Tomorrow Sales Agency Pvt Ltd v SBS Holdings Inc. and Ors

FAO (OS) (Comm)59/ 2023 and

CM Nos 14793/ 2023 & 14794/ 2023

Facts

On 20th December 2018, Tomorrow Sales Agency Pvt Ltd (TSA) had entered a ‘Bespoke funding agreement’ (BFA) to fund the arbitral proceedings of Anant K. Choudhary, Vivek Shula, SBS Transpole Logistics Private Limited and Pravin Chandra Rai(hereinafter ‘the claimants) against SBS and Global enterprise logistics private limited (GEL) before the Singapore International Arbitration Centre (SIAC).

Transpole was under bankruptcy litigation, at the time, in which it claimed that its financial downfall was due to SBS breaching their agreement. This claim was unsuccessful and costs were awarded in favour of SBS on 22 December 2022.

SBS, realising Transpole’s financial situation sought provisional measures to preserve the unencumbered assets of the claimants as well as TSA and for them to disclose their account details with credit balances.[1] TSA contended that since they were neither a signatory to the arbitration agreement nor a party to the proceedings that followed, they were simply under no obligation to pay any amount awarded in favor of SBS. The single-judge bench relying on Arkin v. Borchand Line Limited and Ors[2], and Excalibur Ventures LLC v Texas Keystone Inc[3] affirmed that SBS established a prima facie case that TSA did have a vested interest in the outcome of the arbitration proceedings thus it cannot escape liability. The petition was allowed and the requested interim measures were ordered on 07 March 2023 because:

  1. TSA was a real party to the arbitration.
  2. The BFA terminates only once the final award is passed, thus the costs are retrievable as part and parcel of the same and are covered by the costs recoverable under the BFA.
  3. The grounds upon which a non-signatory may be bound by an arbitration agreement include both ‘Purely consensual’ theories including but not limited to agency and ‘non-consensual’ doctrines such as alter-ego. TSA had control over the arbitration since it had a stake in the outcome, thus it was the alter ego of the Claimants behind the corporate veil.

TSA then filed an intra-court appeal under ‘Section 37[4] of the Arbitration and Conciliation Act, 1996’ (A&C Act 1996) against the order passed on 07 March 2023 (hereinafter ‘the impugned order).

Issue(s)

Whether a person who is not a party to the arbitration proceedings or the award, rendered in respect of disputes inter-se the parties to the arbitration, can be forced to pay the amount awarded against the party to the arbitration.

Contentions

1.     TSA submitted that:

It was a party to neither the arbitration agreement nor the arbitral proceedings that followed, and most definitely not the award therein;

According to Article 7 of the BFA, the agreement[5] stood terminated once the claimants’ case became unfounded on merit.

TSA did not take an active role in the arbitration process. It merely provided funding for the Claimants in that case to assert and sustain their claims.

The amount that was awarded in favour of SBS was neither directed to nor against TSA.

The impugned order was flawed in finding TSA to be a party liable to pay the award.

2.     SBS submitted as follows:

The respondent asserted TSA to have, in fact, been a real party to the proceedings since it provided funding to the claimants for its profit.

TSA did not merely fund the claimants but had control over the arbitral proceedings. A plain reading of the BFA showed that

  1. The claimants could not exceed the budget without the prior consent of TSA,
  2. The claimants were prohibited from reaching a settlement without consulting with TSA,
  3. TSA  would have precedence over the rights of the claimants with an exclusive right on the damages to be awarded therein, and
  4. TSA had the discretion to discontinue the funding in case the tribunal held SBS was not a proper party to the arbitration proceedings or if the case was perceived as unsuccessful.

 In some cases, when third parties claim the benefits of the contract, they may be invoked by the arbitration clause.[6]

Since third-party funders provide litigation funding to retain a portion of the compensation awarded to the claimants should they succeed in their claims, they must bear the costs where such claims are unsuccessful.

Rationale

The court reasoned that TSA, not being a party to the arbitration proceedings in question, was not liable to pay any amount under the award passed in favour of SBS and expressly against the claimants. In the ratio decidendi, the following observations were made:

  1. Consent is cardinal to arbitration and the idea of compelling third-party non-signatories to an arbitration agreement is baseless and contrary to the innate nature of arbitration proceedings. It bears no application when the parties to the agreement have agreed otherwise.
  2. The arbitration proceedings being submitted before SIAC meant the same were subjected to the SIAC rules which provide that:
  3. Before the constitution of a tribunal, an application may be made before the registrar to add parties where such ‘party is prima facie bound by the arbitration agreement and all the parties, including the added party, consent to the joinder’[7],
  4. After the tribunal has been constituted, an application may be made before it to add parties where such ‘’party is prima facie bound by the arbitration agreement and all parties, including the added party, consent to the joinder’[8]
  5. The court, in light of the above, stated that ‘third parties may be bound by the arbitral award only if it has been compelled to arbitrate and is a party to the arbitration proceedings’[9] and SBS neither compelled TSA to arbitrate nor did it set out to add TSA as a party to the arbitration proceedings despite knowing of their agreement with the claimants as well as Transpole’s financial situation.
  6. The learned counsel for SBS argued that the joinder of parties was not open for SBS as TSA was not bound to the initial arbitration agreement nor did it consent to be added as a party to the proceeding that ensued. The court affirmed this argument opining that under the SIAC rules, TSA could not be a party to the arbitration. Not one of the methods or doctrines which could compel a non-signatory to arbitrate can be applied in the present case.
  7. The Court further observed that TSA’s funding agreement with Transpole was essential for consideration when SBS requested security for costs. According to Practice Note[10] issued by SIAC in 2017 funding agreement must be revealed before the tribunal, the tribunal has no power to pass an award of costs against a third-party funder non-signatory to the arbitration agreement and that was not a party to the proceedings.
  8. As regards the BFA, the court found that no clause provided for TSA to bear the costs of an adverse award and Article 7(iv) expressly stated that the BFA shall terminate should the claim be unsuccessful.
  9. The decisions in Excalibur[11] and Arkin[12], based upon which the impugned order was passed, were simply not applicable. ‘The order of costs against non-parties is required to be made in exceptional circumstances.’[13]
  10. The Court also referred to the Civil Procedure Whitebook Service[14] which provides that “A non-party should not ordinarily be liable for costs which would… have been incurred without the nonparty’s involvement in the proceedings.”
  11. The court further considered the possibility that the application for costs against TSA may have been “motivated by a resentment of an inability to obtain an effective order for costs against a legally aided litigant.”[15]

In response to a submission by Mr Narayan (learned counsel for SBS) that in some cases when non-signatory third parties claim the benefits of the contract, they may invoke the arbitration clause, the court opined that the matter therein was not about the enforcement of the award but rather about ‘whether a person who is not a party to the arbitration proceedings or the award, rendered in respect of disputes inter-se the parties to the arbitration, can be forced to pay the amount awarded against the party to the arbitration’.

Defects in Law

Firstly, The Single Judge incorrectly held TSA to be a real party to the arbitration. TSA was neither a signatory to the arbitration clause nor did it consent to be added as a party to the proceedings. Furthermore, the award was not directed against TSA.

Secondly, when determining SBS’s contention that TSA had control over the arbitration, the Single Judge incorrectly found TSA to have an active role in the arbitration. TSA was not the alter ego of the claimants behind the corporate veil. It had no control whatsoever and it did not even participate in the proceedings.

Lastly, the Single Judge erred in holding TSA to be involved in the outcome of the arbitration. TSA was only interested in recovering its funds should the claimants have been successful.

Judgment

The impugned order was set aside and the appeal was allowed.

Inference

This happens to be the first decision that so intricately discusses third-party arbitration funding in India. It, no doubt, signifies a development in the right direction as regards third-party funding in Indian arbitration which has not been regulated yet.

Litigation funding agreements enable persons with perfectly valid claims to pursue litigation for the recovery of legitimately due amounts. They play a cardinal role in promoting access to justice.

Enforcement of awards against non-parties that have neither expressly nor impliedly accepted to bear any such obligation is simply undesirable and should not be permitted. 

While some concerns are there that this decision may bring about third-party funders abusing their position by unduly influencing the arbitral process, the court implored the government to formulate regulations governing the disclosure and transparency of third-party funding arrangements. This much should ease some of the tension in this regard.

Name: FANUEL RUDI

Institution: NIILM UNIVERSITY


[1] SBS Holdings Inc. v. Anant Kumar Choudhary & Ors OMP(I)(COMM) 71/ 2023

[2] Arkin v. Borchand Line Limited & Ors (2005) EWCA Civ 655

[3] Excalibur Ventures LLC v. Texas Keystone Inc and Ors (2016) ECWA Civ 1144

[4] ‘(1)An appeal shall lie from the following orders (and from no others) to the Court authorised by law to hear appeals from original decrees of the Court passing the order, namely:—

(a) granting or refusing to grant any measure under section 9’;

[5]The BFA shall become effective … until … (iv)the claim is not a success’ Article 7 of the BFA

[6] Gary B. Born, ‘International Commercial Arbitration’, Vol I, 3rd Edition, Chapter 10; ‘Legal Basis for Binding Non-signatories to International Arbitration Agreements.’

[7] The SIAC Rules, Section 7.1

[8] The SIAC Rules, Section 7.8

[9] Vibhu Bakhru J at Para36

[10] PN-01/17/ (31 March 2017)

[11] Excalibur Ventures LLC v. Texas Keystone Inc and Ors (2016) ECWA Civ 1144

[12] Arkin v. Borchand Line Limited & Ors (2005) EWCA Civ 655

[13] Vibhu Bakhru at para62

[14] Civil Procedure, Vol I, The Whitebook Service 2018, p1470

[15] Symphony Group Plc v. Hodgson (1994) Q.B 179