Abstract
Third-Party Funding (TPF) has emerged as one of the most significant developments in international arbitration. It enables a person or entity that is not a party to a dispute to finance the legal costs of one of the disputing parties in exchange for a share of the monetary award if the claim succeeds. TPF promotes access to justice, especially for financially weaker parties, and facilitates commercial dispute resolution. Although the practice has gained recognition in jurisdictions such as Singapore, Hong Kong, Australia, and the United Kingdom, India continues to operate without a comprehensive legal framework regulating TPF.
India has witnessed a growing interest in arbitration following the amendments to the Arbitration and Conciliation Act, 1996. However, the absence of statutory provisions governing TPF has created uncertainty regarding disclosure obligations, conflicts of interest, confidentiality, ethical issues, and enforcement of funded awards. While certain judicial decisions have recognized the legality of litigation funding, no uniform legislation exists for arbitration.
This paper examines the concept of Third-Party Funding, its advantages and challenges, judicial developments in India, comparative international approaches, and the pressing need for a regulatory framework to address the existing legal vacuum.
Keywords:
Third-Party Funding, Arbitration, Regulatory Vacuum, Access to Justice, Arbitration and Conciliation Act, Litigation Funding.
Introduction
Arbitration has become the preferred mechanism for resolving commercial disputes due to its flexibility, confidentiality, neutrality, and enforceability. However, arbitration is often expensive, involving substantial costs towards arbitrators’ fees, institutional charges, expert witnesses, and legal representation. Many genuine claimants are unable to pursue legitimate claims because of financial constraints.
Third-Party Funding (TPF) has emerged as an innovative financial solution to this problem. Under a TPF arrangement, a specialized funding company finances the legal expenses of a claimant. In return, the funder receives a percentage of the compensation awarded if the claimant succeeds. If the claim fails, the funder generally bears the financial loss.
Globally, TPF has become an established feature of commercial arbitration. International arbitration institutions increasingly recognize and regulate funding arrangements. India, despite aspiring to become an international arbitration hub, lacks any dedicated legislation regulating TPF. The resulting uncertainty discourages investment, creates ethical dilemmas, and raises concerns regarding transparency and conflicts of interest.
Meaning of Third-Party Funding
Third-Party Funding refers to an arrangement in which a person or company that is not a party to the dispute provides financial support to one of the parties in return for a share of the proceeds recovered from the litigation or arbitration.
The funding generally covers: Legal fees, Arbitrators’ fees, Expert witness expenses, Court or institutional fees, Investigation costs, administrative expenses.
If the funded party loses, the funder generally receives nothing.
Features of Third-Party Funding
The important characteristics of TPF include:
1. The funder is not a party to the dispute.
2. Funding is usually non-recourse in nature.
3. The return depends upon the successful outcome.
4. The funder assesses the merits before investing.
5. Funding agreements remain confidential unless disclosure is mandatory.
6. It enables financially weaker parties to pursue valid claims.
Evolution of Third-Party Funding
Historically, English common law prohibited litigation funding through the doctrines of Maintenance and Champerty.
Maintenance refers to financial assistance provided by a stranger to litigation.
Champerty refers to financial assistance in exchange for a share of the proceeds.
Modern commercial realities gradually led many jurisdictions to abolish or relax these doctrines. Today, TPF is widely accepted in: United Kingdom, Australia, Singapore, Hong Kong, Canada, United States (subject to state laws)
The rapid growth of international commercial arbitration has further increased acceptance of TPF.
Third-Party Funding and Arbitration
Arbitration frequently involves high costs. TPF helps parties continue proceedings without financial hardship.
Funding is commonly used in: International Commercial Arbitration, Construction disputes, Infrastructure projects, Investment arbitration, Energy disputes, Intellectual Property disputes, Shareholder disputes, Large funding companies now operate internationally, investing millions in arbitration claims.
Need for Third-Party Funding in India
Several factors justify the need for TPF:
1. High Cost of Arbitration
Commercial arbitration often costs several lakhs or crores.
2. Access to Justice
Meritorious claims should not fail merely because a party lacks financial resources.
3. Ease of Doing Business
Efficient dispute resolution improves investor confidence.
4. Commercial Growth
Businesses prefer risk-sharing mechanisms.
5. Support for MSMEs
Small businesses often cannot afford lengthy arbitration.
6. International Competitiveness
To become a global arbitration hub, India must adopt internationally accepted practices.
Legal Position of Third-Party Funding in India
India does not prohibit TPF.
There is no central legislation specifically regulating third-party funding.
The Arbitration and Conciliation Act, 1996 does not mention TPF.
The Code of Civil Procedure, 1908 also contains no comprehensive provisions except that some State amendments recognize funding arrangements.
Thus, TPF exists largely through judicial recognition rather than statutory regulation.
Judicial Developments
1. Ram Coomar Coondoo v. Chunder Canto Mookerjee (1876)
The Privy Council held that fair funding agreements are not inherently illegal unless they are unconscionable or contrary to public policy. This remains the foundational authority supporting litigation funding in India.
2. Bar Council of India v. A.K. Balaji (2018)
The Supreme Court observed that although advocates cannot finance litigation on behalf of clients, there is no legal prohibition preventing third parties from funding litigation. The judgment indirectly recognized the legality of TPF.
3. Recent High Court Decisions
Indian High Courts have increasingly acknowledged commercial litigation funding while emphasizing transparency and fairness. However, no detailed judicial framework currently exists.
Advantages of Third-Party Funding
1. Improves Access to Justice
Financial constraints no longer prevent deserving claims.
2. Risk Sharing
The claimant shares litigation risk with the funder.
3. Better Case Screening
Funders invest only after detailed legal analysis.
4. Efficient Resolution
Professionally funded cases are often managed efficiently.
5. Business Stability
Companies preserve working capital.
6. Encourages Settlement
Funders often support commercially sensible settlements.
7. Reduces Financial Burden
Legal costs are shifted from claimants.
Challenges of Third-Party Funding
Despite its advantages, TPF raises several concerns.
1. Conflict of Interest
Funders may influence legal strategy.
2. Arbitrator Independence
Failure to disclose funding relationships may create conflicts.
3. Confidentiality
Funders require access to confidential documents.
4. Control Over Proceedings
The claimant’s autonomy may be compromised.
5. Excessive Profit
Funders may claim a substantial portion of the award.
6. Frivolous Claims
Improper regulation may encourage speculative litigation.
7. Enforcement Issues
Questions arise regarding liability for adverse costs.
The Regulatory Vacuum in India
India presently lacks rules governing:
Registration of funders
Licensing requirements
Disclosure obligations
Ethical standards
Funding agreements
Funders’ liability for adverse costs
This absence creates uncertainty for parties, arbitrators, institutions, and investors.
International Position
Singapore
Singapore legalized TPF for international arbitration through legislative reforms in 2017. Regulations require disclosure of funding arrangements and ensure ethical compliance.
Hong Kong
Hong Kong permits TPF under the Arbitration and Mediation Legislation (Third Party Funding) Amendment Ordinance, 2017. A detailed Code of Practice governs funders’ conduct.
United Kingdom
TPF is recognized through self-regulation by the Association of Litigation Funders (ALF). Funding agreements are widely accepted.
Australia
Australia has one of the most developed TPF markets. Courts actively supervise fairness while allowing funding.
Arbitration Institutions and Disclosure
Several international arbitration institutions require disclosure of TPF.
These include:
International Chamber of Commerce (ICC)
Singapore International Arbitration Centre (SIAC)
International Centre for Settlement of Investment Disputes (ICSID)
Disclosure helps identify conflicts of interest involving arbitrators and funders.
India has not yet adopted similar mandatory disclosure rules.
Ethical Issues
The absence of regulation creates ethical concerns:
Independence of lawyers
Confidentiality of privileged information
Influence over settlement decisions
Disclosure of funding agreements
Recovery of legal costs
Professional misconduct issues
These require legislative intervention.
Recommendations
India should adopt a comprehensive legal framework incorporating the following measures:
1. Enact a dedicated Third-Party Funding law.
2. Amend the Arbitration and Conciliation Act, 1996.
3. Make disclosure of funding arrangements mandatory.
4. Establish licensing requirements for funders.
5. Create ethical guidelines for lawyers.
6. Protect confidentiality and privilege.
7. Regulate funders’ participation in settlements.
8. Permit tribunals to order security for costs where appropriate.
9. Define liability for adverse costs.
10. Introduce institutional rules for Indian arbitration centres.
Future of Third-Party Funding in India
India aims to become a global arbitration hub through initiatives such as institutional arbitration reforms and the establishment of arbitration centres. The increasing complexity of commercial disputes makes TPF commercially attractive.
With multinational companies investing in India, funding arrangements are likely to expand significantly. However, sustainable growth requires legal certainty. Proper regulation will improve investor confidence, reduce disputes concerning funding agreements, and strengthen India’s arbitration ecosystem.
Conclusion
Third-Party Funding represents a significant evolution in dispute resolution by making arbitration more accessible and financially viable. It enables deserving claimants to pursue legitimate claims without bearing the heavy financial burden of arbitration. While India does not prohibit TPF, the absence of a statutory framework has resulted in a regulatory vacuum that creates uncertainty regarding disclosure, conflicts of interest, confidentiality, ethics, and enforcement.
Comparative jurisdictions such as Singapore, Hong Kong, Australia, and the United Kingdom demonstrate that a balanced regulatory approach can successfully encourage TPF while safeguarding fairness and transparency. India should follow these models by introducing comprehensive legislation, mandatory disclosure requirements, ethical standards, and institutional rules. Such reforms would strengthen India’s arbitration regime, promote investor confidence, and support the country’s aspiration of becoming a leading international arbitration hub.
Ultimately, Third-Party Funding should be viewed not merely as a financial arrangement but as an important tool for enhancing access to justice, reducing the economic barriers to dispute resolution, and fostering a modern, efficient, and globally competitive arbitration system.
Author: Shreya Jaiswal
Legal Writer | Lawvaani