Arbitration In IndiaThird Party Funding in Arbitration in India

The phrase “Third Party Funding,” which is becoming very common worldwide, is gradually making its way into India. This enables those who are having financial difficulties to seek arbitration without having to pay for it out front; instead, they can pay after the arbitration is completed and the case is resolved in their favour. Third-party funders, such as institutional investors or litigation financing firms, make this feasible by covering the costs of the case’s legal representation in return for a portion of the settlement. This approach works best for serious international arbitration disputes and on important commercial disputes where the claimant possesses a lot of winning claims, but is not able to get to them because of insufficient funds.

Let’s imagine a SME owner has a legal problem, but the work required to fight for arbitration is too great to ever be worthwhile. This problem is all too familiar to many individuals attempting to launch a business in India. Arbitration, which was formerly a quicker and less expensive alternative to litigation, has turned into a costly and challenging procedure in and of itself. The entire process is financially oppressive due to the combination of the cost of an arbitrator and legal costs, as well as the expenses of the institution and expert witness compensation. For many, this means completely giving up on legitimate claims, which takes away their ability to obtain justice.

Third Party Funding has been well integrated in the UK, Singapore, Hong Kong, Australia, and the US. These countries have clear regulations that govern enforcement, transparency and ethical use. These jurisdictions have adopted Third Party Funding to promote competition, cut down expenses, and increase the availability of justice. In India, on the other hand, Third Party Funding is still at a nascent stage in regards to the enabling legal structure. There is no blanket prohibition, but the absence of precise regulations muddles the legitimacy of funding contracts, conflicts of interest clauses, and other ethical issues.

Legal Framework Governing Third Party Funding in India

Although India does not have clear laws governing third-party funding in arbitration, this does not mean that it is entirely moot. The parties are able to enter into finance arrangements because the Arbitration and Conciliation Act of 1996 does not specifically reject Third Party Funding. The Civil Procedure Code of 1908 has allowed Third Party Funding in civil action in some areas, such as Maharashtra, Gujarat, and this state of Madhya Pradesh. This may have an impact on funding agreements pertaining to arbitration.

One of the most curious features is the relationship between Third Party Funders and professional responsibility. The Bar Council of India (BCI) has a rule that prohibits lawyers from providing funds to litigate on behalf of their clients. However, this does not hold for third-party funders. This allows these private investors to fund the arbitration cases without breaching conduct rules. In India, even without rigidly defined laws, the courts have shown readiness to accept Third Party Funding Agreements.

The Rise of Institutional Arbitration and Third Party Funding in India

Without a doubt, India’s growing focus on institutional arbitration has transformed the nation’s conflict resolution process. Arbitration in the nation has historically been primarily informal, with the parties to a dispute using straightforward procedures. The process is now more dependable and methodical, nevertheless, thanks to the creation of organisations like the Singapore International Arbitration Centre, the Delhi International Arbitration Centre, and the Mumbai Centre for International Arbitration. By offering arbitration services within predetermined protocols, these organisations assist both Indian and international parties, hence enhancing the parties’ comfort levels.

Third-party financiers are becoming more prevalent as institutional arbitration advances. Third Party Funding is already a standard procedure in international arbitrations, and funders are quite interested in financing conflicts in India since the country markets itself as a centre for international arbitration. International litigation financing firms have expressed interest in this type of Third Party Funding activity, particularly in international commercial arbitration. The complexity of the investment arbitration situation is growing, and the globalisation of business has also increased the allure of outside money. Cross-border business conflicts have become one of the main justifications for Third Party Funding in India. Third Party Funding has become very popular as international firms and investors come here to undertake arbitration hearings.

The expansion of Third Party in India has been impacted by each of these developments. As before, risk management in corporate India is still regarded as a very costly and difficult task. But the advent of Third Party Funding has altered how companies, particularly those in legal heavy industries like energy, construction, infrastructure, and even banking, now see arbitration as a resource. Businesses can spend money more wisely and pursue legitimate claims without endangering their operating cash flow when they receive outside funding.

Third Party Funding and international arbitration are supported by India’s integration, as is the country’s aspiration to become a major centre for arbitration. The best practices of other countries, particularly Singapore and the UK, where Third Party Funding is smoothly integrated into the dispute management system due to appropriate rules, are starting to be mirrored by India’s international arbitration centres. Appropriate legislation pertaining to third-party funding are essential given the Indian government’s strong support for arbitration and the gradually growing usage of alternative dispute resolution procedures.

Although Third Party Funding is not very well-known in India at the moment, it has built a name for itself in the arbitration space. Third-party funding will probably grow more necessary as corporations, arbitrators, and attorneys become more conscious of it. The future of Third Party Funding in India will be significantly influenced by the development of institutional arbitration, the growing trust of international investors, and the judiciary’s readiness to accept novel forms of litigation finance. However, in order for Third Party Funding to reach its full potential, India must address legislative gaps, establish clear disclosure standards, and ensure that funding agreements are enforceable in arbitration.

Challenges and Concerns Surrounding Third Party Funding in India

Despite its apparent advantages, third-party funding in India really raises a number of moral and legal concerns. The primary issue is the absence of a legal framework, which frequently leads to uncertainty over the enforceability of funding arrangements. Arbitral tribunals may have trouble determining whether Third Party Funding agreements are lawful in the absence of legislative intent when the funders have complete influence over the case, including the development of strategies and settlement talks.

The potential for having competing interests is another crucial factor. Third Party Funding adds a new actor whose financial interests could weaken the client’s position outside of typical legal representation, where the client has the last say. This raises the possibility that the funders will have excessive influence on procedural elements including choosing the arbitrators, managing the negotiations, and settling the claim. In order to prevent misuse of the arbitration process, it is imperative that Third Party Funding agreements address the arrangements that allow the parties to the arbitration to have control.

Another difficulty is secrecy. The funders must be aware of some sensitive details about the case before they agree to sponsor it, even though the majority of arbitral proceedings are confidential. This raises the possibility of issues with privileged communication and data protection. By enforcing mandated disclosure laws, nations like Singapore and Hong Kong have offered a solution to this conundrum, guaranteeing the highest level of transparency and the least amount of discretion. However, India lacks precise disclosure regulations, which causes arbitral tribunals to adopt inconsistent methods when it comes to declarations pertaining to third party funding.

Global Insights into Third Party Funding and the Indian Experience

India may learn a lot from the development of Third Party Funding in countries like the UK, Singapore, and Australia.  In the UK, funders are subject to ethical norms and transparency requirements thanks to self-regulation through the Association of Litigation Funders (ALF). By passing legislative revisions specifically allowing Third Party Funding in arbitration, subject to statutory disclosure requirements, Singapore and Hong Kong have taken things a step further.  These frameworks maintain the independence of arbitral procedures while guaranteeing that funders function within a specified legal context.

It is imperative that India adopt a regulatory system that balances accountability and adaptability. Legislative actions should clarify the legal status of Third Party Funding agreements, establish transparency standards, and define ethical guidelines in order to prevent funders from manipulating proceedings. Indian courts must also actively support the growth of Third Party Funding jurisprudence by issuing rulings that uphold finance agreements and place restrictions on donor control.

AMLEGALS Remarks

To fully integrate Third Party Funding into India’s arbitration system, significant changes are needed. The 1996 Arbitration and Conciliation Act must be changed to expressly recognise Third Party Funding arrangements. Regulations requiring the disclosure of financial terms, potential conflicts of interest, and funder engagement must be implemented in order to ensure transparency in financing arrangements.

The future of Third Party Funding will be greatly influenced by the judiciary’s adoption of it. The enforceability of financing arrangements, especially with reference to funders’ share of rewards, should be clarified by Indian courts. To standardize Third Party Funding procedures and shield claimants from unjustified financial obligations, it is also essential to establish clear precedents regarding the recoverability of financing expenses. In order to guarantee uniform disclosure requirements and ethical standards, Indian arbitration institutions should also implement Third Party Funding-specific regulations.

Accepting third-party funding in arbitration is a significant advancement for India’s alternative dispute resolution industry. Although the concept is gaining traction, the lack of a defined legal framework raises concerns about party sovereignty, morality, and enforcement. By drawing inspiration from international best practices, India may develop a systematic Third Party Funding system that enhances transparency, protects litigants’ rights, and maintains the integrity of arbitration procedures. With the right legal and judicial adjustments, Third Party Funding has the potential to revolutionise access to justice and enhance India’s reputation as an arbitration-friendly nation.

– Team AMLEGALS

For any queries or feedback, feel free to reach out to rohit.lalwani@amlegals.com