Can a third-party funder be held liable to pay amounts under an arbitral award where the funder was neither a party to arbitral proceedings nor the arbitral award? Recently, a Division Bench of the Delhi High Court in Tomorrow Sales Agency Pvt. Ltd. v. SBS Holdings, Inc. & Ors.1, while deciding this issue has emphasised the importance of third-party funding in ensuring access to justice thereby providing some scope towards the framework of third-party funders. This update considers the basis for the ruling of the Division Bench that a third-party funder cannot be fastened with a liability to pay an amount due under an award passed against the funded party.
In December 2018, SBS Transpole Logistics Pvt. Ltd. ("Transpole") and its Promoters, the Claimants in the arbitration requesting TSA to fund their arbitral proceedings against SBS Holdings Pte Ltd (SBS) and one Global Enterprise Logistics Pte Ltd. ("GEL"). TSA and the claimants entered into a Bespoke Funding Agreement ("BFA") under which TSA agreed to provide financial assistance to the Claimants to pursue their claim for recovery of damages against SBS and GEL. None of the clauses of the BFA imposed any specific obligation on TSA to fund an adverse order against the claimants. Further, the duration and termination clause of the BFA stipulated certain circumstances on occasion of which the BFA would stand terminated. One such circumstance for termination of BFA was if in case the claim is not a success.
Thereafter, arbitral proceedings between the Claimants, SBS and GEL were conducted in accordance with the Singapore International Arbitration Centre, Arbitration Rules (6th Edition, 2016) ("SIAC Rules"). However, the Claimants failed to succeed with their claims and the Arbitral Tribunal, by an award dated 22.12.2022 awarded costs and amounts in favour of SBS and GEL. The Claimants asked TSA to bear the award, which it declined to do. Thereafter, SBS also called upon TSA to pay the amounts in terms of the Arbitral Award. However, TSA denied liability to pay the amounts due from the Claimants, stating that the BFA stood terminated when the Claimants failed to succeed with their claims.
In these circumstances, SBS filed an application before the Delhi High Court under Section 9 of the Arbitration and Conciliation Act, 1996 ("A&C Act") seeking measures to secure the amount awarded in its favour. A Single Judge of the Delhi High Court, by an order dated 07.03.2023 granted relief to SBS thereby directing TSA to disclose on affidavit their fixed assets and bank accounts along with credit balance held by them in India and any other jurisdiction and further directed them not to create any third-party interest/right/title in respect of any of their unencumbered immovable assets to the extent of the sum awarded in favour of SBS in terms of the Arbitral Award.
The learned Single Judge was of the opinion that TSA had not merely funded the arbitral proceedings but since it had an absolute discretion to cease the funding, it played a major role in controlling the proceedings. It accepted SBS's contention that, in view of the above, TSA was a 'real party' to the arbitral proceedings. The Single Judge held that a party, having funded the litigation for gain, could not escape the liability in case the result was contrary to its expectations. The court was of the prima facie opinion that the costs imposed upon the Claimants will be covered under the BFA as these were costs of litigation.
Against the impugned order, TSA filed an intra-court appeal under Section 37 of the A&C Act claiming that it is not liable to pay any amount to SBS and that the impugned order directing it to disclose its assets and restraining it from transferring or alienating any of its assets, is flawed. The Division Bench of the Delhi High Court allowed the appeal and set aside the impugned order.
The Judgment of the Division Bench:
Position of Non-Signatories to an Arbitration Agreement:
The Division Bench explained that a third party may be bound by the arbitral award in exceptional circumstances, which were rooted in the principle of consent. However, in the present case, there was no consensus between the parties to bind any third party to the arbitration agreement. TSA was neither a party to the arbitration agreement nor to the arbitral proceedings. It was also not a party to the Arbitral Award and the amount awarded in favour of SBS was not directed against TSA. It had merely funded the Claimants to pursue the arbitral proceedings and therefore it cannot be said to be a 'real party' to the arbitration proceedings.
The Division Bench held that a third-party funder in an arbitration cannot be fastened with a liability which they have not undertaken or are aware of. The Court observed that third-party funding plays an important role in access to justice because the costs in pursuing arbitral proceedings are huge, which may disable a person to pursue a valid claim. The court also opined that it is necessary to ensure that there is transparency in such third-party funding agreements and that the party funding is not exploitative.
However, the Bench at the same time observed that, it is essential for the third-party funders to be well-aware of the exposure and the liabilities which they are fastened with. In the case at hand, none of the clauses of the BFA provided any obligation for TSA to fund an adverse award. Further, the BFA had ceased to be in effect since the Claimants had not prevailed in the arbitration proceedings. In view of this, the Division Bench was of the view that TSA cannot be made liable for an obligation which it had never agreed to in the first place.
The Division Bench's decision was also based on the reasoning that Section 36(1) of the A&C Act provides for the arbitral award to be enforced in accordance with the provisions of Civil Procedure Code, 1908 in the same manner as if it was a decree of the court. Since, TSA was not a party to the arbitral award, it cannot be treated as a judgement-debtor under the arbitral award if it is enforced as a decree. Therefore, Section 9 of the A&C Act, cannot be brought into play against TSA i.e., against whom there is no arbitral award which can be enforced under Section 36 of the A&C Act. The Division Bench was of the view that absent any specific rules framed for third party funding arrangements , it cannot permit enforcement of an arbitral award against a non-party which has not accepted any such risk.
Third party funding in arbitration is likely to see growth in India and this decision is an important precedent. This is a controversial issue in India, with many grey areas. Under the common law, maintenance and champerty were barred. 'Maintenance' refers to an arrangement where a person agrees to fund or 'maintain' a litigation in which he has no interest. Further, if he bargains for a share of the outcome of such litigation to be ultimately decreed as a consideration of assisting its maintenance, it is known as champerty. Despite the rule against maintenance and champerty in other jurisdictions, India has never legally or expressly barred such third-party financial agreements.2 Indian courts have accepted that a reasonable arrangement to provide finances to support a lawsuit in exchange for a portion of the property, if recovered, is not against public policy.3 It would be interesting to see if the judgment of the Division Bench is appealed to the Supreme Court, and any ruling of the Supreme Court is likely to bring important clarity on this issue. In the coming future, it will be interesting to see as to how various stakeholders in the country engage with this ruling.
The decision emphasises the need for clear and well drafted agreements for third party funding, while bearing in mind that such agreements are likely to heightened scrutiny. The acknowledgement of third-party funding agreements by the Division Bench is likely to be a game-changer for arbitration in India, which is taking steps towards developing into a hub for international arbitration.
1. FAO(OS)(COMM) 59 of 2023.
2. Ram Coomar Coondoo v. Chunder Canto Mookerjee, 1876 SCC OnLine PC 19.
3. Nuthaki Veukataswami v. Katta Nagireddy, 1962 SCC OnLine AP 100.
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