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Chiranth Mukunda*
I. INTRODUCTION
In Tomorrow Sales Agency Ltd (TSA) v. SBS Holdings, a division bench of the Delhi High Court held that third party funding (“TPF”) is essential to ensure ‘access to justice’ because without such funding arrangements, an impecunious claimant would be unable to pursue a valid claim in cost-heavy arbitrations. The case is important because it is the only case that has had an opportunity to expressly deal with the question of whether the third party funder can be made to provide security for the costs of arbitration as an interim measure under section 9. The court rejected such a possibility based on two interconnected reasons (paras 45-48): (1) arbitral award, including the final costs award, is binding and can be enforced only against the parties or persons claiming under or through the parties to the arbitration as provided under Section 35 of the Arbitration and Conciliation Act 1996 (“Act”). The third-party funder in the present case did not fall within the scope of those categories, as the court rejected the application of theories for binding third party non-signatories as parties. (2) As a consequence, since the final cost award cannot be enforced against the third-party funder under section 36(1) of the Act, an interim measure for security for costs under section 9 which can be only available in aid of enforcement of the final arbitral award cannot also be taken recourse to against the said third party (para 47). Although it may seem logical at first instance as seen from the general acceptance of the case on the issue, it is argued here that the court failed to appreciate the real questions before it.
Admittedly, it is generally recognized that it might not be possible to implead third-party funders as non-signatory ‘party’ to the arbitration agreement to make the third-party funder amenable to the tribunals’ jurisdiction for cost awards. As a Report of the International Council for Commercial Arbitration (ICCA) on TPF observes (p. 161), a third-party funder engages in a one-off and arms-length commercial transaction, and the funder typically has no involvement in the performance of the underlying contract. Hence, in the absence of the funder's involvement in performance, negotiation, or termination of the underlying contract, a mere pecuniary interest in the dispute resolution cannot form the basis to satisfy the doctrines of implied consent and other such theories to bind the non-signatories.
However, contrary to the above-mentioned controversy over joinder, the essential question before the court in Tomorrow Sales was whether the third-party funder can be made to provide security for the costs awarded as an interim measure under Section 9 of the Act. It is now settled law that orders for interim measures under Section 9 can be made not only against the parties to the arbitration but also non-parties (para 27) . If this legal proposition holds, then the third-party funder can be made to provide security for costs for the funded arbitration subject to relevant and well-known considerations, which the court must take into account before granting security for costs as an interim order. Hence, reasoning on (1) partly rests on wrong appreciation of the controversy before the court.
Importantly, the possibility of such a measure is already recognized to a limited degree in certain state amendments made to Order XXV (On “Security for Costs”) Rule 3 of Code of Civil Procedure 1908 in the context of litigation-funding. For example, amendments to C.P.C. made by Maharashtra and Madhya Pradesh make a provision for ordering the third-party litigation funder to provide security for costs of the funded litigation. This remedy is provided for even though there is no provision in the C.P.C. or rules made by the courts therein that allows for the final order of costs of litigation to be made against the third party funder (emphasis). These existing provisions are highlighted to merely show that requiring the third party funder who is not liable for final costs order to provide security for costs is not alien to civil procedure rules in India. The courts’ powers under section 9 to act in aid of effective arbitration is even otherwise broader and not bound by the technicalities of the C.P.C provisions (para 39). The minimum requirement is that while exercising its powers to grant interim measures under the act, the general principles underlying C.P.C should be given due regard (para 40). Nevertheless, even as a matter of principle, the reason (2) rests on shaky ground as will be further demonstrated in the essay.
Therefore, I make two arguments in this essay. First, ordering security for costs against the third-party funder, is inherent and permissible under Section 9. It also addressees possible objections similar to those encountered in Tomorrow Sales. Second, as a matter of principle, such a measure is necessary to bring fair balance in the matter of arbitral cost risks assumed by the parties in funded arbitrations. This, it is argued, is essential to strike a balance between the need to ensure ‘access to justice’ through the funding arrangement and the costs that the other party would have incurred in the scenario where the claims by the impecunious claimants fail as being unmeritorious.
II. SOURCES OF THE POWER TO ORDER SECURITY FOR COSTS UNDER SECTION 9
Section 9 and Section 17 of the Act grant the power to order interim measures in aid of arbitration to both the courts and the arbitral tribunal, respectively. Security for costs (‘SfC’) is a provisional measure that can be ordered by the competent court or tribunal against such necessary persons to provide security for the costs incurred by the other party in the event that their claims (or counter-claims) are ultimately unsuccessful. Broadly, it seeks to address the potential risk of non-compliance with the final cost order by the unsuccessful party to the proceedings. Section 38(3) of the English Arbitration Act 1996 expressly provides that the tribunal may order a claimant to provide security for the costs of the arbitration. Some institutional rules also expressly provide for SfC as an interim measure, including Article 25.2 of LCIA Rules , Rule 27(j) of SIAC Rules, Rule 53 ICSID Convention Arbitration Rules 2022.
Sections 9 and 17 of the A&C 1996 or the UNCITRAL Model Law article 17 on interim measures do not have an express provision in this regard. Section 9(1)(ii)(b) and section 17(1)(ii)(b) which allows an interim order for ‘securing the amount in dispute’. However, ‘amount in dispute’ refers to the claims and counter-claims in dispute which relates to the merits of the case (see generally, ONGC v. Afcons Gunanusa JV). Hence, this provision cannot cover for securing the costs of arbitration under its ambit.
There is no direct authority which clarifies the position in India. Nevertheless, the power to order SfC is generally regarded as being a part of inherent powers to preserve the integrity of the proceedings. For example, Article 23(1) of the ICC Arbitration rules only provides that the tribunal “order any interim or conservatory measures it deems appropriate." This language has been interpreted as empowering the tribunal to grant an order for SfC to meet the justice of the case. Nevertheless, with a caveat that this discretionary measure should be an exceptional remedy. Similarly, as noted by the UNCITRAL Working Group Report (para. 48), article 26(2)(c) of the UNCITRAL Arbitration Rules 2021 and article 17(2)(c) of the UNCITRAL Model Law have been ‘generally understood’ to give the tribunal the power to order security for costs. Therefore, the broad language of sections 9(1)(ii)(e) and 17(1)(ii)(e), which empower the court and the arbitral tribunal, respectively, with ‘residuary power’ to order such interim measures that are ‘just and convenient,’ is capable of including within its scope the power to order SfC.
In Essar House Private Limited v. Arcelor Mittal Nippon Steel India Limited (2022), the Supreme Court held that the powers granted under Section 9 are broad in nature, with the paramount consideration being securing justice based on the facts and circumstances of the case. The courts have also held that if a prima facie case is made by the applicant and the balance of convenience is in favor of interim relief being granted, the court will not let procedural technicalities hamper its ability to act in aid of arbitration and ensure that the successful party will be in a position to get the fruits of arbitration in executing the award. Therefore, it is suggested that the power to order SfC being inherent in Section 9, and the courts entrusted with the power to direct the interim orders against third parties (see III), there is no bar as a matter of law to order the third-party funder to provide security for the costs of arbitration under a Section 9 application.
III. SFC ORDER AGAINST THE THIRD-PARTY FUNDER UNDER SECTION 9
In Blue Coast Infrastructure Development vs. Blue Coast Hotels Ltd. (2020), the Delhi High Court reiterated the long standing position that interim measures under section 9 can be directed against third parties. In contrast, the court also recognized that jurisdiction of the arbitral tribunal is limited to the parties to arbitration agreement because the arbitral proceedings is a creature of an agreement, and interim measures under Section 17 cannot be directed against non-parties to the agreement. Hence, under the existing position, it is clear that the tribunal under s. 17(1)(ii)(e) does not possess the jurisdiction to order the third-party funder to provide SfC. However, as the Supreme Court clarified in Arcelor Mittal Nippon Steel India Ltd. v. Essar Bulk Terminal Ltd (2021), the court under section 9(3) can entertain a petition for interim relief even when the tribunal is constituted if the remedy under section 17 is ‘inefficacious’ as provided in the act post the 2015 Amendments. Therefore, the court can exercise its discretion to order SfC against a third-party funder under Section 9(1)(ii)(e) before the commencement of arbitral proceedings, during arbitral proceedings, or at any time after the making of an arbitral award but before it is enforced.
Additionally, Section 9(1) provides that the court shall have the same powers for making interim orders under Section 9 as a civil court has for the proceedings before it. This provision is used as justification for allowing the interim conservatory orders under section to be directed against third parties because the civil courts would be possessed with similar power (Blue Coast Infrastructure Development, para 26). As previously stated, only certain state amendments made in C.P.C. allow for the civil courts to implead the third-party litigation funder to the proceedings to order such persons to provide security for costs. However, that does not mean that the courts’ power to order SfC against the third party funder in arbitrations under Section 9 is circumscribed only to where the state amendments allowing SfC against TPF in litigation context are in force. Evidently, the said provision in section 9(1) is merely an enabling provision and is not intended to limit the scope and extent of the powers of the court under Section 9 to function as an effective aid in arbitration (emphasis). There is a line of cases, including the Supreme Court in Essar House Private Limited v. Arcellor Mittal Nippon Steel India Limited (2022), the Bombay High Court in Nimbus Communications Limited vs. BCCI, and National Shipping Company of Saudi Arabia vs. Sentrans Industries Limited, which has held that the powers of the court under Section 9 are wider and broader than powers granted under C.P.C., with the paramount consideration being promoting the efficacy of arbitration as a form of dispute resolution.
Importantly, the suggested measure is not antithetical to general principles guiding civil procedures rules in India and other jurisdictions. As already stated, certain state amendments made to Order XXV Rule 3 of the C.P.C such as in Maharashtra, allow for the civil court to order SfC against the third party litigation funders. Similarly, Rule 25.14 of Civil Procedure Rules (C.P.R) in U.K allows for the court to order the third party funder to provide security for the costs of funded litigation. The basic principle underlying these provisions is that it is unfair for the third-party funder to reap profits of successful arbitration without bearing the corresponding risk.
Possible Objections Considered
As encountered in Tomorrow Sales (reason 2 mentioned above), one possible objection which might arise is that an interim order could only be in aid of the final order, and when there was no possibility of any final order of costs against the third-party funder, there cannot also be a grant of interim order requiring the third-party funder to produce SfC.
This objection might be short-sighted for two reasons. Firstly, even when the funder is required to provide SfC, the order remains in aid of the final award for costs which might be against the funded party if it ended on the losing side and in favour of the successful respondents (if the case may be). This is considering the general principle of ‘cost follows the event’ principle encoded under section 31A. Secondly, as observed in the English High Court in The RBS Rights Issue Litigation (No. 2), the potential exposure of litigation funders to orders for costs against them at the end of the day does not itself mean that an order for security for costs should be granted. This is because an order for SfC is guided by its own independent considerations as will be demonstrated below in part IV. Hence, as a logical corollary, the non-exposure of the third-party funder who is not subject to the jurisdiction of the arbitral tribunal for costs cannot be a ground for rejecting an order for SfC which is an independent interim remedy available in aid of efficient arbitration.
In similar vein, the English High Court in Bailey v. UK Ltd held that during the stage of imposing SfC for an amount against the third-party litigation funder, the court is not bound by the amount of assumed responsibility of the litigation funder in the arrangement. Hence, the court ordered the third-party litigation funder to provide SfC for an amount (£1.75 million) exceeding funding facility (£750,000) made available to the impecunious claimant under the funding arrangement.
Similarly, as the Delhi High Court recently noted in Lava International Ltd v. Mintellectuals LLP (2024), an order for furnishing a security is not a final determination of liability, but an interim arrangement to ensure that the award is enforceable. It is the reason behind the principle that precise analysis of the quantum of security is not necessary at the stage of interim orders for security. The logical conclusion of this approach would be that extent of liability (or lack of) of the third-party funder to the final adverse costs award at the end of the proceedings does not determine the order of SfC which is based on considerations of fairness in granting an interim measure as an aid to efficient arbitration. Hence, even though here cannot be enforcement of the cost award against the third-party funder as the funder is not a party to the arbitral proceedings. However, as demonstrated above, that does not require that the courts cannot order SfC against third parties as an interim measure.
I have argued that the provisions of the A&C act are in consonance with the measure suggested, i.e., the interim measure under Section 9 against the third-party funder to provide SfC. This is despite the non-existence of potential liability of the funder for final costs award. The next section provides principled justification as to why such a position would bring the right balance to funded arbitrations.
IV. ON BRINGING THE RIGHT BALANCE IN FUNDED ARBITRATIONS
It is demonstrated in preceding parts that the power to grant SfC can be considered as inherent power within the courts/tribunals’ general power to order interim measures. In this part, I would be proceeding on the following. basis: First, I highlight certain important and independent considerations that must be satisfied before an SfC order, including existence of a TPF. Second, I argue that making the third party funder bear the burden of providing SfC in funded arbitration would address practical concerns in obtaining security for the costs in funded arbitrations and also brings fair allocation of costs risk between the parties.
The question whether the court/tribunal should exercise its discretionary power to order SfC is more complicated. In addition to generic criteria of a prima facie case of succeeding, irreparable harm and balance of convenience that must be satisfied before the court can grant any interim order, there are special and specific but non-exhaustive considerations that must be satisfied before granting SfC. In general, to order SfC, a court/tribunal must be satisfied that a ‘significant and real risk’ that the party requesting SfC (usually respondents) will be unable to recover costs if the claims fail. This can be due to various reasons, ranging from impecuniousness of the claimant to a situation where claimants do not have reachable assets within the jurisdiction. The Charted Instituted of Arbitrators’(CIArb) 2015 Guidelines on ‘Application for Security for Costs’ provide a useful guide as to basic issues that must be considered before granting SfC as an interim measure: i) prospects of success of the applicant, ii) claimants inability to satisfy an adverse costs award and availability of the claimant’s assets for enforcement of an adverse costs award, iii) whether granting SfC would be regarded as ‘fair’ in the totality of circumstances. In this context, a material change in circumstances with respect to the financial condition of the party during the proceedings might also be relevant.
With regards to the criteria of claimants’ inability to meet the costs award and financial situation of the party, funding arrangement, if any, might become relevant and material. As this SIAC practice note indicates, there is an obligation on the disputant parties to disclosure any funding arrangements. This is meant to allow the tribunal to take into account the involvement of external funder in an order for SfC or in appropriating the costs of arbitration. In addition, the terms of the funding arrangement with the third party, including whether such an arrangement covers for adverse costs, ease of termination rights given to the funder might go into the analysis of the inability of the impecunious claimants to meet the potential adverse cost award.
This becomes more prominent in the scenarios described as ‘arbitral hit and run’ where an impecunious party brings an unmeritorious or frivolous claim with the support of a funding arrangement with a third-party funder who will not be responsible for potential adverse cost award. In such a scenario, the inability of the impecunious party to satisfy the cost award coupled with the fact that costs-award cannot be enforced against the third party will leave the successful party high and dry in cost-heavy arbitrations. Nevertheless, funding arrangements are considered to be essential to ‘access justice’ by impecunious claimants as seen in growing acceptance and relevance of such funding arrangements in arbitration. ‘Access to justice’ concern becomes more pronounced when the impecuniousness of the claimant is a result of the underlying wrongful act of the other party in dispute itself. In such a case, overall considerations of ‘fairness’ would militate against granting SfC.
‘Access to Justice’ is Two-Way Street
The preceding paragraphs have laid down the considerations that must be taken into account before granting an SfC application with a focus on existence of funding arrangements. In this context, it needs to be emphasised that the existence of the TPF arrangement is only one among many factors that go into the tribunals’/courts’ consideration while granting SfC. As this SIAC Practice note indicates, existence of such an funding arrangement does not automatically show impecuniousness or the claimant or inability to satisfy the costs order. In addition, it is generally accepted that the grant of SfC would only be in ‘exceptional circumstances.’ Various factors would indicate not granting an SfC application. One such major reason is when grant of SfC would impede claimants’ ability to pursue a valid claim by the reason of additional burden on an impecunious claimant to arrange for a security. Even when the parties’ reliance on funding arrangement shows its impecuniousness and other relevant facts points towards the serious risk of non-compliance with the cost award, it needs to be considered ‘whether awarding security would unjustly stifle a legitimate and material claim.’ While there is no consensus on the relative importance to be given to opposing factors, it is accepted that the applicant party’s right to recover potential costs award must be balanced against the other party’s right to pursue its claim.
The contested question is how this balance of justice can be achieved in practical terms. The following paragraphs will make an argument that: it would be a fair approach which is consistent with general principles guiding the power to order SfC as an interim measure to place the burden on the third-party funder, when necessary, to furnish security for the costs of funded arbitrations.
Tripartite Relationship in a Bilateral arrangement : The Suggested Measure Addresses Practical Concerns
Interim orders generally require the applicant to make a prima facie case of succeeding in the proceedings coupled with the fact that SfC is granted only in ‘exceptional circumstances’ that requires a higher burden to satisfy. Assume that the applicant for SfC makes a case for an interim order to require the impecunious claimants to provide security for the costs of the arbitration considering the totality of financial situation of the funded claimant. The third-party funder in such circumstances may not have any incentive to help the impecunious claimants comply with a SfC order. Consider the funding arrangements encountered in Tomorrow Sales. The terms of the arrangement allowed the funder to terminate the agreement if the funder ‘thinks or believes’ that winning is no longer realistically possible. Though the terms of such funding arrangements considerably vary, it is a real possibility that in such circumstances the funder might not help the funded impecunious party to comply with the SfC order. Such a possibility is greater when the funding arrangements do not cover adverse costs. In such circumstances, the tribunal would have no other option but to rescind the order to grant SfC because of the lack of means with the impecunious claimant to arrange for security coupled with the fact that continuing burden might impede the claimants’ ability to pursue a claim.
This is precisely the situation that followed in ICSID arbitration of Herzig v Turkmenistan. In this dispute, the tribunal initially granted the respondents request for SfC but later on rescinded the order because the claimant face ‘insurmountable obstacles’ in arranging security as the third party funder had disclaimed any liability. This was in consonance with general principles taken into account by the ICSID tribunals that the ‘exceptional’ order for SfC must be ‘necessary and proportionate’ and ‘must not create any undue burden’ on the claimants (see, Vercara LLP v. Republic of Columbia(2023). Nevertheless, the negative consequences of such undesirable situation are unduly borne by the respondents (i.e. applicant party) who is now faced with a fait accompli that it might not recover the costs of arbitration even if it succeeds on the merits.
The problem has been described as regulating a tripartite relationship where three parties are interested in the outcome of the proceedings within a bilateral arrangement of arbitration. Various suggestions have been made to mitigate such unfair outcomes, including direct liability on third-party funders by empowering the tribunal to rule over third-party funders for cost as recommended by the Hong Kong Law Reform Commission (see Recommendation 4). This solution is similar to a provision available in English C.P..R Rules 46.2 which allows for the court to order the funder to bear the costs of the litigation proceedings. However, such a possibility might be considered far-fetched considering the party consent basis of arbitration. Another suggestion has been to make SfC mandatory when the TPF is involved. This is similar to a few state amendments made to Order XXV Rule 1 of C.P.C to require the court to mandatorily order SfC if the plaintiff is being financed by a third party in a litigation. However, even such a possibility might be considered militating against the broad and necessary discretion that the court/tribunal exercises in ordering interim measures to act in the interests of fairness and in aid of arbitration. Such discretion is important and necessary because, as previously mentioned, SfC ought not to be ordered when it would impede the impecunious claimants ability to pursue a valid claim or when the impecunious condition of the claimant is the result of the party applying for SfC in the dispute.
Fair Distribution of Arbitral Costs-Risks
It is argued that potential exposure to provide SfC by the order of the court under section 9 would then have to be considered as ‘inherent business risk’ that the third-party funder would have to take into account. Notwithstanding the fact that such funding arrangements might be important for the claimants to pursue a valid claim (‘access to justice’ argument), it is not to be under-emphasized that TPF arrangements are also a ‘commercial adventure’ where the funder has business interest in arbitration and shares the fruits of a potential successful award. The scope for disagreement is always about balancing these opposing factors. It is argued here that a balance can be achieved that is consistent with the party-consent basis of arbitration and general principles guiding interim measure for the courts to actively consider ordering SfC against the third-party funder in well-defined circumstances. This is necessary to make funded arbitrations a fair dispute resolution mechanism with fair allocation risks of arbitral costs for both sides.
V. CONCLUSION
In Value Advisory Servies and Blue Coast Infrastructure Development, the courts observed that interim orders directed against third parties under section 9 though permissible, must only be ordered only in ‘exceptional circumstances’. Such situations arise when denial of an interim order would ‘frustrate’ petitioners rights in arbitration. Similarly, ‘exceptional nature’ status of SfC means that an application for SfC as a provisional measure can only be granted after satisfying a higher burden that there is a real risk of non-compliance and potential for substantial obstacles in enforcing the successful cost award. This gives rise to a scenario of ‘double exception,’ where both interim orders against third parties under section 9 and an order for SfC are independently considered to be ‘exceptional’ remedies. However, that does not preclude the possibility of it when it is necessary after conducting a thorough analysis of the material evidence relating to the ability of the funded party to satisfy the possible adverse cost order.
Other concerns which arise is whether such a measure discourages TPF and consequently restricts ‘access to justice’ that is well-recognized as a facilitation effect of TPF. This would be more relevant in the Indian context considering that third-party funding is in its nascent stage. However, addressing similar concerns, the English Court of Appeal in Excalibur Ventures v Texas Keystone & Ors (2016) had observed that sophisticated funders can make an educated assessment as to the likelihood of an application for security for costs being made against them. In addition, concerns about ‘access to justice’ were addressed by observing that putting up SfC would not deter funding arrangements and consequently deter access to justice to impecunious claimants. The courts’ reasoning was that funders ought to have or would have undertaken due diligence and considered the nature of the risk involved in funding arrangements like any other investment because such arrangements are also driven from commercial considerations. These propositions remain valid even in the commercial context of TPF in India.
Therefore, as highlighted in this essay, in third-party funding arrangements the challenge is to “get the balance right” in regulating tripartite commercial interests in a bilateral arrangement of arbitration. This essay has argued that power to order SfC being inherent under section 9, requiring the funder to put up SfC in necessary and appropriate circumstances can prevent the unreasonable tilt of balance in the matter of cost-risks assumed by the parties in a third party funded arbitrations.
*Chiranth Mukunda is a 2nd Year B.A. LL.B. student at National Law School of India University, Bangalore.
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