Posted In: Alert
Posted By: Singularity Legal
1. The Division Bench of the Delhi High Court in Tomorrow Sales Agency Private Limited v. SBS Holdings Inc. and Ors. recently held that the litigation funders should not be liable to pay adverse awards where they are neither the party to the arbitration proceedings nor arbitral awards. The Court further confirmed that “third-party funding is essential to ensure access to justice.”
2. This decision was in an appeal filed by Tomorrow Sales Agency Private Limited ("TSA”), an NBFC with principal business of litigation funding, under Section 37 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”). The action was against the order of the Single Bench which held that the funder could be liable to pay costs awarded against the party it had funded.
3. The proceedings arise out of a SIAC arbitration brought by a logistics company, SBS Transpole (Fifth Respondent) (“Transpole”) and its promoters (Second to Fourth Respondents) (collectively, “Claimants”).
4. The Claimants’ allegation was that SBS Holdings Inc (“SBS Holdings”) and Transpole had agreed to integrate their businesses and SBS Holdings was in breach of its obligations. This breach caused financial crunch to Transpole leading it to subsequent liquidation.
5. Consequently, the Claimants had entered into a Bespoke Funding Agreement (“BFA”) with TSA whereby TSA agreed to provide financial assistance to the Claimants for pursuing their claim for recovery of damages of approximately INR 250 crores, including against SBS Holdings, for breach of their contractual undertaking.
6. The Claimants did not prevail in the arbitration and were ordered by the Arbitral Tribunal to pay costs. The Claimants failed to pay the amount awarded against them in terms of the Arbitral Award.
7. SBS Holdings noted that the Claimants did not have the wherewithal to satisfy the Arbitral Award. In pursuance of the same, SBS Holdings called upon TSA to pay the costs. However, TSA denied that it had any obligation to pay the costs as imposed on the Claimants.
8. Consequently, SBS Holdings initiated Section 9 proceedings under the Arbitration Act to secure costs under the Award from TSA. SBS Holdings inter alia sought an order to direct TSA to disclose its assets and to restrain it from creating any third-party interests or rights in respect of its assets.
9. The Single Bench noted that TSA had a vested interest in the outcome of the arbitral proceedings, having funded the Claimants for benefiting from the arbitral proceedings, and granted the order requested. TSA filed the appeal impugning this order (“Impugned Order”).
10. TSA is not liable to pay the costs ordered under the Award. Since the Claimants had not prevailed in their claims, the BFA stood terminated on the date of the Award and it had no further obligations thereafter.
11. SBS Holdings contended that:
(a) TSA funded the arbitral proceedings for its own profit and contended that it was a ‘real party’ to the arbitral proceedings. A non-signatory which claims the benefits of the contract can be bound by arbitration. TSA was such non-signatory and was thus bound.
(b) TSA had not merely funded the arbitral proceedings but had substantially controlled it. This argument was basis that under the BFA,
(i) exceeding the budget plan would require TSA’s prior consent,
(ii) TSA had discretion to cease funding in the event SBS Holdings was not found to be a proper party to the arbitration,
(iii) settlement could not be entered into by the Claimants without informing TSA, and
(iv) TSA had an exclusive, unfettered right on the damages recovered and would take precedence over any right of the Claimants.
(c) Relying upon the decision in Arkin v. Borchard Line Ltd. & Ors. and Excalibur Ventures LLC v. Texas Keystone Inc and Ors, the courts in the United Kingdom are empowered to determine by whom and to what extent the costs are to be paid. The court’s power is not limited to awarding the costs only against a party to the litigation.
(d) It is necessary to develop jurisprudence whereby, third-party funders can be held accountable for funding impecunious persons, if they are unsuccessful.
12. At the outset, the Delhi High Court reiterated that consent is the cornerstone of arbitration. In any event, the Respondents’ argument of binding non-signatory is not applicable as the issue is whether a person who is not a party to the arbitral proceedings or the award can be forced to pay the amount awarded against a party to the arbitration. The Court emphasised that in the present case, SBS Holdings is trying to enforce an award against TSA notwithstanding that TSA was not joined as a party to the proceedings. The Bench also rejected the sequitur that a third-party beneficiary, who may be bound by an arbitration agreement, would necessarily be bound by an arbitral award and would be obliged to discharge the same.
13. It was also noted that SBS Holdings did not take any steps to add TSA to the arbitral proceedings. Moreover, on disclosure of the BFA and consequent request by SBS Holdings for security for costs; the Arbitral Tribunal rejected its application for security for costs. The court observed that at this point as well, SBS Holdings did not take any measure to secure any order against TSA.
14. The provisions of Section 9 read with Section 36 of the Arbitration Act were considered and the Bench noted that Section 9 is available in aid of enforcement of an arbitral award. It is trite that a decree is to be executed in its term and it is not open for the executing court to go behind the decree. Therefore, TSA, not being a party to the arbitral award, cannot be treated as a judgment debtor.
15. The Court then considered the provisions of the non-recourse BFA. The Court inter alia noted that under the BFA:
(a) TSA had agreed to provide funding to the lawyers on behalf of the Claimants for pursuing the claims and recovery of the damages.
(b) TSA would provide financial assistance in pursuit of the claim in accordance with the budget plan on a non-recourse basis. Thus, if the Claimants are unsuccessful, TSA would not have any recourse for recovery of the amount financed.
(c) The budget plan could not be increased without TSA’s prior written approval.
(d) The parties had agreed that lawyers engaged for pursuing the claims would be required to open a client account for receipt of the monies from TSA.
16. The Court confirmed that none of the clauses of the BFA provide any obligation for TSA to fund an adverse award. Moreover, the court confirmed that BFA had ceased to be in effect as the Claimants had not prevailed in the arbitration proceedings.
17. The decisions relied upon by the Respondents with respect to court’s powers to order costs were wholly inapplicable as it was a power under specific statutes and to be made in exceptional circumstances Further, it is not a mechanical exercise and various issues are determined when ordering costs against non-parties. The Bench confirmed that are no rules applicable to proceedings in Delhi High Court for awarding costs against third parties. The Court noted that SBS Holdings has sought interim measures in aid of enforcement of the Arbitral Award and not costs against third parties in a suit.
18. With respect to the Respondents’ contention to hold funders liable for costs when claims fail, the court held that it cannot agree to such a view. The Court noted that the crucial points in relation to litigation funding:
(a) In 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. In many cases, the claimants become impecunious on account of the very cause for which they seek redressal. A person without the necessary means would have no recourse, in the absence of third-party funders. Third party funders play a vital role in ensuring access to justice.
(b) An order permitting enforcement of an arbitral award against a non-party which has not accepted any such risk, is neither desirable nor permissible. Whilst, there is no cavil that certain rules are required to be formulated for transparency and disclosure in respect of funding arrangements in arbitration proceedings, it would be counterproductive to introduce an element of uncertainty by mulcting third party funders with a liability which they have not agreed to bear.
19. The Impugned Order was set aside.
20. The Delhi High Court’s judgment is pathbreaking. The Bench recognized the importance of litigation funding and dealt positively in favour of the funders on an issue that has often arisen in recent times. The Bench, importantly, observed the importance of litigation funders to ensure access to justice.
21. The terms of the BFA are standard terms found in all funding agreements. The practical approach has bolstered confidence for the funders looking at active participation in the Indian market. This also confirms our opinion as a firm that there are no legal challenges for third-party funders to invest in cases with an Indian element.
22. This decision adds to the rich jurisprudence of litigation finance in India which has been discussed in our previous publications, including Litigation Finance in India, An overview of Litigation Finance in India, Litigation Finance of mass claims in India, and India appears ready for litigation funding but there are regulatory grey areas.