Third Party Funders In Arbitration Play A Vital Role In Ensuring Access To Justice; Arbitral Award Cannot Be Enforced Against Them: Delhi High Court

The Delhi High Court has ruled that a third-party funder, i.e., a non-signatory to arbitration agreement, who is not a party to the arbitral proceedings or the award, cannot be held liable for the awarded amount merely because it has funded a party in arbitral proceedings.

The court dismissed the contention that third-party funders must be held liable for funding impecunious persons who are unsuccessful in pursuing their claims in the arbitral proceedings. It held that permitting enforcement of an arbitral award against a non-party which has not accepted any such risk, is neither desirable nor permissible.

The court remarked that third-party funders play a vital role in ensuring access to justice. 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, the bench comprising Justices Vibhu Bakhru and Amit Mahajan observed.

The court took note that in many cases, the claimants become impecunious on account of the very cause for which they seek redressal. While noting that the cost for pursuing claims in arbitration are significant, the court held that in the absence of third-party funders, a person without the necessary means would have no recourse.

The bench added that it is essential for the third-party funders to be fully aware of their exposure. Third-party funders cannot be mulcted with liability, which they have neither undertaken nor are they aware of, the court said, adding that any uncertainty in this regard would dissuade third-party funders to fund litigation.

The court made the observation while dealing with an appeal filed against the order of the Single Judge in a petition filed by the award holder under Section 9 of the Arbitration and Conciliation Act, 1996 (A&C Act), where it had sought interim measures in aid of enforcement of the Arbitral Award.

The court disagreed with the view of the Single Judge that the appellant, Tomorrow Sales Agency Private Limited (TSA) (third-party funder), who had funded the Claimants to pursue the arbitral proceedings, was obliged to pay the costs imposed on them by the Arbitral Tribunal, after they had failed in the said proceedings.

The bench concluded that TSA was not a party to the Arbitral Award and it cannot be treated as a judgment-debtor. Therefore, the award cannot be enforced against TSA under Section 36(1) of the A&C Act, the court said. Thus, it concluded that an application under Section 9 of the A&C Act, for securing the award amount against TSA, was not maintainable.

The respondent/ claimants, SBS Transpole Logistics Private Limited (Transpole) and its promoters, instituted arbitral proceedings against SBS Holdings Inc. (Japan) (SBS) and Global Enterprise Logistic Pte. Ltd. (Singapore) (GEL) for recovery of approximately Rs. 250 crores as damages for the alleged breach of contractual undertakings.

The appellant, Tomorrow Sales Agency Private Limited (TSA), entered into a ‘Bespoke Funding Agreement’ (BFA) where it agreed to provide financial assistance to the Claimants for pursuing their claim against SBS and GEL in the arbitration proceedings conducted under the aegis of the Singapore International Arbitration Centre (SIAC).

The claims raised by the Claimants were dismissed by the Arbitral Tribunal, who awarded costs in favour of SBS and GEL.

After the Claimants failed to pay the amount awarded against them in terms of the Arbitral Award, SBS called upon TSA to pay the award amount.

SBS filed an application under Section 9 of the A&C Act before the Delhi High Court seeking interim measures to secure the amount awarded in its favour. SBS alleged that the Claimants did not have the funds to satisfy the Arbitral Award. It claimed that Transpole was under liquidation and it had no operations or assets.

The Single Judge held that SBS had, prima facie, established that TSA had a vested interest in the outcome of the arbitral proceedings. It held that a party, having funded the litigation for gain, could not escape the liability in case the result was contrary to its expectations.

The Single Judge thus passed an order directing the Claimants and TSA to file an affidavit disclosing their fixed assets and bank accounts along with the credit balance held by it. The court further restrained the Claimants and TSA from creating any third-party interest/right/title in respect of any unencumbered immovable assets for the sum awarded in favour of SBS in terms of the Arbitral Award, till further orders.

Against this, TSA filed an appeal under Section 37 of the A&C Act before the Division Bench.

At the outset, the court remarked that a third party may be bound by the arbitral award only if it has been compelled to arbitrate and is a party to the arbitration proceedings.

The bench observed that even a signatory to an arbitration agreement against whom an arbitration agreement is not invoked and who is not joined as a party to the arbitral proceedings, would not be bound by the arbitral award. “Thus, there is no question of enforcing an arbitral award against a non-signatory, who is not a party to the arbitral proceedings,” the court said.

Perusing the facts of the case, the bench noted that the fact that TSA was funding the Claimants to pursue the arbitral proceedings against SBS and GEL, was duly disclosed. Further, SBS did not take any steps to include TSA as a party to the arbitral proceedings nor did it make any attempt to secure any order against TSA before the Arbitral Tribunal.

The court added that because SBS had agreed to be bound by the Singapore International Arbitration Centre, Arbitration Rules, 2016 (SIAC Rules), which did not permit joining of TSA as a party to the arbitration, it cannot now seek to compel TSA to be bound by it.

The bench concluded that TSA had no obligation to pay any amount under the Arbitral Award. It noted that the Arbitral Tribunal had awarded the costs in favour of SBS and against the Claimants, and not against TSA. “TSA is not a party to the Arbitral Award. It cannot be treated as a judgment-debtor under the Arbitral Award if it is enforced as a decree, as required under Section 36(1) of the A&C Act,” said the court. Since the Arbitral Award was not against TSA, therefore, it cannot be enforced against TSA under Section 36(1) of the A&C Act, the court said.

“In the given circumstances, an application under Section 9 of the A&C Act, for securing the amount in dispute against TSA, is not maintainable,” the court remarked. It further disagreed with the view of the Single Judge that TSA was obliged to pay costs according to the BFA. Perusing the provisions of the BFA, the court found that none of the clauses of the BFA imposed any obligation on TSA to fund an adverse award.

The court further observed that it has not framed any rule which contemplates recovery of costs from persons who are not parties to the suit/action. “There are no rules applicable to proceedings in this court for awarding costs against third parties. There is no procedure for impleading third parties for the limited purpose of determining the costs. If a person proposes to pursue any claim against another person, it would be necessary for the said claimant to institute a substantive action in that regard are required to be pleaded. If the claim is disputed and raises a triable issue, the same is required to be tried,” the court said.

The court thus allowed the appeal, setting aside the order of the Single Judge to the extent it directed TSA to disclose its assets, furnish security for the award amount, and restrained it from alienating or encumbering its assets.

Case Title: Tomorrow Sales Agency Private Limited vs SBS Holdings, Inc. and Ors.

Citation: 2023 LiveLaw (Del) 482

Counsel for the Appellant: Mr Shashank Garg, Mr Aman Gupta, Mr Atharva Koppal and Ms Nishtha Jain, Advocates.

Counsel for the Respondent: Mr Gautam Narayan with Ms Asmita Singh, Mr Ranjith Nair, Mr Altamash Qureshi, Ms Akriti Arya and Mr Harshit Goel, Advocates.

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