Third-Party Funding in International Commercial Arbitration: Next Step for India – Maitrey Chaudhary

Third-Party Funding in International Commercial Arbitration: Next Step for India

Maitrey Chaudhary
A student at NLU, Lucknow

During the ‘Arbitrate in India Conclave, 2022’ panel discussion, Justice Sikri highlighted India’s aspirations to position itself as the hub of international arbitration. It is safe to say that India is heading in the right direction. The Delhi International Arbitration Centre (DIAC) observed a remarkable surge in the cases listed in 2022, reaching over 6,000 cases. This is a substantial increase from the previous year’s numbers, as the cases listed in 2021 were only half of what was recorded in 2022. In 2013, PwC conducted a survey revealing that an overwhelming majority of companies, 91% to be exact, preferred arbitration as their chosen method for resolving disputes rather than resorting to litigation. These statistics suggest that arbitration is soaring high as a preferred choice for dispute resolution.

Even though arbitration is a preferred method of conflict settlement, the process’ high expenses are inevitable. The Apex Court identified, in one of the cases, the outrageous costs as one of the primary reasons responsible for the hindrance to the growth of arbitration. In Dolphin Drilling Ltd. v. M/s ONGC Ltd (2017) 443 SC, the Supreme Court termed the costs of arbitration as “unfortunate” in the Indian context. Therefore, if implemented meticulously, third-party funding can solve the problem and provide everyone with an equal right to access justice.

Third-party funding (hereinafter referred to as “TPF”), as the name suggests, is the mechanism wherein a third party who is otherwise not connected with the proceeding, funds the arbitral proceeding in a dispute for one of the parties, usually in consideration of certain financial gain. Funders have different motives for funding claims. Some invest from a business point of view where there is a possibility of earning a huge profit. On the other hand, funders might fund the proceeding not just for financial gain but because they’re against the subject matter in question, as was seen in an ICSID arbitral proceeding where the funding company was against the sale of tobacco products. Third-party funding is a relatively new concept in international arbitration but has gained immense popularity. The two primary reasons for its popularity are (i) it provides a level playing field for both parties and ensures that legitimate rights are not compromised due to scarcity of financial resources, and (ii) it provides an excellent opportunity for funders to make investments.

The growth of third-party funding was rather slow across jurisdictions due to the illegality of the doctrines of champerty and maintenance in the past[1]. Champerty refers to an agreement where the party and the third party aiding the proceeding share the proceeds. At the same time, maintenance means the involvement of an unrelated third party with neither interest nor locus. It is often argued that third-party funding is just another form of maintenance and champerty. Therefore, under common law regimes, it is thought to promote abuse of justice by individuals by associating themselves with frivolous claims in return for a share in the proceeds. The main arguments against maintenance and champerty were grounded in public policy and protecting the sanctity of justice.

However, over the years, English courts have highlighted that public policy should be dynamic and must evolve with changing times. The principles of maintenance and champerty have become less rigorously enforced over time. This can be observed in how the doctrines of maintenance and champerty were done away with in several jurisdictions.[2]

In modern times, TPF has been mostly held valid and legal. In Arkin v. Borchard Lines Ltd., the English Court of appeal displayed a favourable attitude towards TPF as a means to get access to justice that the party wouldn’t have had otherwise. Australian High Court, in one of the cases, held that “litigation funding per se was not contrary to public policy or abuse of due process.” This represents a significant shift in how ordinary law courts have traditionally approached the issue of third-party funding, as earlier attempts to declare it invalid were not in line with this new approach. In legislations like Singapore and Hong Kong, TPF was accepted with open arms, but India still remains silent about it.

Even though there is no express law in India that enables TPF in international arbitration, the doctrines of maintenance and champerty have been nullified by Indian Courts on numerous occasions. TPF is recognized for civil suits under Order XXV rules 1 and 3 of the Code of Civil Procedure, 1908 (state amendments of Maharashtra, Gujarat, Madhya Pradesh and Uttar Pradesh). This rule enables the Court to pass an order instructing the funder to give security for all costs incurred by the defendant. In the case of Ram Coomar Candoo v. Chunder Canto Mukherjee, Calcutta HC held that “a fair agreement to supply funds to carry on a suit in consideration of having a share in the property, if recovered, is not opposed to public policy and not illegal. However, such agreement ought to be carefully watched, when extortionate, unconscionable or made for improper objects, they ought to be held invalid.” The Apex Court, in a decision in the In Re GA Senior Advocate case, held that a TPF agreement is not per se illegal unless the third party itself is the advocate. However, each TPF agreement must be examined independently to ensure it is within public policy’s ambit. For instance, the Rajasthan High Court asserted that TPF agreements created to use litigation as a form of gambling and make exorbitant profits are not justifiable and cannot be upheld under legal scrutiny.

In 2017, the Report of the High-level committee (hereinafter referred to as “HLC”) to review the institutionalization of arbitration mechanisms in India supported the concept of TPF. The Report highlighted the importance of TPF in India for the promotion of the country as an arbitration hub that is on par with seats like Hong Kong, Singapore and Paris. Therefore, India’s position towards TPF, regarding legality and validity, has been its recognition and gradual adaptation into a legislative structure.

Despite the recommendation made in the HLC Report six years ago to introduce TPF in India, there has been no explicit legislation acknowledging the concept of TPF, nor does it find its mention in the Arbitration and Conciliation Act of 1996 (hereinafter referred to as “ACA”). This poses the parties, arbitrators and funders with numerous challenges as the regulations pertaining to TPF in the domain of arbitration are inadequately defined, leaving a significant degree of obscurity and ambiguity in their implementation.

TPF is a double-edged sword. On one hand, it can provide the benefit of levelling the playing field for parties with limited resources. Still, on the other hand, it can also introduce potential conflicts of interest and create Pandora’s box of ethical issues.

The first and one of the most significant issues arising from third-party funded arbitral proceedings is the enforcement of the awards. Under Sections 34(2)(b)(ii) and 48(2)(b) of the ACA, the Court can set aside or refuse the enforcement of the award if it is opposed to public policy. Public policy is generally highly subjective and dynamic, as illustrated by the courts over the years. It differs from jurisdiction to jurisdiction and is formed on a reading of common law principles with statutes while considering social, economic, moral and ethical considerations. For example, in India, there is no doubt that if a TPF agreement is entered into to fund the proceedings to get a share in the proceeds, it is not opposed to public policy. Conversely, in jurisdictions like Ireland, the courts have declared TPF violative of public policy. Therefore, while TPF is widely accepted, the difficulty in enforcing awards in anti-third-party regimes cannot be ignored.

Third-party funders mostly invest in claims with a high probability of reaping high profits. Before investing in a claim, funders consider the merits of the case. An investible claim should be strong, and there should be a recoverable profit margin between the damages sought and the legal costs incurred by the proceeding. Report of the ICCA-Queen Mary Task Force on Third-Party Funding In International Arbitration reveals that the funders reject almost 90 percent of TPF applications. In a survey conducted by MNLU Mumbai, it was found that the success rate fluctuated between 20 to 80 per cent and was higher for funders who funded a higher number of cases. Therefore, only a few funders, willing to undertake such costs and expenses, invest in a large number of claims. This gives rise to a conflict of interest and chances of impartiality and arbitrariness on the arbitrator’s part. The problem arises from the repeat appointment of the same arbitrator by a party funded by a funder who has already funded proceedings. The problem calls for fair disclosure of such TPF arrangements to maintain impartiality and fairness. Although the parties are not obliged to reveal the funder’s name under ACA, the arbitrator is duty-bound to disclose any circumstances that might raise doubts regarding its independence and impartiality under Section 12 of ACA. The International Bar Association: General Standard 7 of the Guidelines on Conflict of Interest in International Arbitration has also mandated the disclosure of TPF arrangements and also allows parties and arbitrators to submit a list of funders with whom they have had a pre-existing relationship, aiding in the identification of any conflict of interest.

In Essar Oilfields Services Ltd. v. Norscot Rig Management, the English Court upheld the validity of TPF and allowed the claimant to recover indemnity costs from the third party. The principle applied was that the cost of funding could be included in the awards granted by the tribunal. Under Rule 33.1 of the SIAC Investment Arbitration Rules, the tribunal can take the TPF agreement while deciding upon the apportionment of costs. This shows that the concept of security costs in TPF is accepted across jurisdictions. Therefore, the tribunal could apply the same principle when deciding adverse costs. The tribunals can impose expenses against the funders, and the funder is responsible for any unwelcome expenses incurred during the proceeding.

Even though TPF is not specifically barred in India, the factors essential for the growth of a robust TPF regime are scarce. Still, it wouldn’t be wrong to say that India has set its foot in the right direction. For instance, there is a scarcity of domestic funders in India, but several legal startups have come up to solve this problem. A legal technology startup called LegalPay has announced plans to launch India’s first third-party litigation funding platform. Advok8 is another startup that has created a third-party funding market through crowdfunding. Organizations like the Indian Association of Litigation Funders have also surfaced, aiming to develop self-regulation and promote knowledge development of litigation finance in India.

From the illegality of doctrines of maintenance and champerty to the Borchard judgement, the concept of TPF has evolved significantly. The HLC report recognized jurisdictions like Singapore, Hong Kong and Paris as arbitration-friendly and considered regulation of TPF as a major reason for their success in becoming arbitration hubs. Analyzing the principles and experiences of these ‘renowned’ seat arbitration, it can be said that without TPF, it would be challenging for India to attain its goal of becoming a leading arbitration hub globally.

Indian arbitration scenario is in dire need of a regulatory framework to introduce third-party funding in India statutorily. The framework should be made from an eclectic approach, and it must learn from renowned arbitration seats like Singapore and Paris. The framework must contain the following necessary rules and characteristics: (i) mandatory disclosure of the identity of the funder, (ii) inclusion of indemnity costs while deciding awards, (iii) Introducing a universally applicable standard of conduct of parties, arbitrators and funders.


[1] Sai Ramani Garimella, ‘Interrogating Third Party Funding in Investment Arbitration: The Need for Regulation in the UK and India’ (2019) 16 Manchester J. Int’l Econ. L. 213.

[2] Gladwin Issac & Trishna Menon, ‘Walking the Tightrope of Third-Party Funding in Arbitration in India: Challenges, Opportunities and Prospects’ (2020) IALR 1.

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