CITATION | MANU/DE/3643/2023 |
DATE OF JUDGMENT | 29.05.2023 |
COURT | DELHI HC |
APPELLANT | Tomorrow Sales Agency Private Limited |
RESPONDENT | SBS Holdings, Inc. and Ors. |
BENCH | Vibhu Bakhru and Amit Mahajan, JJ. |
INTRODUCTION
Third-party funding refers to a scenario where an independent entity, not directly involved in the dispute, offers financial backing to one of the parties involved, typically the claimants. This assistance from the funding party is often driven by the prospect of financial gain or occasionally by alignment with the cause championed by the disputing parties. The financial support extended by third-party funders is commonly viewed as an investment, with the expectation of receiving a portion of the award in return, should it be favorable to the funded party. Such funders typically include banks, hedge funds, insurance companies, or even individual investors. This practice introduces an additional dynamic to the legal landscape, impacting the incentives and risks associated with pursuing legal action, and has drawn scrutiny for its implications on the fairness and integrity of the dispute resolution process.
When considering the concept of profit sharing in the context of a favorable arbitration award, it raises a pertinent inquiry regarding the responsibilities in cases of unfavorable arbitration outcomes. Specifically, it prompts reflection on whether the party providing funding, which stands to gain from successful arbitration awards, should also be held accountable for covering the costs incurred in the event of unfavorable awards. This issue touches upon the broader principles of fairness and equity in the realm of third-party funding in legal proceedings.
The issue at hand pertains to the court’s jurisdiction to enforce arbitral orders against a third-party funder who is not a party to the arbitration proceedings nor the resulting arbitral award and involves Section 36 and 9 of Arbitration and Conciliation Act, 1996. This raises questions about the legal obligations and liabilities of such external financiers in the context of arbitration enforcement.
The present judgment is out of an appeal under Section 37 of the Arbitration and Conciliation Act, 1996, challenging a decision by the knowledgeable Single Judge in a petition initiated by SBS Holdings Inc. under Section 9 of the A&C Act. SBS Holdings Inc (respondent in the present case) succeeded in obtaining the challenged order, which mandates TSA and others to submit sworn declarations regarding their tangible assets and bank accounts, including credit balances held domestically or internationally, and prohibits them from establishing any third-party claims on their unencumbered real estate equivalent to the amount awarded to SBS by the Singapore International Arbitration Centre.
FACTS OF THE CASE
- TSA, a Non-Banking Financial Company (NBFC) registered in India, was approached by the Claimants, including Anant Kumar Choudhary, Vivek Shukla, Pravin Chandra Rai, and SBS Transpole Logistics Private Limited, seeking financial assistance for arbitration proceedings before the Singapore International Arbitration Centre (SIAC).
- The Claimants alleged that SBS breached its obligations to integrate the business of SBS Group with Transpole and provide Transpole’s Corporate Guarantees. They claimed that SBS’s actions led to Transpole’s banks ceasing lending to the company, resulting in its inability to continue operations and causing financial distress.
- Subsequently, TSA entered into a customized funding agreement, known as the Bespoke Funding Agreement (BFA), agreeing to provide financial support to the Claimants in their pursuit of damages against SBS and another party, GEL, for breaching their contractual obligations.
- However, the Claimants were unsuccessful in their claims against SBS and GEL, and the Arbitral Tribunal awarded costs in favor of the SBS respondents.
- Furthermore, the Claimants failed to pay the amount awarded against them according to the Arbitral Award. In response, SBS sent a letter requesting TSA to fulfill the payment obligations outlined in the Arbitral Award.
- Given these circumstances, SBS filed an application under Section 9 of the Arbitration and Conciliation Act (A&C Act) seeking interim measures to secure the amount awarded in its favor.
- The Learned Single Judge issued an order instructing both the Claimants and TSA to submit an affidavit disclosing their fixed assets and bank accounts, including credit balances. Additionally, they were restrained from creating any third-party interest, right, or title in unencumbered immovable assets equivalent to the sum awarded in favor of SBS as per the Arbitral Award.
ISSUES RAISED
Whether third-party funders be held liable for discharging sums stipulated under an arbitral award notwithstanding the funder was neither a party to arbitral proceedings nor the arbitral award ?
CONTENTIONS OF APPEALENT
- Arbitration hinges on the principle of consent. The authority of the Arbitral Tribunal to resolve disputes is derived from an agreement between the involved parties, and without such an agreement, any award issued against a person would lack jurisdiction.
- A third party can only be bound by an arbitral award if they have been compelled to participate in arbitration and are a party to the arbitration proceedings.
- Even if a signatory to an arbitration agreement is not summoned to arbitration and is not included as a party to the arbitral proceedings, they will not be obligated by the arbitral award resulting from those proceedings. Therefore, there is no possibility of enforcing an arbitral award against a non-signatory who is not a participant in the arbitration proceedings.
- TSA was not engaged in the arbitration process and was not party to the agreement or the proceedings. While TSA funded the claimants, it was not directly involved in the Arbitral Award against SBS.
- Clause (a) of Article 1 of the BFA indicates that TSA had committed to financing the lawyers representing the Claimants in their pursuit of claims and damages against SBS and GEL. Furthermore, Clause (c) of Article 1 explicitly states that TSA would provide financial assistance for pursuing the claim as per the budget plan, without any recourse if the Claimants are unsuccessful, meaning TSA cannot recover the funded amount from either the lawyers or the Claimants.
- SBS did not take any measures to include TSA as a party to the arbitration proceedings or seek any orders against TSA, despite the disclosure that TSA was funding the Claimants’ pursuit of the arbitral proceedings against SBS and GEL.
- SBS and the Claimants had agreed to conduct the arbitration proceedings under the SIAC Rules. Therefore, SBS is bound by these SIAC Rules, and it is improper for SBS to now argue otherwise.
CONTENTIONS OF REPONDENT
- SBS argued that TSA not only financed the arbitral proceedings but also exerted significant control over them. TSA purportedly possessed an exclusive and unrestricted right to the damages recovered, superseding any rights of the Claimants.
- SBS’s position is that the Claimants lacked the financial means to satisfy the Arbitral Award.
- SBS maintains that because TSA provided funding and oversight of the arbitration proceedings, it should bear responsibility for the awarded amount, despite not being directly party to the proceedings.
- SBS asserted that TSA funded the arbitral proceedings for its own financial gain and asserted that TSA effectively acted as a ‘true party’ in the arbitral proceedings.
- SBS argued for the “Legal Basis for Binding Non-Signatories to International Arbitration Agreement” and suggested that under certain circumstances where a third party seeks the benefits of a contract, it may be subject to or invoke the arbitration clause.
- SBS cited the case of Gvozdenovic v United Air Lines, Inc.: MANU/FESC/0273/1991 and argued that when a party behaves as if it were a party to a commercial contract, by actively participating in negotiations or executing the contract, it may be deemed to have implicitly consented to be bound by the terms of the contract.
JUDGEMENT
Court ordered to set aside the impugned order of learned Single Judge. Court held that,
- Principle of consent is very important for binding third party to arbitral award and TSA never consented to the arbitration agreement and, TSA was neither a party to the arbitration agreement nor to the arbitral proceedings or Arbitral Award. Hence, TSA’s role was limited to providing funding to the Claimants for their participation in the arbitral proceedings, and therefore it cannot be characterized as a ‘real party’ to the arbitration proceedings.
- Third-party funders must have a comprehensive understanding of their potential liabilities. Holding them accountable for obligations they have not assumed or are unaware of would be unfair. Any ambiguity in this matter could discourage third-party funders from providing litigation funding.
ANALYSIS
- SBS does not aim to bind the third party (TSA) to the arbitration clause and compel arbitration; instead, it seeks to enforce the Arbitral Award against TSA, despite TSA not being part of the arbitral proceedings or compelled to arbitrate, which doesn’t stand good in law.
- As SBS willingly accepted arbitration rules that exclude TSA’s involvement, it cannot now insist on TSA’s inclusion. Therefore, TSA could not be joined as a party to the arbitral proceedings under the SIAC Rules, and SBS made no effort to compel TSA to join.
- There are no provisions for assessing costs against third parties or involving them solely for determining costs. If someone wants to pursue a claim against another individual, they must initiate a separate legal action, providing necessary details to support the claim. Any disputes must be resolved through a trial. Although Order XXA of the Code of Civil Procedure, 1908 addresses costs, this court has not established rules for recovering costs from non-parties.
- Section 36(1) of the A&C Act mandates that arbitral awards be enforced according to the procedures outlined in the Code of Civil Procedure, 1908, treating them as court decrees. As TSA is not party to the Arbitral Award, it cannot be considered a judgment-debtor under the Arbitral Award if enforced as a decree, per Section 36(1) of the A&C Act.
- Section 9 of the A&C Act allows interim measures to enforce arbitral awards. However, since the Arbitral Award in this case does not involve TSA, it cannot be enforced against TSA under Section 36(1) of the A&C Act. Additionally, SBS has not taken legal action to establish TSA’s liability.
- It’s crucial to note that SBS seeks interim measures to aid enforcement of the Arbitral Award, not costs against third parties in a suit. Therefore, the court’s authority to award costs in a trial is irrelevant in determining whether the awarded amount can be recovered from someone not party to the arbitral proceedings or award.
CONCLUSION
Third-party funders play a crucial role in facilitating access to justice, especially for individuals who lack the financial resources to pursue legal action independently. It is essential for these funders to have a clear understanding of their potential liabilities. Holding them responsible for obligations they have not agreed to or are unaware of would be unjust. Such uncertainty could deter third-party funders from providing litigation support. While transparency and disclosure rules are necessary for funding arrangements in arbitration proceedings, imposing liability on third-party funders without their consent would be counterproductive and introduce unnecessary ambiguity.
REFERENCES
- THE ARBITRATION AND CONCILIATION ACT, 1996
- Tomorrow Sales Agency Private Limited Vs. SBS Holdings, Inc. and Ors. MANU/DE/3643/2023
This Article is written by Amit Kumar student of Campus law Centre, Faculty of Law, Delhi university; Intern at Legal Vidhiya.
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