Applicability of a ‘Loser Pays’ Principle to a Third-Party Funder? Striking balance between accountability and access to justice

Applicability of a ‘Loser Pays’ Principle to a Third-Party Funder? Striking balance between accountability and access to justice

While allowing the appeal, the Division Bench laid the foundation for third-party funding to be more relevant in India as even though there was no express bar on Third-Party Funding in India, there did not exist any jurisprudence regarding the applicability and the legal framework of Third-Party Funding in India

The Division Bench of the Delhi High Court in its recent decision “Tomorrow Sales Agency Private Limited v. SBS Holding, IncAO (OS)(COMM) 59 of 2023” has finally paved the way for Third-Party Funding in India as this is one of the first judgements setting out the jurisprudence for Third-Party Funding in India.

While exercising its appellate jurisdiction, the Division Bench comprising Justice Vibhu Bakhru and Justice Amit Mahajan set aside the decision of the Single Bench to the extent that it directed the Third-Party Funder i.e. the Appellant to disclose its assets, furnish security for the amount awarded, and restrained it from alienating or encumbering its assets. The observation of the Single Judge that the Third-Party Funders were essential for access to justice in arbitration proceedings and thus, could not be mulcted with liability was also set aside on the basis of the fact that they did not undertake the liability and were merely aware of their exposure.

The particulars of the case in hand were that the Appellant was a Non-Banking Financial Company that had entered into a Bespoke Funding Agreement (BFA) to provide financial assistance to one SBS Transpole Logistics (SBS Transpole) for pursuing its claim for recovery of damages amounting to nearly Rs. 250 Crores against SBS Holdings and Global Enterprise Logistics (GEL), Singapore. It is pertinent to note that BFA is essentially a tailor made funding arrangement that denotes financial agreement specifically to meet the unique needs and requirements of the parties involved. In-fact, the word “bespoke” in the agreement itself suggests that the agreement has been crafted for a particular situation and suggests high level of customization instead of using a standardized off-the-shelf template.

What later transpired was that SBS Transpole failed in the arbitration and the Tribunal had awarded costs in favour of the Respondents (GEL). Consequently, the Respondents, GEL filed a plea for enforcement of the award but later found out that SBS Transpole did not have any funds or assets to satisfy the award and therefore, GEL sent a letter to the Appellant i.e. the third-party funder to pay the amount of cost awarded to SBS Transpole wherein the Appellant denied any obligations stating that the amount of costs was awarded against SBS Transpole and not the Appellant. They further claimed that since SBS Transpole had failed in their claims, the BFA stood terminated on the date when the arbitral award was announced.

Without considering the aforementioned, the Respondents approached the Single Judge who further passed the impugned order directing the Appellant as well as SBS Transpole to disclose its assets and the bank accounts in India and any other jurisdiction. Not only this, but the Single Bench also restrained the Appellant from creating any third party rights in respect of any unencumbered immovable assets till further orders.

The Division Bench while setting aside the aforementioned order held that there was no question of enforcing an arbitral award against a non-signatory (Appellant) who is not a party to the arbitral proceedings. Not only this, but the Division Bench also provided some elucidation on the disclosure obligations of a third-party funder as it held that since SBS Transpole had disclosed the existence of a third-party funder, it had no obligation to pay any amount under the arbitral award.

The Division Bench paved the way for Third-Party Funding in India as it disagreed with the contention of the Respondents that because the third-parties fund litigation so that if the claimants succeed in their claims they could derive the benefits, they should also be liable to pay the costs where such claims fail. It was further held that a third party may be bound by the arbitral award only if it has been compelled to arbitrate and is a party to the arbitration proceedings.

It is also pertinent to note that before approaching the Single Judge for enforcement of the arbitral award, the Respondents approached Singapore International Arbitration Centre (SIAC) for security of costs against the Appellants and the Arbitral Tribunal also denied to accede to the request of the Respondents as the Appellant was not a party to the arbitral proceedings and it was not even open for the Respondents to include the Appellant being a third-party funder as an additional party to the arbitration.

While allowing the appeal, the Division Bench laid the foundation for third-party funding to be more relevant in India as even though there was no express bar on Third-Party Funding in India, there did not exist any jurisprudence regarding the applicability and the legal framework of Third-Party Funding in India. More than granting legal jurisprudential guidance on Third-Party funding, the Division Bench shed some light on the importance of Third-Party Funding as it observed that in the absence of third-party funding, a person having a valid claim would be unable to pursue the same for recovery of amounts that may be legitimately due. This is a significant stride in the government’s endeavour to establish India as a hub of arbitration and encourage foreign parties to designate India as a preferred seat of arbitration.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.