Delhi High Court says third party funder not liable for adverse cost award

In Tomorrow Sales Agency v SBS, the Delhi High Court ruled that a third party funder was not liable to pay an adverse cost award on the basis that it was not party to the arbitration agreement. This is one of the first judgments of the Indian courts relating to the status of third-party funding (“TPF”) in arbitration (as opposed to TPF for litigation which, subject to certain conditions, is established in India). 

We consider the implications on parties involved in India-related arbitration or enforcement proceedings.

The Delhi High Court judgment

The dispute arose from an SIAC arbitration worth c. USD 48 million, where the claimants were funded by a third-party funder. The claimants were unsuccessful in the arbitration and were ordered to pay the respondents’ costs of c. USD 1.2 million. Concerned that the claimants were not good for the money, the respondents sought relief directly against the funder, applying to the Delhi High Court for interim measures (disclosure of assets, furnishing of security and restriction from creating charges on assets) to secure the award.

The relief was initially granted by a single judge on the basis that the funder was a “real party” to the arbitration, by virtue of its budgetary control over the proceedings, priority claim over any damages awarded, and influence over a possible settlement.

On appeal by the funder, the Delhi High Court set aside the interim orders, finding there to be “no question of enforcing an arbitral award against a non-signatory [the funder], who is not a party to the arbitral proceedings” [37].  It disagreed with the single judge’s characterisation of the funder as a de facto party to the arbitration, as this would be antithetical to party autonomy and consent that was central to arbitration. It could be bound by the arbitral award only if it has been compelled to arbitrate and is a party to the proceedings, but here it was clear that the funder was not a party to the arbitration agreement and no attempt had been made to join it as a party [36, 38, 46]. The Court also had no procedural power to implead third parties for the limited purpose of satisfying a cost award [65].

More broadly, the Court recognised the vital role played by third party funding as “essential to ensure access to justice” [73]), and that it was therefore “essential for third party funders to be fully aware of their exposure” – any uncertainty in this regard “would dissuade third party funders to fund litigation” ([74]). However, the fact that a party is externally funded would be a relevant fact in ordering security for costs, and in this regard transparency and disclosure in relation to the involvement of external funders would be essential [75].

Key takeaways on navigating TPF in Indian arbitrations

Unlike in the UK, Hong Kong and Singapore, in India there is not yet any express code of conduct for TPF (though there are indications that the Indian Association for Litigation Funding is developing one), and there has so far been little guidance from the Indian courts as to the validity and status of third party funding.

This decision is therefore significant as it indicates that third party arbitration funding is not impermissible in India and is a key aspect of the legal ecosystem. 

The decision also demonstrates an adherence to the consensual nature of arbitration including where external funders are involved – enforcement of awards and associated interim relief will generally not be ordered against funders (notwithstanding any control they may exercise over or benefit they may derive from the proceedings), unless, exceptionally, they have become party to the arbitration. This is broadly in line with international practice such as in the UK and Singapore.

However, the involvement of an external funder still remains a key consideration in any arbitration strategy. For example, the fact that the opponent is externally funded would often be relevant to an application for security for costs, the quantum of costs awarded, and the judgment creditor’s enforcement strategy. The SIAC 2017 Practice Note ,for example, states that the arbitral tribunal may take into account the existence of any external funder in awarding and / or apportioning the costs of the arbitration, whilst the 2021 ICC Practice Note to Parties and Arbitral Tribunals likewise provides that the ICC will accept advance costs payments made by a third party provided that the legal relationship between the third party and the party in the case is evidenced. Accordingly, in their strategy for managing arbitration proceedings, parties may well need to consider the relevance of TPF to such issues and the possibility of, for example, obtaining disclosure of details about TPF arrangements (whether pursuant to specific provisions of arbitral rules - such as those in the ICC, SIAC or HKIAC rules - or the tribunal’s general procedural powers). 

With thanks to Tigmika Srivastava for her assistance in the preparation of this article.