This Case Commentary is written by Gannatullah Muhammed Khalil, a Law Graduate of Faculty of Law English Section

INTRODUCTION:-

On May 29, 2023, a Division Bench of the Delhi High Court in Tomorrow Sales Agency v. SBS Holdings (TSA v SBS) set aside an order of a single judge which required a third-party funder to furnish security and comply with other interim measures, for the costs of proceedings awarded against the funded party, in an application under Section 37 of the Arbitration and Conciliation Act, 1996.

The TSA v SBS judgment is a first of its kind, as it discusses highly relevant issues concerning the practice of third-party arbitration funding (TPAF) in India – the practice experiencing proliferation throughout the globe, but one that remains unregulated in India.

The Division Bench in TSA v SBS unequivocally pointed out that an arbitral award cannot be enforced against a third-party funder, one that was not a party to the arbitration proceedings or had any adverse orders against it. The moment that all Indian arbitration practitioners expected to be around the corner has now manifested. The practice of TPAF has now been judicially considered by the Delhi High Court.

This piece consists of four parts and builds an analysis of the TSA v SBS case.

On December 20, 2018, SBS Transpole entered into a Bespoke Funding Agreement with Tomorrow Sales Agency (TSA), whereby TSA would, among other things, fund Transpole’s claim for damages to the tune of ₹250 crore against SBS Holdings (SBS) and one other party for reneging on their contractual obligations.

TSA is registered as a Non-Banking Finance Company under Section 45-1 (f) of the RBI Act 1934 and is in the principal business of litigation funding.

The agreement laid down a non-recourse setup, which means that if the funded party’s claim failed, TSA would not be entitled to any recovery of the amount provided by it against Transpole. A little over two months later, Transpose referred its claim against SBS to arbitration at the Singapore International Arbitration Centre (SIAC). The arbitral tribunal rendered a decision in favor of SBS, declaring it free from any liability for damages against Transpole. Costs of proceedings were also awarded in favor of SBS.

SBS had been aware that Transpole was in strained circumstances and the award for costs against it remained undischarged for quite some time. In one last creative effort to recover the costs of proceedings, SBS roped in TSA, the funding party, and demanded that it pay the sums awarded against Transpole. TSA denied any such liability.

To protect its interests while this deadlock was resolved, SBS filed a Section 9 application in the Delhi High Court seeking interim measures in aid of enforcing the arbitral award.

PRINCIPAL:-

The Delhi High Court decision on third-party funding of arbitrations in India is proof of the concept of arbitrations being funded in India very consistently.1 When we started researching our book on third-party funding2, it was intriguing to find that the first litigation funding to reach court and held to be legal and valid was from way back in 1876.3 Many articles on the Delhi High Court judgment4 on third-party funding of arbitration have expressed a sigh of relief since the judgment acknowledges the necessity of third-party funding for Indian disputes to ensure access to justice. However, the judgment has raised technical issues that shall become important for arbitrators and counsel when dealing with this subject going forward. We deal with one such issue which has been discussed in detail in our book.

IMPLICATIONS:-

Clarification on Third-Party Funder’s Liability: The court’s decision has provided much-needed clarity on the liability of third-party funders. It has been established that unless explicitly stated in the funding agreement, third-party funders cannot be held liable for adverse costs awarded in arbitration proceedings.

Contractual Precision: The judgment emphasizes the importance of clear and precise terms within third-party funding agreements. Future agreements are likely to be drafted with greater specificity regarding the scope of a funder’s obligations and the circumstances under which these obligations may be terminated.

Encouragement of Third-Party Funding: By setting boundaries on the liability of funders, the judgment may encourage more third-party funding in arbitration, as it reduces the risk of unforeseen liabilities for the funders. This could lead to increased access to justice for parties who otherwise lack the financial resources to pursue their claims.

Influence on Arbitration Practices: The case may influence how arbitration clauses are structured, especially concerning third-party funding. Parties may now seek to include specific provisions that address the involvement and liability of third-party funders directly within the arbitration agreement.

Judicial Approach to Non-Signatories: The application of the Group of Companies doctrine and the court’s interpretation of non-signatory liability in arbitration agreements may have broader implications for corporate structures and their involvement in arbitration proceedings

Impact on Legal Strategy: Legal practitioners may need to adjust their strategies when dealing with funded parties in arbitration. The ruling could affect how claims and defenses are structured, considering the potential involvement of third-party funders.

Precedent for Future Cases: This case sets a legal precedent for future disputes involving third-party funding in arbitration. It provides a reference point for courts when determining the liability of funders who are not signatories to the arbitration agreement.

Broader Implications for Access to Justice: The judgment promotes wider accessibility to justice for parties in dire need of funding, while also protecting the rights of third-party funders from incurring liability that they have not agreed to bear.

CONCLUSION:-

The Tomorrow Sales Agency vs. SBS Holdings is a landmark case in India that clears up the liability of third-party funders in arbitration. The Delhi High Court just said that when someone else puts money into an arbitration deal, it doesn’t mean they’re automatically part of the whole thing. This is great news for the people who like to fund these situations because it means they can do it without as much worry. But, the court case also shows that we could use some better rules about this kind of funding. Having more clear guidelines would help everyone involved feel more secure and make sure things go smoothly. The court gave some good advice, but it would be even better if we had more specific rules to follow.

SOURCES:-

Chandan Maheshwari, Shantanu Pachahara/ Bar and Bench/22 Jul 2023, 12:26 pm https://www.barandbench.com/columns/tomorrow-sales-v-sbs-holdings-delhi-high-courts-rendezvous-with-third-party-funding/18/9/2024

Andrew Cannon/Herbert Smith freehills 05 July 2023/https://www.herbertsmithfreehills.com/notes/arbitration/2023-07/delhi-high-court-rules-that-third-party-funder-has-no-liability-to-pay-costs-award-against-a-losing-funded-party/18/9/24

Kritika Krishnamurthy and Anuroop Omkar SCC online 6/24/23/ times/https://www.scconline.com/blog/post/2023/06/24/can-indian-third-party-funders-party-to-arbitration-tomorrow-sales-case/18/9/24

Fanuel Rudi/15-11-23 Meditation Centre/https://viamediationcentre.org/readnews/MTY0MA==/The-Boundaries-of-Third-Party-Liability-Insights-from-Tomorrow-Sales-Agency-vs-SBS-Holdings/ 18/9/24

Vibhu Bakhru Indian Kanoon 5/29/23 https://indiankanoon.org/doc/168478192/ 18/9/24