Introduction
Third-Party funding (“TPF”) is defined by the Singapore Institute of Arbitrators [Archive Link] as “when a third party (the Funder) provides financial support to enable a party (the Funded Party) to pursue or defend an arbitration or related court or mediation proceedings. Such financial support is provided in exchange for an economic interest in any favourable award or outcome that may ensue.”
Thus, TPF entails a “funder” who is not a party to the dispute, funding the claim or defense of a party to these proceedings. Like litigation funding, in arbitration, the third party provides capital to the party concerned to carry out the arbitration proceedings, and in return, funder gets a share of the arbitral award. The funder treats this funding as an investment.
The funder may either fund the Claimant or the Respondent; but general practice is more inclined towards funding Claimants since there is a higher possibility of profit on their side, while in the case of Respondents there is generally only a defeat of the claim rather than a profitable award.
The concept of TPF, perhaps, has developed due to both legal and commercial drivers. From a commercial standpoint, parties in arbitration may require funding either because of lack of resources, disparity in resources between the disputing parties, or to avoid using their own funds into the process as it involves significant expenses. Whatever may be the reason, unavailability of resources delays the administration of justice and creates a situation of imbalance between parties, defeating the very purpose of arbitration: to facilitate a fair resolution that is acceptable to both sides. TPF has thus gained popularity in recent years, largely due to its role in improving access to justice and levelling the playing field by enabling those with meritorious claims but deficient resources to gain access to the required funds.
From a commercial perspective, the economic downturn exacerbated by a recessive economic environment over the past few years, led companies to deprioritize dispute resolution in their spending priority. This created the need to explore alternative methods of financing, which gave rise to TPF. Funders saw an opportunity to invest and get a profitable return from the arbitral awards. Consequently, TPF has promoted business investment, increased availability of capital for proceedings, and all in all, create a win-win situation.
This article aims to analyze how the concept of TPF has been developing globally, the issues it poses, and how the legal landscape of India can introduce and formalize TPF, specifically in arbitration proceedings, in a way so as to pave the way for future third-party fundings to be minimally technical and largely accessible.
Global Development of TPF
To aptly understand the evolution of TPF, it is important to first understand the common law Doctrine of Maintenance and Champerty, which posed significant obstacle to its advancement. The doctrine of maintenance and champerty prohibited third parties from funding another party’s litigation, and since a lot of common law countries had adopted the law of maintenance and champerty, there was an apparent hindrance in the way of development of TPF.
Maintenance was seen as unnecessary meddling of a third party, who has no direct interest in the outcome of the case, under the disguise of “assistance”; while Champerty related to providing direct financing to a case by a funder interested only in a share of the proceedings and not in the outcome of the case.
Both maintenance and champerty were seen as a serious abuse of process and were categorised as both crimes and torts in common law.
Since the practice of TPF had been developing across jurisdictions in civil and commercial litigations, especially with respect to high-value claims as well as class-action suits (due to investors seeing potential profitability in these cases), it was inevitable that this practice would seep into arbitration as well.
In the present developing globalized arena, numerous jurisdictions are doing away with these defunct doctrines, especially with respect to the proceedings of arbitration. For instance, the current situation of arbitration intensive countries like Hong-Kong and Singapore has seen certain developments in this context.
In Hong-Kong, the Supreme Court in Cannonway Consultants Ltd. vs. Kenworth Engineering Ltd. (1994), a dispute between a claims consultant (petitioner) and a contractor (defendant), observed that the scope of doctrine of champerty had been narrowed over the years and that arbitration was excluded from the scope of the doctrine. It held that the doctrine should not infiltrate the private proceedings of arbitration as the doctrine is a part of public justice system, and often parties subject themselves to arbitration to keep their disputes outside the scope of this public justice system. The Hong Kong Court of First Instance has also discussed the validity of TPF in insolvency proceedings in Re Cyberworks Audio Video Technology Ltd (2010), wherein it held that where a funding agreement includes an assignment of a cause of action by a liquidator or a trustee in bankruptcy, is an exception to the prohibition on maintenance and champerty and is lawful.
In consonance with these judgements, the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance 2017 has also been enacted which has provided that the common law offences and tort of maintenance and champerty do not apply in relation to TPF of arbitration [§98K & §98L]. Thus, effectively permitting TPF for arbitration proceedings related to parties in Hong Kong, subject to the condition that funding shall not be provided by a lawyer acting for a party to arbitration [§98O].
The HKIAC has also laid down the Administered Arbitration Rules, 2024 which contain detailed provisions relating to the obligation to disclose any TPF contracts entered into by the parties [Article 44]. These rules are also in furtherance of the Arbitration Ordinance, 2017 and a Code of Practice for third party funding of Arbitration released by the Secretary of Justice, both of which dealt with the aforementioned conditions.
In Singapore, one of the first step towards third-party funding was made in 2017 with the introduction of the Civil Law (Third-Party Funding) Regulations 2017, which laid down the conditions that the third party must fulfil to be qualified as a valid funder [§4]. In Lao Holdings NV v. The Government of the Lao People’s Democratic Republic (2022), the Singapore International Commercial Court observed that the common law prohibitions against maintenance and champerty were against public policy and were hence removed in relation to TPF, thus postulating that TPF contracts are not against the public policy [¶69]. It also said that originally, the scope of dispute resolution proceedings included only international arbitration proceedings, along with its related mediation and court processes. However, the Civil Law (Third-Party Funding) (Amendment) Regulations 2021 expanded its scope to include all arbitration proceedings, including domestic ones [¶70].
Recently, the SIAC 2025 Arbitration Rules have also provided for regularization of TPF which seek that a party shall disclose the existence of any third-party funder, any subsequent changes in the TPF Agreement and also provide any information required by the Tribunal. The rules also provide that no TPF agreement shall be entered into by either party that would render a conflict of interest with any member of the Arbitral Tribunal. [Rule 38].
The Paris Bar Council has also shown its support for the same by stating that TPF would be a beneficial especially in international arbitration. The council has passed a resolution dated 21 February 2017 wherein it has observed that there is no provision in the French law which prohibits any party from seeking financial assistance for any international arbitration procedure.
It can thus be inferred that the international community has been inclining towards taking positive steps in the direction of TPF in arbitrations. However, it will not be apposite to state that a few progressive steps in this direction in a handful of countries has not had the effect of rendering the concept of TPF flawless and globally popular. It still has its set of issues. Every time the concept of TPF is discussed, the most common questions that are raised are: Does it align with the ideals of public policy? Or will it compromise the confidentiality and independence of private arbitration proceedings?
While addressing these issues, the question that lingers is how exactly is TPF conflicting with the ideals of public policy?
It is vital to emphasize that the extent to which TPF in arbitration may violate public policy would vary according to jurisdiction, legal traditions, and cultural values. Certain jurisdictions have adopted TPF as a tool to improve access to justice and facilitate meritorious claims, while others may be doubtful of its possible impact on the integrity of the arbitration process, due to the nature of the relationship between an unconcerned party and the arbitral award.
In certain societies, where there is unequal distribution of power in the commercial arena, some parties may have greater access to this funding, either because of their personal and professional relationships, or because of the popularity of their claim, which may once again lead to an issue of unequal status quo in the arbitration. Parties funding frivolous claims, only for their own profit and not to back some legitimate issue may also go against the principles of public policy.
Another issue is how can we expect the arbitration proceedings to maintain their impartiality, independence and confidentiality?
Since an arbitration takes place between two parties, only these parties are privy to the information. However, with the introduction of TPF, certain questions need to be answered like: How much information shall be disclosed to the third party? Should any information be disclosed, or should they be kept nescient of the whole proceedings and only be shared at the time of the arbitral award? Should the presence of the third-party funder be disclosed to the other party? Should the third party be allowed to be an active part of the proceedings, or should it be made a silent spectator? Does it go against the basic framework of arbitration to allow an unrelated party to be made privy to the information and conflict between the two concerned parties? What happens if there is a conflict of interest between the third party and the arbitrator? If a third party gets a share in the profit or award, is it also liable to pay the whole or a part of the arbitral award in case their claim loses? The list of these issues is not exhaustive.
While some of these issues have been acknowledged and efforts have been made to tackle them in countries like Hong-Kong, Singapore, the UK and even India, including being incorporated and discussed in institutional rules of HKIAC [Article 44], SIAC [Rule 38], International Chamber of Commerce [Rule 11(7)], ICSID [Chapter II Rule 12] as well as the International Bar Association Guidelines [Part I(6)(b)] which mainly provide for a rule regarding disclosure of third-party funders, TPF still lacks a formal code in a majority of countries.
TPF in India
In India, arbitration proceedings are conducted under the Arbitration and Conciliation Act 1996. Though the act does not explicitly talk about third-party funding, the idea has had its base structured through a series of judgements and reports in the country. The legal frameworks have sought to establish a general principle that TPF is in fact not against public policy, provided that the process does not lack transparency and accountability. There has been no declaration of TPF being illegal or immoral in the Indian law. However, the Supreme Court had an opinion on litigation funding. It held in Bar Council Of India v. A.K. Balaji that advocates could not fund the litigation on behalf of their clients, since it could lead to violations of the Bar Council of India’s Standards of Professional Conduct and Etiquettes. Additionally, the court observed that no such restriction applied to third parties (non-litigants) for financing a litigation in lieu of a repayment from the result of the case [¶35].
A step was also taken to acknowledge and study the scope of institutionalization of arbitration in India in 2017, which was followed by the submission of a High Level Committee Report on the same. The report acknowledged the positive steps taken by Singapore, Hong Kong and Paris towards recognition and regulation of TPF, and opined that if similar steps were taken (with suitable modifications), it could give a much-needed boost to arbitration in India.
The Delhi High Court, in a recent judgment has also answered another important question regarding TPF. In Tomorrow Sales Agency Private Limited vs SBS Holdings, Inc. and Ors., the Court opined that third-party funders play an important role in providing access to justice for those without sufficient resources. However, just because they are entitled to a share of the arbitral award, the funders cannot be held liable to pay the award in case of loss of a claim by a party.
An Expert Committee was also formed to look into and recommend reforms in the Arbitration and conciliation act in 2023. The Committee has submitted its final report earlier this year and has recommended that the term “affiliate” (Schedule V Explanation 2) should also include any person bearing the cost of arbitration under a funding arrangement with one of the parties. The committee opined that this would help to maintain the independence and impartiality of the arbitrator [¶3.17.5].
Further, it postulated that in order to have more transparency in arbitral proceedings, it is necessary to impose a duty on the party receiving funding to disclose the identity of the third party to the arbitral tribunal and thus recommended insertion of a new Section 18A [¶ 3.17.8]. It also recommended that the larger question of regulating TPF should be referred to the Law Commission for their examination.
These recommendations can be considered as a direct result of the new ICC Arbitration Rules which also require parties to disclose the existence of any third-party funder[Article 11(7)].
From the abovementioned facts, it can be inferred that India is indeed taking a step in the direction of TPF; but the authorities still need to provide the concept with a legal backing to strengthen it. No practice is devoid of cons or drawbacks. However, since it is evident that TPF is a concept being adopted globally, one country at a time, it is not something which can be ignored or sidelined just because of its current nascent stage.
Since the Arbitration & Conciliation Act does not explicitly prohibit TPF in arbitration [which can be inferred by a bare reading from the act, including sections concerned with the payment of deposits, costs and fees (§38 & 39 ACA 1996)], however, there is a need for regulation of TPF so as to prevent any further disputes regarding interpretation of these sections from a funding point of view. Additionally, the Insolvency & Bankruptcy Code 2016 already enables a resolution professional to raise interim financing in case of insolvency resolution processes [§ 5(15) Part II Chapter 1]; and the Insolvency Law Committee Report dated 20 February 2020, was also guided by the ratio laid down in A.K. Balaji, and observed that where lack of funding for expenses related to insolvency proceedings exists, there exists no bar to seek financial assistance for the same from a third party [¶5.2 Chapter 3]. Hence, formal recognition of TPF would also help in providing yet another recourse for parties in case of their insolvency.
Steps must be taken to provide a strong legal sanction with clearly defined qualifications and conditions of the funding which answer the questions posed in this article. Additionally, provisions to address the powers and duties of the third party, and to balance the scope of TPF in private arbitration proceedings have to be formulated if we are to have a conscientious standing in the international arbitration arena.
Conclusion
It is evident that instead of waiting for it to become absolutely imperative to acknowledge the presence and scope of third-party funding, it is better to get ahead and start formulating beneficial policies which would serve both, the parties, and the larger goal of India in becoming an arbitration hub, all while maintaining the liberty and sanctity of the arbitration proceedings overall. Legalising and formalising TPF would also facilitate inflow of forex through funding from international companies and institutions, thus building gup the image of India as an up-and-coming hub of International Commercial Arbitration.
Acknowledging the fact that TPF agreements are essentially a contract, and any provision of a contract agreement when not surrounded or defined by a legal boundary, is bound to result in ambiguities and discrepancies, which then once again would end up in court. Hence, it is apparent that focus needs to be shifted to institutionalization and regularization of the commercial arbitration sector in the country.
Author(s)
Riffat Soin
Student at UILS, Panjab University