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Protectionist Framework for Third-Party Funders

The author is Mayank Jain, third year student at Jindal Global Law School.


Introduction


The recent Delhi High Court ruling in Tomorrow Sales Agency Private Limited v. SBS Holdings, Inc. laid down that an arbitral award cannot be enforced against a third party that is not a part of the arbitration agreement/proceedings and is merely funding the entire process for one of the parties. This arrangement between a Third-Party Funder (TPF) and one of the disputing parties is based on the principle of quid pro quo, i.e., if the claims of the arbitrating party are awarded by the Arbitral Tribunal, the TPF happens to take a part of such sum. The Bespoke Funding Agreement (BFA), in the present case, between Tomorrow Sales Agency (TSA) and the Claimants laid down such stipulations where TSA would be provided with an amount/asset if the claims were successful and would not be entitled to recover any financed amount from the Claimants if the Arbitral Tribunal awarded against them.


The Arbitral Tribunal passed an award in favour of SBS and against the Claimants. Resultantly, SBS filed an application u/s 9 of the Arbitration and Conciliation Act, 1996, and asked for TSA to disclose their credit balance to recover the awarded amount from TSA. SBS solemnly believed that since the arbitral proceedings were initiated on account of the financial assistance offered by TSA itself, the latter had consented to be part of the arbitration proceedings. The Impugned Order of the Single Judge that was being challenged before the Delhi High Court had granted relief in favour of SBS and allowed them to enforce the arbitral award against TSA. The Single Judge noted – first, not only was TSA funding the entire process but also had a vested interest and consequent control over the proceedings. Second, the costs that SBS wanted to recover were found to be recoverable under the BFA and the termination of the agreement would have no bearing upon SBS’s agency to claim such damages. Thus, the Single Judge opined that TSA could not be allowed to escape liability just because the result was contrary to their expectation. This paper seeks to analyse the understanding of the Group of Companies (GoC) doctrine by the Division Bench and the pro-TPF stance laid down by the Court.


Funding does not signify the Intention


SBS contended before the Delhi High Court that the award can be enforced against TSA as it was a non-signatory that was a party to the arbitration agreement. The Delhi High Court rightly concluded that the Indian jurisprudence has provided for an expansive definition as to who constitutes a ‘party’ to an arbitration agreement. Here, the Court relied upon the Chloro Controls (I) P. Ltd. v. Severn Trent Water Purification decision where the following conditions were granted paramountcy while deducing whether a non-signatory could be made part of the arbitration proceedings – (i)intention of the parties, (ii)relationship between the parties and the non-signatory, (iii)commonality of subject matter and (iv)whether the agreement with the non-signatory formed a composite transaction. A composite transaction would simply mean a transaction with a shared and common business objective that cannot be achieved without the participation of the non-signatory.


Bakhru J. observed that the question of the imputation of a non-signatory to the arbitral proceedings must be brought up and dealt with before the Arbitral Tribunal passes an award. However, in the present case, no such plea was raised by SBS, and they were merely trying to enforce the award against a TPF since the latter had a perennial cash flow. Thus, there was never any intention on SBS’s part to compel TSA to arbitrate. The Court went ahead and stated that an award cannot be enforced against a signatory to an arbitration agreement against whom arbitration has not been triggered let alone a non-signatory. The Division Bench refuted the reliance placed upon Gemini Bay Transcription Pvt. Ltd. v. Integrated Sales Service Ltd. where a non-signatory tried to resist the enforcement of an award despite being a party to the arbitration proceedings. Resultantly, no parity can be claimed between the factual matrix of the Gemini Bay case and the facts of the case. Hence, the Court rightly pointed out that the first prong, i.e., the requirement of intention to include a third party in an arbitration agreement was itself missing and an attempt to recover damages using such a doctrine must be dismissed.


Secondly, the Court also dismissed SBS’s argument regarding the steering control TSA had over the claimants in the arbitral proceedings because of the financial assistance provided by the former to the latter. Court took notice of the dictum in Cheran Properties Ltd. v. Kasturi & Sons Ltd. wherein it was concluded that the GoC doctrine allows one to ascertain the intention of the signatories to the agreement and does not interfere with the separate legal personality of a corporation. Furthermore, it is pertinent to consider the judicial opinions in GMR Energy Ltd. v. Doosan Power Systems India and Shapoorji Pallonji and Co. Pvt. Ltd. v. Rattan India Power Ltd. both of which assert that to add a non-signatory to an arbitration proceeding, there must be pervasive control and management of the affairs as only that would show such a third party to be a real beneficiary of the arbitration agreement. The Court focused on Rules 7.1 and 7.8 of the SIAC Rules which lay down guidelines as to the addition of non-signatories to arbitration agreements. The Court noted that none of the conditions under the SIAC Rules were met and no endeavour was made by SBS to add TSA to the proceedings. Therefore, it would be wrong to enforce such an award against TSA.


Protecting Litigation Funding

The Division Bench made it amply clear that a mere TPF that has – (i)no intention of arbitrating and, (ii)no direct relationship with the parties to the arbitration agreement cannot be compelled to arbitrate let alone have an award enforced against them. The Courts elaborated how TPF cannot be mulcted with liability, which they have neither undertaken nor are aware of”. The Report of the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration noted that due to the inherent limitations imposed upon the jurisdiction of an Arbitral Tribunal due to the consensual and autonomous nature of such proceedings, no costs can be imposed so easily on a TPF. Unlike the general presumptions under which a non-signatory is added to the arbitration proceedings, a TPF forms an isolated commercial relationship with one of the disputing parties and does not have any concrete relationship with the arbitrating parties nor does it become a real beneficiary of the contract between the parties to the arbitration agreement. For eg: in Shapoorji Pallonji and Co. Pvt. Ltd. v. Rattan India Power Ltd., the Court noted that even though the contract and the arbitration agreement were entered into between Shapoorji Pallonji and Elena, the latter was a Special Purpose Vehicle created by Rattan India Power (RP). RP was a direct beneficiary of the contract as not only were the Bank Guarantees issued in favour of RP but Clause 8 of the Letter of Agreement also noted that Shapoorji Pallonji was entering into a contract with RP. Thus, it was reasonable for the Court to apply the alter ego doctrine, do away with the principle of separate legal personality and include RP in the arbitration proceedings.


Unlike other jurisdictions, India lacks a statutory framework to deal with TPF. Funding arrangements have evolved based on the evolution of judicial pronouncements. The Privy Council in Ram Coomar Coondoo v. Chunder Canto Mookerjee noted that funding agreements in exchange for some consideration cannot be regarded as opposed to public policy. However, a caveat was added which propounded that such arrangements must be carefully watched to promote bona fide objectives and justice. There is a need to transition to a statutory framework that is better able to regulate such funding agreements. Inspiration can be drawn from the Hong Kong Code of Practice for Third Party Funding in Arbitration which lays down regulations that make the entire funding process transparent for all the stakeholders. The Code ensures that the funded party can take independent decisions that are not driven by the interests of the funder. It also sets forth disclosure requirements to be made by both the funder and the funded party along with an exhaustive list of circumstances when the funding agreement can be terminated to prevent the TPF from escaping liability when the situation goes south. However, what is of notable importance in the Code is the section that deals with the liability of costs which clearly states that the funding agreement must provide if the TPF would be responsible to pay any form of costs in case an adverse award is pronounced by the Arbitral Tribunal. Thus, the legislation focuses on the text of the funding agreement to ascertain the intention of the funder and the funded party.


Such a form of provision for liability of costs becomes imperative because it would be unreasonable to expect the funder to pay the costs when they had little control over the arbitration proceedings. Furthermore, the funder had no control over the conduct of the funded party which resulted in the adverse award. A slightly radical approach would be the one adopted under Article 35 SIAC Investment Arbitration Rules which highlights that the Arbitral Tribunal has the power to take note of TPF agreements and at the same time can order the costs to be paid by some third entity instead of the disputing party. However, the Indian Courts in the absence of concrete legislation have adopted a more liberal framework for the liability of funders.


Conclusion


The Delhi High Court’s recent ruling shows the pro-funding and pro-arbitration bias of the judiciary. It was pertinently held that if more liability is imposed on a funder than what they endeavoured to take via the funding agreement, it would actively disincentivise such litigation funders and consequently, harshly impact the achievement of justice. The Court limited its analysis to the textual interpretation of the BFA that was signed and restricted itself from adding more words to the agreement than what was originally intended. The decision opened floodgates for future TPF agreements without the constant apprehension of undertaking non-assented liability by the funder. Not only does it provide greater access to the monetarily disenfranchised claiming party but it also successfully shields the funder from shamed manoeuvres of the party in whose favour the Arbitral Tribunal pronounced the award.







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