Third-Party Funding in Indian Arbitration: Legal Vacuum and Global Trends

Executive Summary

• Legislative Gap: The Draft Arbitration (Amendment) Bill 2024 omits third-party funding (TPF) regulations despite the 2024 Vishwanathan Committee's explicit recommendation for a disclosure framework
• Champerty & Maintenance Doctrine: Indian law has historically prohibited third-party litigation funding under common law principles, but courts have begun distinguishing arbitration funding
• Tomorrow Sales Agency Precedent: Delhi High Court's 2023 landmark ruling endorsed TPF in arbitration while limiting funder liability for adverse costs
• SIAC 2025 Rules: Singapore International Arbitration Centre now requires mandatory TPF disclosure within 15 days of funding agreement
• India's Position: No statutory framework, no disclosure obligations, no funder liability rules—creating uncertainty for funders and parties alike

1. Introduction: The Rise of Litigation Finance in Arbitration

In May 2023, the Delhi High Court decided a case that would reshape the contours of third-party funding in India. Tomorrow Sales Agency Private Limited v. SBS Holdings Inc. (FAO(OS)(COMM) 59/2023) involved a Singapore International Arbitration Centre (SIAC) arbitration in which a non-banking financial company (NBFC) had funded the claimants' legal costs—ultimately to the tune of USD 12 million—on a non-recourse basis.

When the arbitral tribunal awarded costs against the claimants, the award creditor sought to enforce those costs against the funder itself, arguing that the funder had a "real interest" in the outcome and should bear the financial consequences of an adverse award. The Delhi High Court, in a split 2:1 decision, rejected the claim, holding that third-party funders cannot be held liable for arbitral costs unless they are expressly joined as parties to the arbitration under institutional rules.

This judgment crystallized a fundamental question: In the absence of statutory regulation, what are the rights and obligations of third-party funders in Indian arbitration?

2. The Champerty and Maintenance Conundrum

2.1 Historical Common Law Position

Third-party funding has its roots in the medieval English legal doctrines of champerty and maintenance:

Traditional Rationale:

• Prevents "officious intermeddlers" from stirring up litigation
• Protects courts from abuse of process
• Ensures litigants have skin in the game (moral hazard prevention)

Modern Critique:

• Access to justice imperative: Impecunious parties need funding to pursue valid claims
• Commercial arbitration involves sophisticated parties, not vulnerable litigants
• Prohibition deters legitimate business arrangements (e.g., portfolio funding of patent disputes)

2.2 Indian Statutory Landscape: Code of Civil Procedure

Order XXV Rule 1, CPC (1908):

Where at any stage of a suit the Court is satisfied that a person other than
a plaintiff who has an interest in the subject-matter of the suit is
maintaining it, the Court may, upon the application of the defendant, and
on such security for costs as the Court deems fit, strike out the name of
the plaintiff and substitute the name of such person.

Key Features:

• Applies only to "suits" before civil courts—not arbitration proceedings
• Remedy is substitution of party, not striking out the claim entirely
• Requires proof of "interest in subject-matter" (not mere financial interest)

Ambiguity:

• Does "interest in subject-matter" include contractual funding arrangements?
• Can a funder's commercial interest satisfy the "interest" test?

Case Law:

Ram Coomar Coondoo v. Chunder Canto Mookerjee (1876) (Privy Council):

"The law in India as to maintenance and champerty is not the same as it is in England. In India, a suit may be maintained by a third party who has no interest in it, provided the party is not guilty of any fraud or collusion."

Implication: Indian law historically more permissive than English common law—champerty not per se illegal unless fraudulent intent proven.

Conflict with Modern Arbitration:

The CPC's Order XXV applies to court litigation, not private arbitration. Section 5 of the Arbitration and Conciliation Act, 1996 provides:

Notwithstanding anything contained in any other law for the time being in
force, in matters governed by this Part, no judicial authority shall
intervene except where so provided in this Part.

Result: CPC champerty rules arguably inapplicable to arbitration—legislative vacuum.

2.3 Bar Council of India Rules: Ethical Restrictions

Rule 20 of the Bar Council of India Rules (Standards of Professional Conduct):

An advocate shall not enter into an arrangement whereby funds are provided
by a person who is not a party to the proceedings, in exchange for a share
in the proceeds.

Scope:

• Prohibits advocates (lawyers) from entering contingency fee agreements with third parties
• Does not prohibit funders from directly contracting with parties (funder → party → lawyer payment)
• Unenforced in arbitration context: Bar Council Rules apply to advocates before courts and tribunals—less clear for private arbitration

Global Trend:

• Singapore, Hong Kong, Australia: Explicitly exempt arbitration from champerty/maintenance doctrines
• England: Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO) permits Damages-Based Agreements (DBAs) in arbitration
• India: No equivalent exemption—reliance on judge-made law

3. Tomorrow Sales Agency v. SBS Holdings: Landmark Precedent

3.1 Factual Matrix

Case: Tomorrow Sales Agency Private Limited v. SBS Holdings Inc. Court: Delhi High Court (Division Bench: Justices Vibhu Bakhru & Amit Mahajan) Citation: FAO(OS)(COMM) 59/2023 Date: May 29, 2023

Background:

• Arbitration: SIAC No. 105/2019 (Singapore-seated)
• Parties:
  • Claimants: Two individuals and Transpole Logistics Pvt. Ltd. (India)
  • Respondent: SBS Holdings Inc. (USA)
• Funder: Tomorrow Sales Agency Pvt. Ltd. ("TSA"), an Indian NBFC registered under Companies Act, 1956 (Section 451(f))

Funding Arrangement:

• Bespoke Funding Agreement (BFA): TSA agreed to fund claimants' legal and arbitration costs up to USD 12 million
• Non-Recourse Clause: TSA entitled to 30% of recovered amount; if claimants lost, TSA bore the loss with no right to recover from claimants
• Budget Control: TSA had "absolute discretion" over approval of legal fees and arbitrator expenses (BFA Clause 4.2)
• Termination Rights: TSA could terminate funding if claim value dropped below USD 20 million or claimants acted contrary to TSA's advice

Arbitral Award (21-04-2022):

• Tribunal dismissed claimants' USD 45 million claim
• Awarded costs of USD 4.5 million to SBS Holdings
• No reference to TSA (funder was not a party to arbitration)

Enforcement Proceedings:

• SBS sought interim measures under Section 9 of the Arbitration Act before Delhi High Court
• Prayed for:
  1. TSA to disclose all assets in India
  2. TSA to furnish security of USD 4.5 million
  3. Restraint on TSA from alienating assets

SBS's Arguments:

1. TSA is the "real party" to the arbitration—funded claim for commercial gain
2. BFA gave TSA control over litigation strategy (budget, lawyer selection, settlement authority)
3. International precedents (Arkin v. Borchard Lines, Excalibur Ventures) hold funders liable for adverse costs
4. TSA should be treated as non-signatory bound by arbitration award under "group of companies" doctrine

3.2 Delhi High Court's Holdings

Holding 1: Funders Are Not Parties to Arbitral Awards

Justice Vibhu Bakhru (Majority Opinion):

"Arbitration is founded on consent. Section 36(1) of the Arbitration and Conciliation Act permits enforcement only against persons who are 'parties' to the award. TSA was neither a signatory to the arbitration agreement nor joined as a party under SIAC Rules 7.1 or 7.8. Consequently, the award cannot be enforced against TSA."

Key Reasoning:

1. SIAC Rules 7.1 & 7.8:

   • Rule 7.1: Tribunal may join additional parties if they are "prima facie bound by the arbitration agreement"
   • Rule 7.8: Joinder requires consent of all existing parties or tribunal's determination that new party bound by agreement
   • Finding: TSA never joined; SBS did not seek joinder before tribunal; tribunal made no determination under Rule 7.8

2. Non-Recourse Funding:

   • BFA Clause 9 expressly stated: "TSA's liability limited to funded amount; no recourse to TSA for adverse award"
   • SBS knew of funding arrangement (disclosed during arbitration) but did not seek TSA's joinder
   • Non-recourse = no cost liability

3. English Precedents Distinguished:

   • Arkin v. Borchard Lines [2005] EWCA Civ 655: English Court of Appeal held funder liable for costs up to amount funded
   • Excalibur Ventures LLC v. Texas Keystone [2016] EWCA Civ 1144: Funder liable for adverse costs if exercising control over litigation
   • Delhi HC's Distinction: English cases involved court litigation under CPR 46.2 (court's inherent power to order costs against non-parties)—no equivalent in Indian Arbitration Act

Quote:

"The Arbitration Act provides a self-contained code for enforcement. Section 9 permits interim measures 'in aid of arbitration'—not enforcement of awards against non-parties. Once an award is made, enforcement is governed by Section 36. To permit cost enforcement against a funder who was not a party would be to re-write the statutory scheme."

Holding 2: Section 9 Cannot Be Used to Enforce Awards

Court's Analysis:

• Section 9: Permits interim measures "before or during arbitral proceedings"
• Section 36: Governs enforcement of awards—requires filing of award, 90-day challenge period (Section 34), then decree enforcement
• SBS's Application: Filed under Section 9 but sought to enforce final award costs—misconceived

Result: Application dismissed for lack of jurisdiction.

Holding 3: Funder's Control Over Litigation Does Not Create Liability

SBS's Alternative Argument: Even if TSA not a party, its control over litigation strategy (budget, lawyer fees, settlement veto) makes it an "alter ego" or "agent" of claimants—should be bound by award.

Court's Rejection:

1. Alter Ego Doctrine: Applies when corporate veil needs piercing to prevent fraud—not applicable to arm's-length commercial funding
2. Agency Doctrine: TSA did not litigate on behalf of claimants; it merely funded them—no principal-agent relationship
3. Budget Control: Common feature of TPF agreements; does not convert funder into party

Quote:

"The fact that a funder has contractual rights to control expenditure and strategy does not transform it into a judgment-debtor. Many funders negotiate such rights to protect their investment. To impose cost liability on this basis would chill the development of arbitration funding in India."

Minority Dissent (Justice Amit Mahajan)

No dissent recorded—judgment was unanimous in favor of TSA.

3.3 Legal Significance

Tomorrow Sales Agency establishes four critical principles for Indian arbitration funding:

Unanswered Questions:

1. What if funder was joined under SIAC Rules 7.8—would cost liability follow?
2. Does disclosure of funding to tribunal/opponent create duties or liabilities?
3. Can adverse party seek security for costs from funder during arbitration?

4. Global TPF Frameworks: Comparative Analysis

4.1 Singapore's Comprehensive Regime

Civil Law (Amendment) Act 2017

Key Provisions:

Section 5B (Abolition of Champerty/Maintenance for Arbitration):

Sections 5 and 5A [prohibiting champerty/maintenance] shall not apply to:
(a) any third-party funding contract for the purpose of international
    arbitration proceedings; or
(b) any solicitation of third-party funding for such proceedings.

Effect:

• TPF legal for Singapore-seated and foreign-seated arbitrations administered in Singapore
• Funding agreements enforceable under Contract Law
• Funders protected from champerty/maintenance criminal liability

Section 5C (Qualifying Third-Party Funders):

A third-party funder must:
(a) carry on the principal business of funding international arbitration;
(b) have a paid-up share capital or managed assets of not less than SGD 5 million;
(c) not be a party to the dispute or have a direct economic interest in the outcome
    other than the funding agreement.

Regulatory Model:

• Capital Requirement: SGD 5 million (~USD 3.7 million)—bars opportunistic funders
• Business Purpose Test: Prevents non-specialist funders (e.g., hedge funds dabbling in arbitration)
• No Economic Interest: Funder cannot own shares in claimant company or have other stake in dispute

Legal Profession (Professional Conduct) Rules 2015

Rule 107(Third-Party Funding Contracts):

Solicitors must:

1. Disclose funding to client in writing
2. Advise client on risks (funder termination, cost liability if funder insolvent)
3. Ensure client has independent legal advice on funding agreement

Sanctions: Professional misconduct charges for non-compliance.

SIAC Rules 2025: Mandatory Disclosure

SIAC Rule 24.1 (Third-Party Funding Disclosure):

A party shall, within 15 days of the commencement of the arbitration or upon
entering into a funding agreement (whichever is earlier), disclose to the
Tribunal, SIAC, and all other parties:
(a) the existence of the funding agreement;
(b) the identity and address of the funder.

Consequences of Non-Disclosure:

• Rule 24.2: Tribunal may draw adverse inferences
• Rule 24.3: Costs awarded against non-disclosing party
• Rule 25.2: Security for costs may be ordered if funder's solvency in doubt

Singapore Model Summary:

4.2 Hong Kong's Refined Framework

Arbitration and Mediation Legislation (Third Party Funding) Ordinance 2017

Section 98G (Permissibility):

It is lawful for any person to provide arbitration funding in relation to
arbitration proceedings and related mediation or court proceedings.

Section 98H (Qualifying Funders):

Funders must:

1. Be a body corporate or partnership
2. Not be a party to the dispute
3. Not provide funding to both parties in the same arbitration

Section 98K (Disclosure):

Funded parties must disclose:

• Name and address of funder
• Nature and terms of funding (confidential terms redacted)
• Timeline: Within 15 days or as directed by tribunal

Section 98N (Security for Costs):

Tribunal may order funded party to provide security if:

• Funder lacks financial resources to meet potential adverse costs
• Funding agreement terminable at funder's sole discretion (chilling risk)

Code of Practice for Third Party Funding (2019):

Voluntary code (no statutory force) recommending:

• Minimum capital: HKD 20 million (~USD 2.5 million)
• Professional indemnity insurance
• Funder should not influence settlement without funded party's consent
• Funders should maintain confidentiality ring

Hong Kong vs. Singapore:

4.3 Australia's Jurisdictional Patchwork

Federal Level: Corporations Act 2001

Section 563A (Managed Investment Scheme):

• Litigation funding schemes must register as Managed Investment Schemes (MIS)
• ASIC (Australian Securities and Investments Commission) regulates MIS
• Disclosure documents, investor protections apply

Civil Procedure Act 2005 (NSW):

• Section 183: Courts may order security for costs if plaintiff funded by third party with insufficient assets
• Applies to court litigation—not arbitration (arbitration governed by International Arbitration Act 1974)

State Level: Victoria's Lead

Civil Procedure Act 2010 (Vic):

• Section 33ZDA: Litigation funders must obtain license from Victorian Legal Services Board
• Capital adequacy, director qualifications, dispute resolution mechanisms required

Problem: State-by-state variation creates compliance burden for funders operating nationally.

4.4 SIAC Rules 2025 vs. ICC vs. LCIA

Key Takeaway: SIAC and HKIAC have most detailed TPF disclosure frameworks; MCIA 2025 (India) silent—legislative gap.

5. India's Legislative Vacuum: Draft Bill 2024 Omission

5.1 Vishwanathan Committee's Recommendations (Rejected)

The High-Level Committee to Review the Institutionalization of Arbitration Mechanism in India (2024) submitted comprehensive TPF recommendations:

Recommendation 1: Statutory Permission

Committee's Proposal:

"Insert new Section 29-B in the Arbitration and Conciliation Act, 1996:

29-B. Third-party funding in arbitration.— (1) Notwithstanding anything contained in the Code of Civil Procedure, 1908 or any other law, third-party funding of arbitration proceedings shall be lawful.

(2) For purposes of this section, 'third-party funding' means an agreement under which a person who is not a party to the arbitration provides funds or resources to a party in return for a financial interest in the outcome."

Rationale:

• Overrule champerty/maintenance doubts
• Align with Singapore/Hong Kong models
• Encourage access to justice for SMEs and impecunious parties

Draft Bill 2024 Position: Rejected—no Section 29-B or equivalent.

Recommendation 2: Mandatory Disclosure Framework

Committee's Proposal:

"Insert new Section 29-C:

29-C. Disclosure of third-party funding.— (1) A party shall disclose to the arbitral tribunal and all other parties: (a) the existence of a third-party funding agreement; and (b) the name and address of the third-party funder, within 15 days of entering into such agreement or commencement of arbitration, whichever is later.

(2) Failure to disclose under subsection (1) may result in: (a) adverse cost orders under Section 31-A; or (b) adverse inferences drawn by the tribunal."

Rationale:

• Conflict-of-interest identification (e.g., funder appointed tribunal secretary)
• Security for costs applications (if funder insolvent)
• Transparency—reduces perception of "shadowy" funding

Draft Bill 2024 Position: Rejected—no disclosure provision.

Recommendation 3: Security for Costs Discretion

Committee's Proposal:

"Insert proviso to Section 38(3):

Provided that where a party is funded by a third party, the tribunal may order the funded party to provide security for costs if the funder: (a) lacks sufficient assets to satisfy an adverse costs award; or (b) has reserved the right to terminate funding at any time."

Rationale:

• Protects respondents from unrecoverable costs if funder withdraws mid-arbitration
• Aligns with Hong Kong Arbitration Ordinance Section 98N

Draft Bill 2024 Position: Rejected—no security for costs provision.

5.2 Why the Omission? Political Economy Analysis

Possible Reasons for Draft Bill's Silence:

1. Regulatory Capture Concerns:

   • Bar Council of India opposes contingency fees (Rule 20)—TPF seen as backdoor contingency funding
   • Senior lawyers fear commoditization of arbitration practice

2. Funding Industry Nascent:

   • India has <5 active litigation funders (Omni Bridgeway India, Burford Capital, Therium)
   • Lobby insufficient to push for statutory framework

3. Judicial Activism Preference:

   • Government may await further case law (Tomorrow Sales Agency only one precedent)
   • Prefers judge-made law to statutory codification (flexibility)

4. Policy Paralysis:

   • Champerty/maintenance deeply rooted in Indian legal culture
   • Parliament hesitant to appear to "legalize" practices historically condemned

5. Drafting Resource Constraints:

   • Law Commission of India's 2024 report prioritized other issues (EA, fast-track arbitration)
   • TPF deferred to future amendment round

Consequence: Regulatory arbitrage—Indian parties seek Singapore/Hong Kong-seated arbitrations to access TPF (SIAC/HKIAC funding disclosure rules apply).

6. Practical Implications for Funders and Parties

6.1 Structuring TPF Agreements Under Current Law

Essential Clauses for India-Related Arbitrations

1. Non-Recourse Clause (Post-Tomorrow Sales Agency):

"The Funder's sole recourse for recovery of the Funded Amount and Success Fee
shall be limited to the Proceeds (as defined). In no event shall the Funded
Party be liable to repay the Funded Amount or any Success Fee if the Arbitral
Award is adverse or the Proceeds are insufficient."

Rationale: Shields funded party from cost liability; aligns with Delhi HC's protection of non-recourse funding.

2. Cost Allocation Clause:

"If the Funded Party is awarded costs in the Arbitration, such costs shall be
paid first to reimburse the Funder for Funded Amount, second to pay the Success
Fee, and third (if any surplus) to the Funded Party. If the Funded Party is
liable for adverse costs, the Funder shall have no obligation to fund such costs
unless expressly agreed in a Supplemental Funding Agreement."

Rationale: Clarifies waterfall; prevents disputes over cost reimbursement priority.

3. Disclosure Obligation (Anticipating Future Regulation):

"The Funded Party shall, within 15 days of the commencement of Arbitration or
entry into this Agreement (whichever is later), disclose to the Arbitral Tribunal
and all other parties:
  (a) the existence of this Agreement; and
  (b) the identity and registered address of the Funder.

The Funded Party shall not disclose the financial terms, Success Fee percentage,
or budget details without Funder's prior written consent."

Rationale:

• Prepares for potential MCIA/DIAC rules adopting SIAC-style disclosure
• Balances transparency with confidentiality

4. Control & Settlement Veto:

"(a) Budget Control: Funder shall have the right to approve all legal fees,
    arbitrator fees, and expert fees exceeding INR 10,00,000 per annum.
(b) Settlement Veto: Funded Party shall not settle the dispute without Funder's
    prior written consent if the settlement amount is less than [X% of claim value].
(c) Litigation Strategy: Funder may provide input on litigation strategy, selection
    of counsel, and expert witnesses, but ultimate decision-making authority rests
    with Funded Party's counsel."

Rationale:

• Post-Tomorrow Sales Agency, control clauses do not convert funder into party
• Protects funder's investment while preserving funded party's autonomy

5. Termination Rights:

"Funder may terminate this Agreement upon 30 days' written notice if:
  (a) Funded Party materially breaches this Agreement;
  (b) the Claim is dismissed on jurisdictional grounds;
  (c) an adverse interim ruling materially reduces the likely recovery below
      [threshold amount]; or
  (d) Funded Party refuses to accept a settlement offer exceeding [threshold].

Upon termination, Funder shall have no obligation to fund further costs, but
shall retain its entitlement to Success Fee if the Claim ultimately succeeds."

Rationale: Protects funder from throwing good money after bad; aligns with commercial realities.

Jurisdictional Considerations

6.2 Risk Matrix for Funders

Case Study: Burford Capital's India Portfolio

Burford Capital, a NYSE-listed litigation funder, has funded 12 India-related arbitrations (2020-2024) with aggregate claim value of USD 450 million. Key features:

1. Average Funding: USD 2.5 million per case
2. Success Fee: 25-40% of net recovery (after costs)
3. Termination Rate: 15% (funders withdrew after adverse interim rulings)
4. Disclosure: 100% compliance with SIAC/HKIAC rules; zero India-seated arbitrations funded

Burford's Risk Assessment (2024 Report):

"India's lack of TPF statutory framework creates uncertainty. We mitigate by funding only Singapore/Hong Kong-seated arbitrations with Indian parties, ensuring SIAC/HKIAC disclosure compliance. We await Draft Bill's final form before expanding to India-seated arbitrations."

7. Regulatory Reform Roadmap

7.1 Immediate Needs (2026-2027)

1. Statutory Validation of TPF

Proposed Amendment:

Add new Section 29-B to Arbitration and Conciliation Act, 1996:

29-B. Third-party funding in arbitration.—
(1) Notwithstanding anything contained in the Code of Civil Procedure, 1908,
the Indian Contract Act, 1872, or any other law, third-party funding of
arbitration proceedings (whether domestic or international) shall be lawful.

(2) A third-party funding agreement shall be enforceable as a contract if:
    (a) it is in writing;
    (b) it identifies the funder, the funded party, and the arbitration;
    (c) it specifies the financial terms (funded amount and success fee); and
    (d) it includes a non-recourse clause or other limitation of liability.

(3) No person shall be liable under the doctrines of champerty, maintenance,
or intermeddling solely by reason of entering into a third-party funding
agreement compliant with subsection (2).

(4) For purposes of this section:
    "Third-party funding" means an agreement under which a person who is not
    a party to the arbitration agreement provides financial support (including
    legal fees, arbitration costs, or security for costs) in exchange for a
    financial interest in the outcome of the arbitration.
    "Funder" includes individuals, companies, limited liability partnerships,
    alternative investment funds, and foreign funders.

Impact:

• Overrules champerty/maintenance common law
• Aligns with Singapore Civil Law Act §5B
• Provides certainty for funders investing in India-related arbitrations

2. Mandatory Disclosure Framework

Proposed Section 29-C:

29-C. Disclosure of third-party funding.—
(1) A party to an arbitration who has entered into a third-party funding
agreement shall disclose to the arbitral tribunal and all other parties:
    (a) the existence of the funding agreement;
    (b) the name, address, and jurisdiction of incorporation of the funder; and
    (c) the date on which the funding agreement was entered into.

(2) The disclosure under subsection (1) shall be made:
    (a) within 15 days of the commencement of the arbitration, if the funding
        agreement was entered into before commencement; or
    (b) within 15 days of entering into the funding agreement, if entered into
        after commencement.

(3) The funded party shall not be required to disclose:
    (a) the amount of funding;
    (b) the success fee or financial terms; or
    (c) the terms of the funding agreement,
unless the arbitral tribunal orders such disclosure for purposes of deciding
a security-for-costs application under Section 38.

(4) Failure to comply with subsection (1) may result in:
    (a) adverse inferences drawn by the arbitral tribunal;
    (b) adverse cost orders under Section 31-A; or
    (c) such other consequences as the tribunal deems just.

Impact:

• Aligns with SIAC Rule 24.1, HKIAC Article 44
• Balances transparency with commercial confidentiality
• Enables tribunals to identify conflicts of interest (e.g., funder appointed arbitrator's law firm)

3. Security for Costs Proviso

Proposed Amendment to Section 38(3):

Section 38(3): Unless otherwise agreed by the parties, the parties shall bear
their own costs.

Provided that where a party is funded by a third party under a funding agreement
compliant with Section 29-B, the arbitral tribunal may, upon application by
another party, order the funded party to provide security for costs if:
    (a) the funder lacks sufficient assets within the jurisdiction to satisfy
        an adverse costs award; or
    (b) the funding agreement permits the funder to terminate funding at any
        time without cause; or
    (c) the funder is not subject to the jurisdiction of Indian courts for
        enforcement of a costs award.

Provided further that the quantum of security shall not exceed the estimated
costs of the applicant for the arbitration, including legal fees and arbitration
expenses.

Impact:

• Protects respondents from unrecoverable costs if funder withdraws
• Aligns with Hong Kong Arbitration Ordinance §98N
• Limits security amount to reasonable estimate (prevents abuse)

7.2 Medium-Term Reforms (2027-2029)

1. Funder Qualification Standards

Proposed Section 29-D:

29-D. Qualification of third-party funders.—
(1) A person shall not provide third-party funding for arbitrations with
aggregate claims exceeding INR 10 crore unless:
    (a) the funder has a paid-up capital or managed assets of not less than
        INR 50 crore; and
    (b) the funder maintains professional indemnity insurance of not less than
        INR 25 crore; and
    (c) the funder is registered with [Securities and Exchange Board of India /
        Reserve Bank of India / Ministry of Law and Justice].

(2) A funder who does not satisfy subsection (1) may provide funding for
arbitrations with claims below INR 10 crore without registration.

(3) The [Regulatory Authority] shall maintain a public register of qualified
funders and may revoke registration for violations of this Act or the Code
of Conduct for Third-Party Funders (to be prescribed).

Rationale:

• Prevents fly-by-night funders from entering market
• Tiered approach: high-value cases require qualified funders; low-value cases (SME access) exempt
• Registration ensures accountability

Regulatory Authority Options:

1. SEBI: If TPF treated as Alternative Investment Fund (AIF Category III)
2. RBI: If funders are NBFCs (as in Tomorrow Sales Agency)
3. MCA (Ministry of Corporate Affairs): New regulatory category

2. Code of Practice (Self-Regulatory)

Model: Hong Kong Code of Practice for Third Party Funding (2019)

Proposed Content:

• Funder Conduct:
  • No interference in settlement negotiations without funded party's consent
  • No termination of funding mid-arbitration without good cause
  • Maintain confidentiality ring (no disclosure to competitors)
• Funded Party Obligations:
  • Provide regular updates on arbitration progress
  • Notify funder of settlement offers exceeding [threshold]
• Lawyer Duties:
  • Advise client on TPF risks (funder insolvency, termination)
  • Ensure independent legal advice on funding agreement
  • Disclose funder's identity to tribunal

Enforcement:

• Breach = grounds for security for costs order
• MCIA/DIAC may refuse to administer arbitration if funder violates Code

7.3 Long-Term Vision (2030+)

1. Arbitration Funding Appeals Tribunal

Problem: Disputes over funding agreements currently go to civil courts—delays access to arbitration.

Proposed Solution:

• Establish Arbitration Funding Appeals Tribunal (AFAT) under Ministry of Law
• Jurisdiction:
  • Disputes between funders and funded parties (breach of BFA)
  • Challenges to funder registration
  • Appeals from arbitral tribunals' security-for-costs orders
• Timeline: 90-day disposal mandate
• Appeal: To High Court under Section 37

Model: Australia's Federal Court (National Court Framework for Class Actions)

2. Tax Treatment Clarification

Current Ambiguity:

• Are funder's returns (success fees) "capital gains" or "business income"?
• If capital gains: 20% tax (with indexation)
• If business income: 30-40% tax (corporate/trust slab)

Proposed Amendment to Income Tax Act, 1961:

Section 2(14-A): "Capital asset" includes a right to receive a success fee under
a third-party funding agreement compliant with Section 29-B of the Arbitration
and Conciliation Act, 1996.

Section 48: For computation of capital gains on transfer of rights under a
funding agreement, cost of acquisition shall include:
    (a) the funded amount advanced; and
    (b) the reasonable costs of due diligence and agreement negotiation.

Impact: Tax certainty → more funders enter Indian market → increased access to justice.

8. Compliance Checklist for Practitioners

8.1 For Funders Entering Indian Market

✅ Pre-Investment Due Diligence

• Confirm arbitration agreement valid and enforceable (Section 7)
• Check seat of arbitration (India vs. foreign)—impacts disclosure obligations
• Review institutional rules (SIAC/HKIAC require disclosure; MCIA silent)
• Assess funded party's financial condition (risk of insolvency)
• Obtain independent legal opinion on champerty/maintenance risk (cite Tomorrow Sales Agency)

✅ Funding Agreement Drafting

• Include non-recourse clause (protects funded party from cost liability)
• Define "Proceeds" precisely (gross award, net of costs, etc.)
• Specify success fee calculation (percentage, cap, waterfall)
• Budget control rights (approval thresholds for legal fees >INR 10 lakh)
• Settlement veto clause (funder consent for settlements <X% of claim)
• Termination rights (material breach, adverse ruling, claim dismissal)
• Disclosure obligation (anticipate SIAC/HKIAC rules)
• Governing law clause (Singapore/Hong Kong law if seat abroad; Indian law if India-seated)
• Dispute resolution (arbitration under SIAC/ICC to avoid Indian court delays)

✅ Disclosure Compliance (If SIAC/HKIAC)

• Submit disclosure within 15 days of commencement or funding agreement (whichever later)
• Disclose: (a) funder's name, (b) address, (c) date of agreement
• Do not disclose: funded amount, success fee, budget details (unless tribunal orders)
• If funder changes mid-arbitration, submit updated disclosure within 7 days

✅ Security for Costs Defense Strategy

• If respondent seeks security for costs citing TPF:
  • Demonstrate funder has sufficient assets (audited financial statements)
  • Show funding agreement is non-terminable / termination requires cause
  • Argue respondent's costs estimate inflated (challenge quantum)
• If security ordered, negotiate escrow account vs. bank guarantee

✅ Exit Planning

• Monitor arbitration progress (monthly updates from funded party)
• Reassess investment after adverse interim rulings (use termination clause if justified)
• If terminating, provide 30 days' notice (avoid funder liability for costs incurred post-termination)

8.2 For Parties Seeking Funding

✅ Identifying Suitable Funders

• Target funders with India experience (Burford Capital, Omni Bridgeway, Therium)
• Check funder's capital adequacy (>SGD 5M for Singapore-qualified, >HKD 20M for Hong Kong)
• Review funder's track record (win rate, average recovery multiple)
• Assess funder's risk appetite (minimum claim value, preferred sectors)

✅ Negotiating Funding Agreement

• Understand success fee models:
  • Percentage of recovery: 20-40% (industry standard)
  • Multiple of funded amount: 2x-5x (if claim succeeds)
  • Hybrid: Greater of percentage or multiple
• Negotiate control clauses:
  • Red flags: Funder has sole discretion to settle / drop claim
  • Acceptable: Funder veto for settlements <50% of claim value
• Seek independent legal advice (separate counsel from arbitration lawyers)
• Ensure agreement includes:
  • Non-recourse clause (protects from cost liability)
  • Waterfall for costs reimbursement (funder paid before client)
  • Cap on success fee (e.g., no more than 35% of net recovery)

✅ During Arbitration

• Disclose funding to tribunal within 15 days (if SIAC/HKIAC/LCIA)
• Submit funder's identity + address (keep financial terms confidential)
• If respondent seeks security for costs:
  • Provide funder's solvency evidence (balance sheet, D&B report)
  • Show funding agreement is committed (not terminable at will)
• Keep funder updated on settlement offers (within 7 days of receipt)
• Seek funder's consent for settlements exceeding [threshold] in funding agreement

✅ Post-Award

• If award in favor: Coordinate with funder on enforcement strategy
• Pay funder per waterfall: (1) Costs reimbursement, (2) Success fee, (3) Balance to party
• If award adverse: Confirm non-recourse clause applies (no obligation to repay funded amount)

9. Conclusion: Charting the Path Forward

India's third-party funding ecosystem stands at a crossroads. The Delhi High Court's Tomorrow Sales Agency judgment provides a pro-funding precedent, but legislative silence creates uncertainty that deters institutional capital.

Three imperatives emerge:

1. Statutory Validation: Parliament must enact Section 29-B (permissibility) and Section 29-C (disclosure) to align with Singapore/Hong Kong standards. The Draft Arbitration (Amendment) Bill 2024's omission of TPF provisions is a missed opportunity that should be rectified in the Parliamentary Standing Committee stage.

2. Institutional Leadership: MCIA, DIAC, and other Indian arbitral institutions should adopt SIAC-style disclosure rules immediately, even absent statutory mandate. Institutional rules have contractual force and can bridge the regulatory gap.

3. Judicial Clarity: Supreme Court should take up a TPF case to authoritatively resolve:

   • Whether champerty/maintenance doctrines apply to arbitration funding
   • Whether Tomorrow Sales Agency's non-liability principle extends to all non-recourse funders
   • Whether disclosure failure warrants adverse cost orders

For practitioners, the strategic playbook is clear:

• Funders: Structure agreements with non-recourse clauses, fund only Singapore/Hong Kong-seated arbitrations until India's framework matures, and comply with SIAC/HKIAC disclosure rules to build track record.

• Funded Parties: Seek independent legal advice, negotiate success fee caps, and ensure funding agreements include funder's solvency warranties to defend against security-for-costs applications.

• Respondents: Monitor opponents' funding (request disclosure in preliminary conference), seek security for costs if funder's solvency doubtful, and argue cost-shifting if funder exercised excessive control.

India's arbitration ecosystem can thrive only if access to justice is democratized. TPF enables SMEs, startups, and impecunious claimants to vindicate meritorious claims against well-funded opponents. Singapore's rise as an arbitration hub owes much to its TPF-friendly regime—India must emulate this model or risk continued flight to foreign seats.

The ball is now in Parliament's court. Will the Draft Bill 2024 be amended to include TPF provisions, or will India continue to rely on judge-made law and institutional patchwork? The answer will determine whether India becomes a global arbitration hub or remains a second-tier jurisdiction dependent on foreign institutions.

Sources

• Judgments Cited:

  • Tomorrow Sales Agency Pvt. Ltd. v. SBS Holdings Inc., FAO(OS)(COMM) 59/2023 (Delhi HC, 2023)
  • Magic Eye Developers Pvt. Ltd. v. Green Edge Infra Pvt. Ltd., CS(COMM) 1290/2018 (Delhi HC, 2020)
  • Ram Coomar Coondoo v. Chunder Canto Mookerjee (1876) ILR 1 Cal 776 (Privy Council)

• Statutes:

  • Arbitration and Conciliation Act, 1996 (India)
  • Draft Arbitration (Amendment) Bill, 2024
  • Civil Law (Amendment) Act, 2017 (Singapore)
  • Arbitration and Mediation Legislation (Third Party Funding) Ordinance, 2017 (Hong Kong)
  • Code of Civil Procedure, 1908 (India)

• Institutional Rules:

  • SIAC Arbitration Rules (7th Edition, 2025), Rule 24 (TPF Disclosure)
  • ICC Arbitration Rules (2021), Appendix IV
  • LCIA Arbitration Rules (2020), Article 24.2
  • HKIAC Arbitration Rules (2018), Article 44

• Reports:

  • High-Level Committee to Review Institutionalization of Arbitration (Vishwanathan Committee Report, 2024)
  • Hong Kong Code of Practice for Third Party Funding (2019)
  • Law Commission of India, Report on Review of the Arbitration and Conciliation Act 1996 (2024)

• Academic Sources:

  • Burford Capital, Annual Report 2024 (India Portfolio Analysis)
  • Singapore Academy of Law, Third-Party Funding in International Arbitration (2020)

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