Third-party funding in international arbitration: Indian perspective and global trends

1 Introduction to third-party funding in international arbitration

Third-party funding (TPF) has emerged as a transformative force in international arbitration, enabling claimants with meritorious claims to pursue justice without bearing the prohibitive costs of arbitration. In essence, TPF involves a non-party funder agreeing to finance the costs of arbitration in exchange for a share of the proceeds if the claim is successful. This practice has grown exponentially over the past decade, driven by the increasing complexity and cost of international arbitration, as well as the recognition that access to justice should not be limited by financial constraints.

In India, the concept of third-party funding is still evolving. While the Arbitration and Conciliation Act, 1996 does not explicitly address TPF, the Supreme Court of India has recognized the legitimacy of third-party funding in certain contexts. However, there are significant ethical, regulatory, and procedural issues that arise in the context of TPF, including questions of disclosure, conflicts of interest, and the impact on costs and security for costs.

2 Global trends in third-party funding

Globally, third-party funding is now a well-established feature of international arbitration. Jurisdictions such as the United Kingdom, Australia, Singapore, Hong Kong, and the European Union have embraced TPF, with regulatory frameworks that balance the benefits of funding with the need to protect the integrity of the arbitral process.

In the United Kingdom, the Supreme Court's decision in R (on the application of PACCAR Inc) v. Competition Appeal Tribunal (2023) clarified that litigation funding agreements (LFAs) are not damages-based agreements, thereby allowing funders to operate without being subject to the strict regulatory regime for DBAs. In Australia, the High Court has recognized the validity of third-party funding, and the Australian Securities and Investments Commission (ASIC) has issued guidelines for funders.

Singapore and Hong Kong have emerged as key hubs for TPF in Asia. Singapore's Civil Law (Third-Party Funding) Regulations (2017) permit third-party funding in international arbitration and related proceedings, subject to certain conditions. Hong Kong's Arbitration Ordinance was amended in 2017 to allow third-party funding for arbitration, and the Law Reform Commission has issued further recommendations.

3 Indian perspective on third-party funding

In India, the legal framework for third-party funding is less developed, but there are several important developments. The Supreme Court of India, in Bar Council of India v. A.K. Balaji (2018), observed that third-party funding is not prohibited under Indian law, provided it does not amount to champerty or maintenance. However, the Court also noted that the legality of funding agreements must be assessed on a case-by-case basis.

The Indian government and the Law Commission have also considered the issue of TPF. The Law Commission's 246th Report on "Amendments to the Arbitration and Conciliation Act, 1996" (2014) recommended that third-party funding be regulated, but no legislative action has been taken so far. In 2023, the Ministry of Law and Justice constituted a committee to examine the feasibility of introducing a regulatory framework for TPF in arbitration.

Currently, third-party funding is governed by the general principles of contract law, and the specific provisions of the Arbitration and Conciliation Act, 1996. Funders typically enter into a funding agreement with the claimant, which sets out the terms of funding, including the payment of arbitration costs, the share of the proceeds, and the conditions for termination.

4 Funding agreements and key terms

A third-party funding agreement is a contract between the funder and the claimant, which governs the terms of the funding arrangement. Key terms typically include:

• Scope of funding: The funding agreement specifies the costs that will be covered by the funder, including legal fees, expert fees, arbitral tribunal fees, and other expenses.
• Return on investment: The funder is entitled to a share of the proceeds if the claim is successful. This share is usually a percentage of the award or settlement, and may be calculated as a multiple of the funded amount.
• Conditions for funding: The funding agreement may include conditions for funding, such as the claimant's compliance with certain obligations, the conduct of the arbitration, and the provision of information to the funder.
• Termination: The funding agreement may provide for termination in certain circumstances, such as the claimant's failure to comply with the terms of the agreement, or the funder's decision to withdraw funding.
• Confidentiality: The funding agreement typically includes provisions to protect the confidentiality of the arbitration and the funding arrangement.

5 Ethical issues and professional responsibility

Third-party funding raises significant ethical issues for arbitrators, counsel, and funders. The primary concerns include:

• Disclosure: Whether the existence and identity of the funder should be disclosed to the tribunal and the other party. Disclosure is essential to identify potential conflicts of interest and to assess the impact of funding on the proceedings.
• Conflicts of interest: Funders may have relationships with arbitrators or counsel that give rise to conflicts of interest. It is essential to ensure that the arbitral tribunal is impartial and independent.
• Confidentiality: The involvement of a funder may compromise the confidentiality of the arbitration. Funders are typically bound by confidentiality obligations, but there is a risk that information may be disclosed inadvertently.
• Professional responsibility: Counsel have a duty to act in the best interests of their clients, and to ensure that the funding arrangement does not compromise their professional independence.

6 Disclosure of third-party funding

The disclosure of third-party funding is one of the most contentious issues in the context of TPF. The key question is whether the existence and identity of the funder should be disclosed to the tribunal and the other party. The leading institutional rules, such as the ICC Rules, SIAC Rules, and LCIA Rules, have all introduced provisions requiring disclosure of third-party funding.

In India, the Arbitration and Conciliation Act, 1996 does not specifically address disclosure of TPF. However, the Supreme Court of India, in Afcons Infrastructure Ltd. v. Cherian Varkey Construction Co. (P) Ltd. (2010), recognized that the tribunal has the power to order disclosure of funding arrangements if it is necessary for the fair conduct of the proceedings. The NCLT has also considered issues of disclosure in the context of insolvency and arbitration.

7 Costs, security for costs, and third-party funding

Third-party funding has a significant impact on costs and security for costs in international arbitration. The presence of a funder may affect the tribunal's decisions on costs, including the allocation of costs and the ordering of security for costs.

In general, the tribunal has discretion to allocate costs based on the outcome of the case. However, the involvement of a funder may influence the tribunal's decision, particularly if the funder's conduct has increased the costs of the proceedings. The tribunal may also consider the funder's financial resources when determining whether to order security for costs.

In India, the Supreme Court has held that the tribunal has the power to order security for costs, but this power should be exercised sparingly and only in exceptional circumstances. The Court in Fuerst Day Lawson Ltd. v. Jindal Exports Ltd. (2011) clarified that the tribunal may consider the financial resources of the parties and the existence of third-party funding when determining whether to order security for costs.

8 Third-party funding and investor-state arbitration

Third-party funding has become particularly prominent in investor-state arbitration, where the costs of pursuing a claim can be prohibitive. Investors often turn to third-party funders to finance the costs of arbitration, including legal fees, expert fees, and arbitral tribunal fees.

The use of TPF in investor-state arbitration raises unique issues, including the question of whether funders can be held liable for costs, and the impact of TPF on the settlement of disputes. The ICSID Convention and the UNCITRAL Rules do not specifically address TPF, but the tribunals have addressed the issue on a case-by-case basis.

In India, the use of TPF in investor-state arbitration is less common, but it is likely to increase as India continues to attract foreign investment. The Indian government has signed several bilateral investment treaties (BITs) that provide for arbitration, and it is expected that TPF will play a role in future disputes.

9 Regulatory approaches to third-party funding

Different jurisdictions have adopted different regulatory approaches to third-party funding. The key regulatory models include:

• Permissive approach: Jurisdictions such as Singapore and Hong Kong have enacted legislation that expressly permits third-party funding in international arbitration and related proceedings, subject to certain conditions.
• Regulatory oversight: Jurisdictions such as Australia have established regulatory bodies, such as ASIC, to oversee the activities of third-party funders.
• Self-regulation: In the United Kingdom and the United States, third-party funding is largely self-regulated, with funders adhering to voluntary codes of conduct.
• Restrictive approach: Some jurisdictions, such as China and the Middle East, have adopted a more restrictive approach to TPF, with limited recognition of the practice.

10 Third-party funding and insolvency

The intersection of third-party funding and insolvency is a complex and evolving area. In the context of insolvency proceedings, third-party funding may be used to finance claims against the corporate debtor or to fund the pursuit of claims by the corporate debtor.

In India, the Insolvency and Bankruptcy Code, 2016 (IBC) does not specifically address third-party funding. However, the National Company Law Tribunal (NCLT) has recognized the validity of third-party funding in certain cases, particularly where the funding is necessary to ensure the success of the insolvency process. The NCLT has also considered the disclosure of funding arrangements in the context of insolvency and arbitration.

The Supreme Court of India, in Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta (2020), held that the resolution professional has the power to enter into funding arrangements for the purpose of pursuing claims, subject to the approval of the committee of creditors.

11 Practical strategies for practitioners

For practitioners in India and internationally, navigating the landscape of third-party funding requires careful planning and strategic thinking. The following strategies are recommended:

• Early assessment: Assess the feasibility of third-party funding at the outset of the arbitration. Consider the likelihood of success, the amount at stake, and the costs involved.
• Due diligence on funders: Conduct thorough due diligence on potential funders, including their financial resources, track record, and reputation.
• Drafting funding agreements: Ensure that the funding agreement is carefully drafted, with clear provisions on the scope of funding, the return on investment, termination, and confidentiality.
• Disclosure: Be prepared to disclose the existence and identity of the funder to the tribunal and the other party, in accordance with the applicable rules and ethical guidelines.
• Manage costs: Work with the funder to manage the costs of arbitration effectively, including the costs of experts, discovery, and hearing.
• Monitor judicial developments: Stay updated with the latest judgments of the Supreme Court, NCLT, NCLAT, and other tribunals on third-party funding.

12 Emerging trends and future directions

The future of third-party funding in international arbitration is likely to be shaped by several key trends:

• Increased regulation: More jurisdictions are likely to introduce specific regulations for third-party funding, including requirements for disclosure and ethical conduct.
• Use of technology: Technology is playing an increasing role in third-party funding, with funders using data analytics and AI to assess the merits of claims and to manage the costs of arbitration.
• ESG considerations: Environmental, social, and governance (ESG) factors are becoming more important in funding decisions, with funders increasingly focusing on claims that align with ESG principles.
• Cross-border coordination: The development of a global regulatory framework for third-party funding is likely to be a key area of focus for international organizations, including UNCITRAL and the ICC.
• India's role: India is likely to play a more significant role in the global third-party funding market, with the government and the judiciary taking steps to clarify the legal framework for TPF.

13 Comprehensive glossary of third-party funding terms

This glossary provides definitions of key terms relevant to third-party funding in international arbitration.

14 Further resources and reading

For practitioners seeking to deepen their understanding of third-party funding in international arbitration, the following resources are recommended:

• Books: "Third-Party Funding in International Arbitration" by Victoria Shannon Sahani; "The Law and Practice of Third-Party Funding in International Arbitration" by John P. Reilly; "International Arbitration and Third-Party Funding" by Michael Pryles.
• Journals: "Indian Journal of Arbitration Law", "Journal of International Arbitration", "Global Arbitration Review".
• Websites: ICC, SIAC, LCIA, HKIAC, and other institutional websites for rules and guidance; Ministry of Corporate Affairs for updates on IBC; UNCITRAL for model laws and guidelines.
• Continuing Legal Education: Participate in seminars, conferences, and webinars on third-party funding and international arbitration to stay updated with the latest developments.