Abstract
Disputes have become a significant financial burden for businesses in India, making it harder for them to manage resources effectively. There’s a large backlog in courts and tribunals dealing with debts, consumer complaints, accident claims, and insurance cases, which require urgent attention. Third-party funding (TPF) could be a helpful solution to address this. TPF is a financing method where an external entity, not directly involved in a dispute, provides money to cover legal fees or other costs related to the dispute.
This practice is common in countries like the UK, Singapore, and Australia, and could also benefit India. However, for TPF to work effectively in India, especially in domestic arbitration, certain aspects of the Arbitration and Conciliation Act of 1996 need to be reconsidered. The main issue with implementing TPF in India is the lack of clear regulations or guidelines on how it should work.
While TPF is legal in India, there are concerns about confidentiality, disclosure requirements, and the potential for bias or conflicts of interest among arbitrators. These issues need to be carefully examined in the context of the existing legal framework to fully understand how TPF can be applied. The book Third Party Funding of Dispute Resolution highlights these challenges and provides insights into how TPF can be successfully introduced in India.
Key Technical Barriers
One of the main challenges in using third-party funding (TPF) for disputes in India is dealing with ethical issues and potential conflicts of interest. When a third-party funder is involved, it can raise concerns about whether the arbitrators (the people making decisions in the case) remain independent and unbiased. According to Section 12 of the Arbitration and Conciliation Act, arbitrators must stay impartial and not let any personal connections or interests affect their decisions.
However, when TPF is involved, the funder’s influence could raise doubts about the arbitrator’s neutrality. For example, if the funder has a relationship with the arbitrator, or if the arbitrator has financial or personal interests that could be impacted by the TPF arrangement, it might affect their ability to make fair decisions.
The Arbitration Act provides guidelines on what might be seen as a conflict of interest, especially after an amendment in 2015, which added a list of situations where an arbitrator’s neutrality could be questioned. Section 12 also requires arbitrators to disclose any potential conflicts before they are appointed.
However, these rules don’t specifically address situations where TPF is involved, which could create unique issues. In the book Third Party Funding of Dispute Resolution, the authors explain that while the rules for maintaining impartiality are clear, they don’t fully cover the complexities of TPF. To deal with these conflicts, it may be helpful to add clearer rules, such as requiring more detailed disclosures about the relationships between arbitrators and funders. This would increase transparency and help ensure that the arbitration process remains fair and unbiased, even when TPF is used.
Confidentiality and disclosure requirements
A major challenge in using third-party funding (TPF) for arbitration is the issue of confidentiality. In arbitration, confidentiality is very important, and it is protected under Section 42-A of the Arbitration and Conciliation Act. This section requires that the arbitrator, the arbitral institution, and all parties involved in the case keep all details of the arbitration private. The only exception is that the final decision (the arbitral award) can be shared if needed for it to be enforced.
However, when a third-party funder is involved, it becomes difficult to maintain this level of confidentiality. This is because the funder may need to know certain sensitive information about the case to decide whether to support it financially. Sharing this information with the funder could potentially compromise the confidentiality of the entire arbitration process, which is a concern when TPF is used.
Party to an Arbitration Agreement
Under Section 2(1)(h) of the Arbitration and Conciliation Act, a “party” refers to someone who is directly involved in the arbitration agreement. This means that a third-party funder, who is not part of the arbitration agreement, is technically not considered a “party” in the dispute. While there has been some debate about whether entities like funders should be considered parties to arbitration, there is not enough legal guidance to suggest that they should be.
Moreover, making funders equal to the actual parties in the case might disrupt the fairness and balance of the arbitration process, which should focus on the rights and obligations of the people directly involved in the dispute.
In a recent Delhi High Court ruling, it was noted that while some international arbitration rules allow funders to become parties, Indian law doesn’t support this idea. The court concluded that, under Indian law, a funder cannot be treated as a party in arbitration proceedings. This was because the term “party” in the Indian Arbitration Act refers only to those who are part of the arbitration agreement.
Funding agreements are usually confidential, and strict confidentiality rules could prevent parties from disclosing information about the funding arrangement. However, to ensure fairness and transparency in TPF cases, it’s recommended that funders follow the same confidentiality rules as the disputing parties. This could be achieved by requiring funders to sign non-disclosure agreements and setting clear rules on what information can be shared. This way, confidentiality can be maintained, and the integrity of the arbitration process won’t be compromised by the involvement of a third-party funder.
Challenge to Party Autonomy
A major issue with third-party funding (TPF) in arbitration is the level of control the funder might have over the proceedings. When a funder provides money in exchange for a share of the arbitration’s outcome, it can help financially strained parties access justice. However, it also raises concerns about how much influence the funder might have on the process and decisions.
Arbitration is based on the principle of party autonomy, which means that the parties involved should have control over key aspects like choosing the arbitrators and setting the procedural rules. But the involvement of a funder might interfere with this control, as the funder may try to influence decisions or introduce their own interests into the case.
In some countries, funding agreements that give funders too much power can be considered illegal or against public policy. While this is not an issue in India, it’s still important to ensure that the funding agreement doesn’t give the funder excessive control, which could undermine the actual parties’ autonomy in the dispute.
To avoid such problems, clear rules are needed, and some international guidelines help address this. For example, the Hong Kong Code of Practice and the UK’s Code of Conduct for Litigation Funders both emphasize that funders should not pressure or control the party they are funding, nor should they influence the legal team. These guidelines also ensure that if a funder wants to give input on settlement decisions, the process is clearly defined, maintaining transparency and fairness in the decision-making. This way, the integrity of the arbitration process is protected, and the rights of the disputing parties are upheld.
What could be the way forward for TPF in India
Since third-party funding (TPF) is still in its early stages in India, it’s important to set clear rules about how much control a funder can have over the arbitration process. This is to make sure the funder doesn’t influence the decision-making, affect the impartiality of the arbitrators, or unfairly impact the outcome of the case. One way to handle this is by requiring full transparency about the funder’s role and influence.
This would allow the parties and the arbitrators to assess any potential conflicts of interest and decide whether the funding arrangement is acceptable. For example, in the UK, the Supreme Court ruled that litigation funding agreements (LFAs), which share in the damages, must follow certain legal rules to be valid. This ruling has made parties more careful in reviewing their funding arrangements to ensure they meet the necessary legal standards.
Similarly, in India, it would help to limit how much a funder can communicate with the arbitrators or influence the selection of arbitrators. This would preserve the independence and fairness of the arbitration process. Additionally, funding agreements should clearly state that the funder’s role is only to provide financial support and that the disputing parties retain control over important decisions, such as choosing the arbitrators or making settlement decisions.
By establishing these guidelines, India can allow third-party funding to grow while also protecting the fairness and independence of arbitration. This would encourage trust in the process, making it more attractive for businesses in India. Even though there are still challenges, TPF has already started gaining popularity, with examples like the success of LegalPay in the Sare Gurugram case. To fully integrate TPF into India’s legal system, it’s important to develop a clear legal framework. This framework should address the unique challenges of TPF while learning from the best practices in countries like Hong Kong, Singapore, and the UK, which can provide useful insights for India.