grata’, who sought to make money through prosecuting people.
DOCTRINES OF MAINTENENACE AND CHAMPERTY
Maintenance is the officious assistance by money or otherwise proffered by the third person to either party to a suit in which he himself has no legal interest to enable them to prosecute or defend it. And champerty is a form of maintenance is defined as a bargain between a stranger and a party to a lawsuit by which the stranger pursues the party’s claim in consideration of receiving part of any judgement proceedings3
Maintenance may be defined as an agreement whereby a stranger promise to help another person by money or otherwise in litigation in which that third person has himself no legal interest. Champerty is an agreement whereby a person agrees to assist another in litigation in exchange for a promise to hand over a portion of the proceeds of the action.
In both cases financial or professional assistance is provided with a view to assisting another person in litigation, but in the case of champerty the party helping in litigation also shares in the gains of the litigation in addition to interest on money advanced or fees for professional services.
Under the English law, such agreements are absolutely void. The Indian law, however, does not make them absolutely void because of the peculiar position of Indian litigants, many of whom are too poor to afford expensive litigation.
With regard to the applicability of the doctrine in India, it has been laid down by the privy council in the case of Ram Coomar Coondoo and another v.Chunder Canto Mookerji4 that champerty agreements would be held invalid by the courts when such agreements are against public policy.
Recently the supreme court of India in case5 held that even though the advocates cannot fund litigation on behalf of their clients, there appears to be no restrictions on third parties funding the litigation and getting repaid after the outcome of the litigation.
At present in India, there does not exist any regulatory framework for addressing the concerns that arises out of TPF in arbitration, neither there exists any such precedent whereby law has been laid down with regard to third party funding in domestic arbitration proceedings. Thus, there arises a need to adopt a proper policy regarding promotion and regulation of TPF in India.
One of the most important benefits of third- party funding in international arbitration is that it allows for increased access to justice.6 The disputes should be resolved based on the merits of the claims and defenses, not based on who has more money at hand to spend on the proceedings. Sometimes, despite a very strong case, lack of funds might prevent the smaller party to access arbitration.7 In such a situation, funding arrangements allow smaller companies to put up an equal fight against their opponents, promoting access to justice. Even if a portion of the prospects will be shared with the funder, it is better for him to recover a substantial part of his damages than to recover nothing at all.8
Today, all over the globe there has been a rapid surge in the need for third-party funding. Anecdotal reports suggest that the global market for dispute funding both litigation and arbitration is currently estimated as exceeding US$ 10 billion and rapidly growing. Because the global economic slowdown has inspired companies facing bankruptcy or insolvency to seek funding to pursue claims that may generate cash flow for their business or mitigate the risk of losing.
In India, access to justice has been consistently declared to be a fundamental right under the constitution.
9Generally, with regard to the cost associated with arbitration, the Hon’ble Supreme Court of India has aptly observed in the case of Union of India v. M/S Singh Builders Syndicate10 that;
“If a high fee is claimed by the arbitrator and one party agrees to pay such a fee, the other party, who is unable to afford such a fee or reluctant to pay such a high fee, is put in an embarrassing position. He will not be in a position to express his reservation or objection to the high fee, owing to an apprehension that refusal by him to agree to the fee suggested by the arbitrator may prejudice his case or create a bias in favor of the other party who readily agreed to pay the high fee."It is necessary to find an urgent solution for this problem to save arbitration from the arbitration cost”
It could be asserted that the inception of third-party funding in arbitration proceedings could led to the development of a level playing field for both the parties, which would invariably negate bias and ensure ‘access to justice’. Since the committee to review the institutionalization of arbitration mechanism in India has invariably recommended the inception of third-party funding in India.11 It could be argued that a suitable policy should be adopted to regulate the TPF in India.
These issues can be controlled by prohibiting investors from controlling the cases, forbidding direct contracts between investors and lawyers that do not include the client; prohibiting the use of financing in class actions; and requiring disclosure of funding contracts.12
During the earlier period, especially in the common law jurisdiction of the UK, the concept of maintenance and champerty was evolved to curb the menace of frivolous litigations, resulting from the involvement of a third party. There has been an increased focus on the advancement of TPF since the cost of conducting the arbitration proceedings has become exorbitant.
Many jurisdictions such as the UK, Singapore have abolished the concept of the doctrine of maintenance and champerty giving legitimacy to financial transactions arising out of third-party funding. Even when other jurisdictions have given importance to the concept of the third-party funding, India still continues to lag behind in adopting measures to legitimize it. At present, India does not recognize the third party finding as the doctrine of champerty and maintenance has still been applied by the courts and that there has been no legislative sanction being provided under the Arbitration and Conciliation Act 1996; therefore, it becomes necessary that the legislature provide legitimacy to these financial transactions a/so as to promote arbitration in India.
1Michael K Velchik & Jeffery Y Zhang, Islands of Litigation Finance 5 (2017), HARVARD(Oct,15,10:15PM) http://www.law.harvard.edu/programs/olin_center/fellows_papers/pdf/Zhang_71.pdf (hereinafter referred to as “Michael K& Jeffery”).
2Bayless Manning, Hyperlexis: Our National Disease, 71 NW. U. L. REV. 767,767 (1976); Marc Galanter, Reading the Landscape of Disputes: What We Know and Don’t Know (and Think We Know) About our Allegedly Contentious and Litigious Society, 31 UCLA L. REV. 4,5 (1983).; Max Radin, Maintenance by Champerty, 24 CAL. L. REV. 48, 51 (1935).
3Black’s Law Dictionary 231 (6th ed. 1990)
4Ram Coomar Coondoo and Another v. Chunder Canto Mookerjee, (1876) LR 4 IA 23
5Bar Council of India v. A.K. Balaji, (2018) 5 SCC 379
6Kelsie Massini, Risk Versus Reward: The Increasing Use of Third Funders in International Arbitration and the Awarding Security for Costs, 7 Y.B. Arb. & Mediation 323, 325 (2015)
7Christopher Bogart, Overview of Arbitration Finance, in THIRD-PARTY FUNDING IN INTERNATIONAL ARBITRATION 51-52 (Bernardo M. Cremades & Antonias Dimolitsa eds., ICC, 2013)
8REVIEW OF CIVIL LITIGATION COSTS 117 (2009), https://www.judiciary.uk/wp- content/uploads/JCO/Documents/Reports/jackson-final-report-140110.pdf
9 Brij Mohan Lal v. Union of India and Ors., (2012) 6 SCC 502; Tamilnadu Mercantile Bank Shareholders Welfare Association v. S.C. Sekar and Others, (2009) 2 SCC 784; Sunil Batra v. Delhi Administration, (1978) 4 SCC 494; Charles Sobhraj v. Suptd. Central Jail, (1978) 4 SCC 104.
10 Union of India v. M/S. Singh Builders Syndicate, (2009) 4 SCC 523.
11 report of the high-level committee to review the institutionalization on arbitration Mechanism in India 43-44 (2017), http://legalaffairs.gov.in/sites/default/files/report-hlc.pdf.
12 STOPPING THE SALE ON LAWSUITS: A PROPOSAL TO REGULATE THIRD-PARTY INVESTMENTS IN LITIGATION (2012), https://www.instituteforlegalreform.com/uploads/sites/1/TPLF_Solutions.pdf.