Delhi High Court has finally paved the way for third-party funding in India. A division bench decision in Tomorrow Sales Agency Private Limited v SBS Holding, Inc stands as one of the first that sets out jurisprudence for third-party funding.
The case involved an appellant that was a non-banking financial company. It entered a bespoke funding agreement (BFA) with SBS Transpole Logistics to recover nearly INR2.5 billion (USD30.5 million) in damages from SBS Holdings and The Global Enterprise Logistics (GEL) Singapore. The BFA was essentially a tailor-made funding arrangement to meet the unique needs and requirements of the parties.
SBS Transpole failed in the arbitration and the presiding tribunal awarded costs to the GEL. GEL filed a plea for enforcement but discovered SBS Transpole did not have sufficient funds or assets. GEL then sent a payment letter for the costs to the appellant third-party funder. The funder denied any obligations, saying the costs were awarded against SBS Transpole and not it. The funder further claimed that, since SBS Transpole had failed in its claims, the BFA was terminated on the date the claim was decided.
A single judge directed that the third-party funder, as well as SBS Transpole, disclose assets and bank accounts in India and any other jurisdiction. The judge also restrained the funder from creating any third-party rights for unencumbered immovable assets until further orders.
The division bench set aside the single judge’s order. It held that there was no question of enforcing an arbitral award against a non-signatory (appellant) who was not a party to the arbitration proceedings.
The division bench provided some elucidation on the disclosure obligations of the third-party funder, holding that since SBS Transpole had disclosed the existence of a third-party funder, it had no obligation to pay any amount under the arbitral award.
With its decision, the division bench has paved the way for third-party funding in India. It disagreed with the respondent’s contention that because third parties could derive benefits from successful litigation they fund, they should also be liable to pay the costs where such litigation fails. It held that a third party may be bound by an arbitral award only if it has been compelled to arbitrate, and was a party to, the arbitration proceedings.
The division bench has laid the foundation for third-party funding to be more relevant in India. Although there was no express bar against it, there was no jurisprudence on its applicability and legal framework.
Beyond the jurisprudential guidance, the division bench observed that without third-party funding, a person with a valid claim might be unable to recover what might be legitimately due to them. This is a significant stride in the government’s endeavour to establish India as a hub of arbitration and encourage foreign parties.
The dispute digest is compiled by Numen Law Offices, a multidisciplinary law firm based in New Delhi & Mumbai. The authors can be contacted at support@numenlaw.com. Readers should not act on the basis of this information without seeking professional legal advice.
