Background

In this particular case, a third-party funder, Tomorrow Sales Agency Private Limited (hereafter "TSA") registered as a non-banking financial company, entered into a customised funding agreement with the claimant, to provide financial funding for an arbitration administered by the Singapore International Arbitration Centre ("SIAC"). The claimant was unsuccessful in its claims during the arbitration and ended up with an adverse arbitral award, for costs. Subsequently, the respondents in the arbitration, SBS Holdings Inc. (hereafter "SBS") filed a petition under Section 9 of the Arbitration and Conciliation Act, 1996 ("A&C Act") before the Delhi High Court, seeking urgent interim measures of protection to enforce the award against the third-party funder, on the ground that TSA was in dire straits. The Single Judge of the Delhi High Court issued interim directions seeking a detailed disclosure of the third-party funder's assets and bank accounts, which was subsequently challenged by the third-party funder before the Division Bench of the Delhi High Court.

Judgement of the Delhi High Court

The Division Bench of the Delhi High Court in its judgment on 29 May 2023 in Tomorrow Sales Agency Private Limited v. SBS Holdings, Inc. and Ors.1 overturned the decision of the Single Judge. The Division Bench based their ruling on the principles that ordinarily an award cannot be enforced against a non-signatory to arbitration agreement, which was not a party to the award. The court emphasised that it would be counterproductive to impose a liability on third party funders that they had not agreed to assume, as it would introduce an element of uncertainty. The judgment of the Single Judge was set aside recognising the potential negative consequences of holding third party funders accountable without their express consent.

Overview of rights and liabilities of third-party funder

A non-signatory can be bound by an arbitration agreement based on both purely consensual theories (e.g., agency, assumption, assignment) and non-consensual theories (e.g., estoppels, alter ego).2 Consent may be imputed where it is found that the benefit of the contract has been assigned and accepted by the assignee, or where the non-signatory has substantially participated in the negotiations and is involved in the contract.3 Under the SIAC Rules, 2016, it was not open for SBS to add TSA as a party since TSA was neither bound by the arbitration agreement nor agreed to be included as an additional party to the arbitration.4 The Division Bench held that the conduct of third-party funders cannot be equated with that of a party which engages in the negotiations and facilitates the performance of the contract.

The Court also held that there was a difference between the three concepts of party, beneficiary, and funding party, and the liability of the funding party to pay the costs and award amount would have to be looked at from this perspective.

The principle that a non-signatory may be bound by arbitration,5 is limited to circumstances, where such non-signatory indicates by conduct its consent to be included in the arbitration,6 would not be applicable automatically to third parties, in cases where third-party funders have not intended to be included.

Enforcing an award against a third-party funder: When and How

The liability of a third party for the award amount would have to be construed on the basis of the funding arrangement.

Even if such liability was to be imposed on the funding party or any other third party, the same can be done only in exceptional circumstances7 and by determining inter alia questions of quantum, proportion, and identification of parties and would vary on a case-to-case basis. In this case, it was observed that:

  • The third-party funder was neither a signatory to the arbitration agreement, nor joined as a party to the proceedings and would therefore, ordinarily not be bound by the award;
  • In terms of the funding arrangement, the third-party funder's liability was at an end when the claimant was unsuccessful in arbitration; and
  • The arbitral tribunal was best placed to consider the relevant circumstances while awarding costs, and no order for allocating costs to the third-party funder was made by the tribunal.

The court held that enforcing the award against a non-party, which had not accepted such risk, would not be desirable nor permissible. An application for interim relief for securing the amount in dispute, would also not be maintainable.

The court also ruled that it could not come up with a straight-jacket formula for the liability of third-party funders for the awarded amounts. In this case, the court held that the funding arrangement made it clear that the arrangement had ceased to be in effect as the claimants had not prevailed in the arbitration proceedings. Moreover, there remains no rules or procedure for putting the onus to finance the award on the funding party or impleading them only for the said limited purpose.

It was also held that the enforcement of the award must be governed by the provisions of the Code of Civil Procedure, 1908. Further, the appellate court added that interim relief under Section 9 of the A&C Act also cannot be extended beyond the scope of the award.

Key Takeaways

  1. The judgment promotes wider accessibility to justice for parties in dire need of funding, while also protecting the rights of third-party funders from incurring liability which they have not agreed to bear.
  2. More so, this necessitates the need to formalise the third-party funding process in the Indian jurisdiction, akin to Singapore under the Civil Law (Amendment) Bill8 wherein third-party funding was validated in proceedings of international commercial arbitration and mediation. Similar provisions have been made in Hong Kong via the Mediation Legislation (Third Party Funding) (Amendment) Bill 2017.
  3. In this case, the SIAC tribunal disallowed security for costs since parties were financially capable of fulfilling their liabilities; however, it remains unexplored if the tribunal would have opined differently had had the parties been inept to do the same, plausibly tipping the scales in favour of SBS before the court.
  4. As per SIAC's Practice Note PN-01/17 dated 31.03.2017,9 there is a dual duty, firstly, on the parties to disclose any funding arrangements to the arbitrator and secondly, on the arbitrator to disclose any possible sources of conflict of interest arising from the same. Thus, transparency and disclosures regarding funding arrangements and decisions concerning funding parties need to be reasonably construed to avoid potential hindrances to enforcement.

Footnotes

* Kartikey Mahajan, Partner, Khaitan and Co., Singapore; Swastika Chakravarti, Senior Associate, Khaitan and Co., New Delhi, Aayushi Singh, Associate, Khaitan and Co, New Delhi.

1. Tomorrow Sales Agency Private Limited v. SBS Holdings, Inc. and Ors. 2023 DHC 3830-DB

2. Gary B. Born, International Commercial Arbitration, Volume I, (Third Edition), p. 1531.

3. Gvozdenovic v. United Air Lines, Inc. 933 F.2d 1100.

4. Rule 7.1, 7.8, SIAC Rules, 2016.

5. Id, ¶¶ 38 and 73.

6. Chloro Controls (India) (P) Ltd. v. Severn Trent Water Purification Inc. (2013) 1 SCC 641, ¶67.

7. Chloro Controls, ¶72.

8. Civil Law (Amendment) Bill, Bill No. 38/2016, https://sso.agc.gov.sg/Bills-Supp/38-2016/Published/20161107?DocDate=20161107, Accessed on 14 June 2023.

9. SIAC Practice Note PN – 01/17/ (31 March 2017) https://siac.org.sg/wp-content/uploads/2022/08/Practice-Note-for-Administered-Cases-%E2%80%93-On-Arbitrator-Conduct-in-Cases-Involving-External-Funding.pdf, Accessed on 14 June 2023.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com