Can Indian Third-Party Funders be made Party to Arbitration | Tomorrow Sales Agency (P) Ltd. v. SBS Holdings Inc.: A case comment

The Delhi High Court decision on third-party funding of arbitrations in India is proof of the concept to arbitrations being funded in India very consistently.¹ When we started researching our book on third-party funding², it was intriguing to find that the first litigation funding to reach court and held to be legal and valid was from way back in 1876.³

Many articles on the Delhi High Court judgment⁴ on third-party funding of arbitration have expressed a sigh of relief since the judgment acknowledges the necessity of third-party funding for Indian disputes to ensure access to justice. But the judgment has raised technical issues that shall become important for arbitrators and counsel when dealing with this subject going forward. We deal with one such issue which has been discussed in detail in our book.

Could the third-party funder have been made a party to the arbitration even if the SIAC Rules allowed it

To summarise quickly, SBS Transpole Logistics Private Limited (Transpole) failed to implement a business plan which required Transpole to integrate with SBS Holdings (SBS) and Global Enterprise Logistics Pte Ltd. (together “respondents”). The respondents sued Transpole for breach of contract and claimed damages. Transpole entered into a third-party funding arrangement with Tomorrow Sales Agency Private Limited (TSA), a non-banking financial company in India, to fund arbitration proceedings before the Singapore International Arbitration Centre (SIAC). The claimants believed that another company, SBS, caused financial distress to Transpole, and they sought damages from SBS for breaching their agreement. However, the claimants failed in their claims against SBS in the arbitration and the Arbitral Tribunal awarded costs to the tune of INR 96.2 million in favour of SBS. SBS requested TSA to pay the awarded amount, but TSA argued that they were not obligated to because the funding agreement terminated when the claimants lost their case.

SBS then filed an application under Section 9 of the Arbitration and Conciliation Act⁵, seeking TSA to pay the arbitration award costs. TSA filed an intra-court appeal against this decision under Section 37 of the Act⁶, which deals with appealable orders arising from arbitral proceedings.

The Delhi High Court in its judgment⁷, observed that the fact TSA was funding the claimants to pursue the arbitral proceedings against the respondents was duly disclosed before the Tribunal. The Delhi High Court observed that SBS did not take any steps to include TSA as a party to the arbitral proceedings nor attempted to secure any order against TSA. There is a reference to the SIAC Rules⁸ and an observation of the Court that TSA could not be joined as a party to the arbitral proceedings under the SIAC Rules, and SBS did not attempt to compel TSA to join the arbitral proceedings. But the judgment is silent on the definition of “party” itself under the Arbitration and Conciliation Act, 1996.⁹ A party here only means a party to an arbitration agreement. So, even if the SIAC Rules allowed, TSA could not have been made a party to the arbitration proceedings.

Unfortunately, such arbitrations are considered “hit and run” arbitrations internationally because they create a risk asymmetry — if the claimant would have won, the funder gets paid; if the claimant lost and incurred costs, the funder enjoys a “gamblers nirvana” of moving out without recourse.

What could SBS Holdings have done differently to mitigate its risks

The Delhi High Court rightly observed that the extent of third-party funding was duly disclosed. The Bench referred to a SIAC Practice Note¹⁰ on “Disclosure” and “Costs”. The Tribunal holds the power to order the disclosure of any funding relationship with an external funder, details of the external funder’s interest in the outcome of the proceedings and whether or not the external funder has committed to undertake adverse costs liability. The High Court observed that it was apparent that funding arrangements were required to be disclosed to the Arbitral Tribunal. Further, the Court also emphasised that although the Arbitral Tribunal may allocate costs among the parties, it cannot award costs against a third-party funder.

In an alternate arbitration universe, if someone finds themselves in the position of SBS Holdings, it is imperative to use the institutional rules for discovery of whether or not the third-party funding arrangement covers costs arising out of adverse orders. There is also the requirement to take protection through a security for costs order that was very much available to the respondents before the Tribunal as well as before the courts in India.

Although the High Court observed that permitting enforcement of an arbitral award against a non-party which has not accepted any such risk is neither desirable nor permissible, in many countries like the United States of America¹¹ courts have the powers to hold a funder responsible especially in cases where they have direct control over the course of the dispute resolution.

Most case summaries online portray the present situation, a proof of the proverbial adage that arbitral awards are difficult to enforce in India. But it is important to note here that the scales of justice were balanced even so late in the game by the Division Bench of Vibhu Bakhru and Amit Mahajan, JJ. by directing the claimant to disclose its assets and furnish security for the amount awarded in the arbitral award. The High Court further restrained the claimant from alienating or encumbering its assets.