Third-Party Funding of Arbitration

Third-party funding is an arrangement under which a person with no prior connection to a dispute pays the cost of pursuing it, in return for a share of what is recovered, and receives nothing if the claim fails. It answers a real problem: a claimant with a good claim and no money cannot arbitrate, and arbitration is expensive precisely because the parties pay for the tribunal. India has no statute regulating funders, but nothing in Indian law prohibits the arrangement, and the practice has grown.

The arrangement, its position in Indian law, and the questions it raises

1. The Arrangement

• Who funds. Specialist litigation funds, insurers and, occasionally, the claimant's own trade creditors.
• What is funded. The fees of the tribunal and the institution, counsel's fees, expert and translation costs, and sometimes an adverse costs indemnity.
• The return. A multiple of the sum advanced, or a percentage of the recovery, or the higher of the two, payable only on success.
• Control. The funder does not conduct the case, but the agreement usually requires it to be consulted on settlement and gives it information rights, which is the source of most of the difficulty.

2. The Position in Indian Law

The English doctrines of maintenance and champerty, which made it unlawful to support another's litigation or to do so for a share of the proceeds, were never applied with full force in India. The position has long been that an agreement to finance litigation in return for a share of the property recovered is not by itself void; it is void only where it is extortionate and unconscionable, or is made for an improper object such as gambling in litigation or oppressing a defendant, in which case it offends Section 23 of the Indian Contract Act, 1872.

3. The Questions It Raises in an Arbitration

1. Disclosure and conflict. An arbitrator may have a relationship with the funder that he does not know of, because he does not know the funder exists. The Fifth Schedule to the Arbitration and Conciliation Act, 1996 requires disclosure of relationships with the parties and with those having an interest in the outcome, and institutional rules increasingly require the funded party to disclose the funder's identity for that reason.
2. Security for costs. A respondent facing a funded but impecunious claimant may ask the tribunal to order security for its costs under Section 17. The existence of funding is not by itself a ground, since the funder is not liable for the respondent's costs, but funding together with impecuniosity is commonly relied on.
3. Costs against the funder. Section 31A permits costs to be awarded against a party. The funder is not a party, and there is no Indian provision permitting an award against it, so a successful respondent may find the costs order unenforceable in practice.
4. Privilege and confidentiality. Material shared with a funder in the course of its due diligence may cease to be privileged, and Section 42A does not bind the funder, so the funding agreement should impose confidentiality expressly.
5. Control of the settlement. An agreement that gives the funder a veto over settlement risks offending the principle that the claim belongs to the claimant, and is the term most likely to be attacked as against public policy.

4. The Case for Regulation

The Law Commission, in its 246th Report, recommended that third-party funding be expressly recognised and regulated, and the recommendation has not been enacted. Several States recognise the practice in their civil procedure rules by permitting a financier of a suit to be made a party for the purposes of costs. What India lacks is what mature jurisdictions supply: a capital adequacy requirement so that a funder can meet an adverse costs order, a rule on disclosure of the funder's identity, a limit on the funder's control of the claim and of settlement, and a rule on the recoverability of the funding cost as part of the costs of the arbitration.

5. Related Topics and Provisions