Third Party Funding in Arbitration

The concept of third party funding in arbitration is slowly being seen more prominently in India. This mechanism can be used to benefit both the sides of the balance that is the well established profitable companies and also, the growing business as a means for them to cover the costs the company entails due to the legal proceedings. However, this means of third party funding has its pros and cons which should be well understood before using the same as a resource. There are various concerns like that of confidentiality and  usage of classified information, the interests of the funders and conflicts of interests that may take place between various organs of the corporate body because of the involvement of the funder.

When third party funding is generally seen in the Indian context we see that in respect of civil suits, express recognition has been granted in states like Uttar Pradesh, Madhya Pradesh, Maharashtra and Gujarat. Rule 1 of Order XXV of Code of Civil Procedure 1908 (as amended by these states) has laid down that litigation costs can be secured by making the financier a party to the proceedings. In respect of third party funding in arbitration, there is no such express acceptance or bar as under the Arbitration and Conciliation Act of 1996 which governs arbitration in India and the procedural law of some states in India in respect of third party funding in civil suits cannot be taken as adducing legality to third party funding in arbitration.

In reality as the Arbitration and Conciliation Act of 1996 is silent on this aspect, it has been taken to be as nonexistent in India and till date, there is no such instance where third party funding has been used in arbitration proceedings. However, if third party funding is taken as a champerty contract which are contracts where the returns are contingent on the result, it doesn’t render it per se illegal except in cases where an advocate may be an party and also in cases, where the consideration of the agreement goes against any such law like gambling debt recovery then, it is rendered illegal by the Contract Act of 1872.

However, as third-party arbitration funding is gaining momentum all across the world, it is pertinent to understand the potential risks for a company and the ways in which these risks can be avoided or minimized. As per the present Arbitration and Conciliation Act of 1996, there would be a need to disclose the agreement between the company and the third party funder so as to establish the relationship between them as otherwise the financier or funder would not be allowed to continue. This exposes the company to a risk as the other party might use his influence to block the arbitration at any stage, even at the beginning or may cause unnecessary legal hurdles by challenging it on public policy grounds under the Contract Act of 1872. Moreover, a third party funding can expose the party to risks like conflict of interest, autonomy dilution, confidentiality breach and reluctance and discouraging attitude towards settlement only because a third party i.e the financier or funder is involved.  However, it is important to note that these are speculative in nature as there are no such instances in India of third party funding in arbitration before and hence, there has been no such instance where either the legislature or the executive or even the courts could form any such directions and laws on the same. If in case, later on, the third party funding agreements are rendered legal in respect of arbitrations, strict legal rules need to be formulated like restricting the financier’s interference rights, his rights in respect of termination of the arbitration agreement, rules in respect to non disclosures and confidentiality clauses in such agreements and the stipulation of penalties in cases where the funder or arbitrator has resorted to threat, duress or other modes to change the course of arbitration proceedings or terminate them.

In respect of third party funded arbitration, a major cause of concern arises in the form of confidentiality and privilege of access and use of sensitive information in the arbitration proceedings. The mere involvement of a non interested party to the proceedings merely because of the fact that they have contributed funds puts the highly confidential and sensitive data to an unprecedented risk. As there is no such data is present in the public domain respect of any such third party funded arbitration, the risks that such information is exposed to cannot be gauged. This risk of loss of confidentiality can be put in check by either entering into non disclosure or other such separate third party funding agreement or better still, by proper laws in place. The laws which are to be made should be made with the intent of avoiding unfair influence, economic duress or unlawful use of information which can affect the result of the proceedings or can affect the parties adversely. It should also take into account situations where the agreement can be rendered invalid because of violation on grounds of public policy.

The legal and ethical issues that are connected with third party funded arbitration hence show the imperative need for regulations to resolve potential interest conflicts, confidentiality, chances of partiality. It also becomes increasing important with the developments that are taking place in the global arbitration scenario especially in respect of international commercial arbitration. There is an imperative need to have laws and guidelines from a statutory authority as an external regulator so that the rules and parameters for third party funded arbitration agreement are crystal clear. Special attention should be paid to the fact that a level of uniformity and certainty is maintained in the agreements and constant assistance and help should be provided in later stages for proper regulation and implementation. The laws should also be framed in such a way that  limitations and penalties are provided in case there is a misuse of the third party funded arbitration agreements.

The establishment of the Mumbai International Arbitration Centre seems as a hope that all of the above stated ethical, legal and financial standards in respect of third party funded arbitration agreement will be brought into place and standardized soon.

Authored By:

Dhriti Dhairya,

LexisNexis India’s Student Ambassador



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