Introduction
Third Party Maintenance essentially means that a third party that is not a party to the dispute funds the arbitration proceedings on behalf of a party in dispute either wholly or partly with the expectation of receiving a certain percentage of the arbitral award. The concept that leads to the development of third party funding as a concept is the Doctrine of Obsolete Maintenance & Champerty. To understand the doctrine the meaning of the words Maintenance and Champerty has to be understood separately. Maintenance means the involvement of a third party in a dispute where they have no interest. The meaning of Champerty can be understood as a heightened form of maintenance wherein the meddler is provided with certain benefits in return. In the present article, the authors shall discuss the developing jurisprudence of Third Party Funding in International Commercial Arbitration and India. The authors shall also discuss the complications which are brought with the funding process along with recommendations to develop this system in India.
International Arbitration And Third Party Fundings
International commercial arbitrations are partly renowned for the confidentiality of proceedings. The involvement of multinational companies, state utilities in some cases makes the requirement of confidentiality a huge factor in making the choice between arbitration or litigation. Arbitration protects the content of the proceedings and any sort of documents or materials in relation to the proceedings. The factor of confidentiality is not restricted to just the duration of the arbitration, it is in fact extended prior to and post the proceedings.
However, one can notice an issue with confidentiality, there lacks uniformity in the way institutional rules address confidentiality. An adequate solution is not found in the UNCITRAL Arbitration Rules as they simply talk about the confidentiality of the award if the parties consent to it. The Rules fail to address the various nuances of confidentiality. The similarity is noticed when the ICC and SCC Rules are analysed. These two rules lay the onus of maintaining confidentiality on the parties themselves. Analysing the LCIA and SIAC Rules, we can see a contrary stance as these rules give a very clear and distinct duty about confidentiality even in a situation when there is no express agreement on the same.
Concerns Regarding Confidentiality
When a third or a non-related party to dispute steps in to finance a legal claim then it nomenclatures to Third party funding. The said funding can be in part or full but entitles the said funder to a share in a favorable award. Further, in case of an adverse result or award, there is no entitlement whatsoever.
Though Third Party Funding is generally seeked as an aid or a financial support to achieve justice, apart from the legal risk management and mitigation, yet it has its own set of loopholes. Third Party Funding has paved way for another set of potential conflicts leading to frivolous claims, concerns regarding the very essence of confidentiality, and the very conflict of interests between parties to claims and third parties. Another set of shortcomings is in ICA the confidentiality clauses are so airtight that to resort to Third Party Funding becomes seldom impossible.
Since every coin has two sides, we see that Third Party Funding has indicated a landing towards increasing use and the problems not only need to be identified but reformed to be mitigated.
The concerns are both procedural and ethical and they revolve around arenas of conflicts of interest, arbitrator bias, security for costs, confidentiality etc. However, apart from these basic shortcomings, a few massive concerns arise when a party engages with a Third Party Funding to finance it. A glitch arises at the due diligence stage, where the details have to be exchanged between the funded party and the funder in the furtherance of case assessment. This is done by preserving business integrity, but the information is in the situation of open wedlock without any safeguards and can be misused, as a court observed in Sarah Lynnette Webb v. Lewis Silikn. This problem evinced from such information or data leak leads to ‘market abuse’.
Another set of concern is absence of privity to the proceedings i.e. the tribunal thereby lacks the competence to decide upon breach. Hence, an ambiguous legal framework providing little room for confidentiality highlights breaches and does more harm than good, and often the harm goes unassessed.
Further, there is no mandate to disclose Third Party Funding by the funder in ICA sometimes they remain so discreet that even the arbitrators are not aware of the existence of Third Party Funding, hence, such lack of a binding legal framework creates a pre-emptive loophole to prevent any misuse of such mechanism.
Often, Third Party Funding proponents take recourse of commercial interests and protection of business integrity yet the balance can only be maintained by a regime that promotes transparency with respect to funding and an overall legitimate interest assessment to preserve sensitive information and most importantly to conduct in good faith.
INDIA
Going by the applicable Act, the Arbitration and Conciliation Act doesn’t make any specific law regarding third party funding in India. The question regarding the provision of funds provided by a third party to the dispute to a party in dispute still remains a grey area that needs to be adjudged based on the question whether such provision is an absolute necessity or just another supplement provision. If the traces of the Third party funding cannot be tracked in Arbitration and Conciliation Act then the support of the Indian Contracts Act can be taken or not?
According to the Indian Contracts Act, 1872 Third party funding are valid agreements which carry the force of being legally enforceable just like any other agreement under the Act. as discussed above the concept of Maintenance and Champerty were first discussed in the case of Ram Coomar Coondoo v. Chunder Canto Mookerjee, wherein the concept of Maintenance and Champerty were declared to be legal in India but cannot be said to be applicable in toto. However with the development of Third Party Funding jurisprudence in India the courts recognized the concept to be legal in their decisions. The Apex Court in the case of Bar Council of India v. A.K. Balaji stated that there exists no implied bar on funding of litigation by any third party for getting an expected return after the decision is given.
But as the concept was recognised by the Apex Court certain caveats were also brought to light. While deciding the matter in Khaja Moinuddin Khan v. S.P. Ranga Rao The court held that the exceptions to the Doctrine of Maintenance and Champerty is that the share given to the party in return for funding the litigation shall not be unfair or unreasonable in proportion and if it appears so then such funding shall be declared to be against the public policy of India.
Recommendations For Applicability of Third Party Funding
- One of the cardinal principles behind choosing arbitration as a means of dispute resolution is the autonomy offered by the procedure. Herein the parties are given the freedom to choose their arbitrators along with the conditions under which they want to proceed. Therefore taking away their right to freedom of choice for the purpose of financial matters in violation of the principle.
- To ensure that Third Party Funding does not violate the public policy of the country it is pertinent to define the regulations which decides the level of interference a third party funder can exercise in the proceedings. This must include proper rules to be laid out before the beginning of the arbitration process in order to clarify the circumstances under which such funding has to be withdrawn.
- Rules for the protection of the funders are one of the moot questions that demand the recourse to be defined in the case where any dispute arises between the funder and the party. The lawmakers shall lay down the forum to be approached in such a scenario as well as what will constitute the overstepping the control boundary for both the funder and the party.
- India shall take suggestions from the already working models in other countries like Singapore, Hong Kong, etc who have embraced the concept of Third Party Funding in their legislation. These working models can help India develop a successful model in terms of the amendments required in already existing laws as well for the development of any new laws and institutions to deal with disputes of this and similar kind.
Conclusion
The concept of Third Party Funding is not new to the country as it has been functional in litigation for a long time. India has embraced arbitration wholeheartedly and it is the need of the hour to keep up with the pace of developments in the international arbitration scenario to ensure that the domestic laws align with the international laws for the success of arbitration as a means of dispute resolution. The shortcomings are natural in any procedure but it has to be borne in mind that for ensuring the success of the justice system certain difficult choices are to be made which will help overcome such concerns. If the concept is introduced in arbitration it can result in a game changer move which could make arbitration more attractive to the parties and can help India achieve the status of Arbitration hub globally.
This article is written by Khushi Sethia, Rakshit Kapoor and Suraj Shah, all are 4th year law student at the Institute of Law, Nirma University.
