Third-party funders in arbitration ensure access to justice; cannot be saddled with liability they did not undertake: Delhi High Court

The Delhi High Court has held that third-party funders in arbitration proceedings ensure access to justice and cannot be mulcted with liability which they did not undertake and are not aware of [Tomorrow Sales Agency Private Limited v. SBS Holding, Inc and Ors]. .A Division Bench of Justices Vibhu Bakhru and Amit Mahajan said that it is essential for third-party funders to be fully aware of their exposure.Permitting enforcement of an arbitral award against a non-party which has not accepted any such risk is neither desirable nor permissible, the Court said..“It is essential for the third-party funders to be fully aware of their exposure. They cannot be mulcted with liability, which they have neither undertaken nor are aware of. Any uncertainty in this regard, would dissuade third party funders to fund litigation.".It rejected the contention that because third-parties fund litigation to derive the benefits of the claimants succeeding in their claims, they should also be liable to pay the costs where such claims fail..The Bench highlighted the importance of such funding and said that in many cases, the claimants become impecunious on account of the very cause for which they seek redressal because the costs of pursuing those causes are significant..“…the same not only include fees paid to arbitrators and institution, but also professional fees for legal counsels and experts and other attendant expenses. A person without the necessary means would have no recourse, in the absence of third-party funders. Third party funders play a vital role in ensuring access to justice.”.The Court made the observations while dealing with an appeal filed by a Non-Banking Financial Company (NBFC) named Tomorrow Sales Agency (TSA) against a single-judge order.The genesis of the dispute goes back to December 2018, when TSA entered into a Bespoke Funding Agreement (BFA) to provide financial assistance to one SBS Transpole Logistics and its promoters for pursuing their claim for recovery of damages of nearly ₹250 crore against SBS Holdings Inc and Global Enterprise Logistics (GEL), Singapore..SBS Transpole and its promoters failed in the arbitration and the tribunal further awarded costs in favour of SBS Holdings.SBS Holdings then filed a plea for enforcement of the award, but found that SBS Transpole did not have assets to satisfy the award. SBS Transpole also failed to pay the amount it was directed to pay in terms of the award.Therefore, SBS Holdings sent a letter to TSA to pay the amount. TSA denied any obligation, stating that the costs imposed were against SBS Transpole and its promoters, and not TSA. It claimed that since the SBS Transpole had failed in their claims, the BFA stood terminated on the date of the arbitral award and it had no further obligations thereafter..SBS then approached the single-judge who passed an order directing TSA as well as SBS Transpole to file an affidavit disclosing their fixed assets and bank accounts along with a credit balance held in India or any other jurisdiction.The single-judge also restrained them from creating any third party interest/right/title in respect of any unencumbered immovable assets for the sum awarded in terms of the arbitral award, till further orders..After considering the case, the Division Bench held that there is no question of enforcing an arbitral award against a non-signatory (TSA) who is not a party to the arbitral proceedings.The Court said that the fact that TSA was funding the claimants to pursue the arbitral proceedings was duly disclosed and it has no obligation to pay any amount under the arbitral award.The arbitral tribunal has awarded the costs in favour of SBS Transpole and against the claimants and not TSA. It thus disagreed with the view of the single-judge that TSA is obliged to pay costs according to the BFA.“There are no rules applicable to proceedings in this court for awarding costs against third parties. There is no procedure for impleading third parties for the limited purpose of determining the costs. If a person proposes to pursue any claim against another person, it would be necessary for the said claimant to institute a substantive action in that regard. The necessary averments in support of the claim are required to be pleaded. If the claim is disputed and raises a triable issue, the same is required to be tried.”.The Court finally set aside the single-judge’s order to the extent that it directed TSA to disclose its assets, furnish security for the amount awarded, and restrained it from alienating or encumbering its assets..Advocates Shashank Garg, Aman Gupta, Atharva Koppal and Nishtha Jain appeared for TSA.Advocates Gautam Narayan, Asmita Singh, Ranjith Nair, Altamash Qureshi, Akriti Arya and Harshit Goel appeared for SBS Holdings and other respondents..[Read Judgment]