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GAR Mumbai: Arbitration finance poised to enter Indian legal landscape

  • Quentin Pak

I recently had the honour of speaking on a panel at the inaugural GAR event in India on the topic of arbitration finance. One of the key takeaways was the considerable interest amongst Indian practitioners in the topic. There is also a relatively high level of understanding of legal finance concepts and a good appreciation of the value proposition.

This interest appears to stem from the attractiveness of international arbitration to Indian corporates as a means to resolve disputes and the inherent cost implications of arbitration proceedings. For this reason, we expect demand for arbitration finance in the region to rise, emulating the trends we have seen in Singapore and Hong Kong in recent years.

The rise of international arbitration

A rise in the numbers of cross-border commercial transactions and India’s growing reputation as a valuable trading partner have naturally led to an increase in disputes being resolved through international commercial arbitration, whether seated within or outside India. In fact, it is estimated that Indian companies currently make up 30% of the total arbitration cases handled by Singapore and London.[1]

A key reason for the rise in popularity of arbitrations as a forum for disputes in India is the speed of results compared with the domestic litigation mechanism which can take years and in some cases decades to resolve.

Several recent developments look set to render India itself a more attractive seat for arbitrations, including the set-up of the Mumbai Centre for International Arbitration (MCIA) in October 2016 and the recent promulgation of the New Delhi International Arbitration Centre (NDIAC) Ordinance 2019. These developments signal a move towards improving the overall arbitration landscape in India to compete with other Asia arbitration centres such as Singapore and Hong Kong.

Despite international arbitration being ideal for reasons of expediency, privacy and the relative ease of enforcement—the high operational costs of arbitration often represent a disincentive for parties to pursue this dispute resolution mechanism. This is the reason why interest in third-party funding is surging. Arbitration financing allows parties increased flexibility in pursuing their claims, better access to resources and mitigation of cost risks. Though still in its nascent stages in India, it is clear that the use of third-party funding in major Indian arbitration cases is a development that is here to stay.

Legal framework for third-party funding

In comparison with other common law jurisdictions, India has historically had relatively few legal hurdles to financing litigation. Judicial precedent has held since 1876 that the common law doctrines of champerty and maintenance do not apply to India and that legal finance agreements are generally enforceable unless the object of the contract is contrary to public policy.

The Civil Procedure Code of some Indian states expressly refers to “third parties financing litigation,” and case law has generally been supportive of the industry. Various High Courts have both expressly recognised litigation financing and made provisions for security for costs in such cases.

That said, there is some residual concern on whether the same position would apply to arbitration and the recent Arbitration and Conciliation (Amendment) Bill 2018 also makes no reference to funding.

Another issue raised in the discussions at GAR Mumbai related to the complexities surrounding exchange controls and the hedging of currency risks. It was posited that it could be troublesome to enforce the exact value of foreign arbitral awards in India due to currency exchange fluctuations and strict regulations on currency hedging.

With the growing demand in legal finance, we expect these questions will become the focus of market participants who, in time, will come up with practical legal and market solutions to address the issues.

The future of arbitration finance

It is clear that Indian corporates and law firms are taking legal finance seriously as a risk and cost management tool for arbitration. I anticipate that following the recent legislative advances in Singapore and Hong Kong recognising the legality of third-party funding in arbitrations, India will not be far behind.

Indian corporates will continue to look to international arbitration as a forum for resolving disputes and therefore will inevitably turn to arbitration finance to mitigate the cost impact of arbitration proceedings.

[1] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3014001