India: third-party funder not liable for adverse costs award in arbitration

Delhi High Court rules that a third-party funder was not liable for an adverse costs arbitral award against the funded party. 

Background

In 2018, Tomorrow Sales Agency Private Ltd (“TSA”) was approached by a group of claimants (SBS Transpole Logistics Private Limited and three individuals- the “Claimants”), who requested funding for bringing arbitral proceedings (SIAC rules) against SBS Holdings Inc (“SBS”) - the respondent. TSA entered into a Bespoke Funding Agreement (the “BFA”), agreeing to provide financial assistance for the Claimants to pursue their claim for recovery of damages from SBS for breach of contract.

The Claimants were unsuccessful and the tribunal made an award in favour of SBS, including relating to costs.

When the Claimants failed to pay the costs, SBS sought recovery from TSA. TSA denied it had an obligation to pay the costs award, asserting that the BFA was terminated in December 2022 and TSA was not a party to the arbitral proceedings so could not be bound by the arbitral award.

SBS was successful at first instance.

The Appeal

In the appeal, TSA argued that, as the Claimants’ funder, it was not a party to the arbitral proceedings, and was not bound by the arbitral award. As such, it was not liable to pay any amount to SBS.

SBS submitted that TSA was liable to pay the costs amount awarded, as the award was in respect of the costs incurred by SBS in defending the arbitral proceedings brought by the Claimants, and that those proceedings were issued with the support of funds provided by TSA.

Court’s decision

The Delhi High Court decided that TSA was not liable to SBS.  This was on the basis that the BFA did not contain any obligation on TSA to fund an adverse award. TSA was not a party to the arbitral proceedings and was not bound by the award. 

In reaching this conclusion the Delhi High Court also considered SBS’ position that there should be the possibility of holding third-party funders accountable for funding impecunious parties, particularly when they are unsuccessful.  SBS noted that it is the availability of funding that enables such parties to pursue claims, which results in respondents incurring costs that cannot then be recovered in the event the claim is unsuccessful.  The Delhi High Court was not prepared to accept this position.  It concluded that third-party funding was essential to ensuring access to justice.  Without such funding, some parties would be unable to pursue their legitimate claims, which in some instances maybe the very cause for a party’s impecuniosity.

The Delhi High Court stated that any uncertainty around TPFs with regards to their exposure to liability for costs’ awards, would deter such funders from funding any dispute proceedings. However, the court went on to say that there should be transparency around third-party funding, and that it should not be exploitative.