DELHI HIGH COURT: Arbitral Award can’t be enforced against third party funders when they are not a party to arbitral proceedings

CASE NAME: Tomorrow Sales Agency (P) Ltd. v. SBS Holdings, Inc.

CASE CITATION: 2023 SCC OnLine Del 3191,  FAO(OS)(COMM) 59/2023

FACTS

•    The appellant filed the present intra-court appeal to challenge a ruling made by the Single Judge in response to a petition filed by SBS Holdings Inc. under Section 9 of the Act. SBS submitted the petition with multiple requests, including the disclosure of asset and bank account details from the appellant. SBS also sought an order to prohibit the appellant from encumbering any unencumbered movable or immovable assets in favor of third parties. These interim measures were requested to secure the amount awarded to SBS in an arbitral award rendered by an arbitral tribunal.

•    The appellant was a third-party funder and financed the claimants in pursuing the arbitration.  However, the appellant was neither a party to the arbitration agreement nor the arbitral proceedings.

•    Furthermore, the appellant was not named in the Arbitral Award. Therefore, the appellant argued that it had no liability to pay any sum to SBS, and the impugned order demanding asset disclosure and restricting asset transfers or disposals was flawed.

ISSUE

Whether a person who is not a party to the arbitral 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 a party to the arbitration.

JUDGMENT

•    The court opined that a third party could only be obligated by an arbitral award if it had been compelled to participate in the arbitration and was an actual party to the arbitration proceedings.

•    Additionally, the court stated that the notion of enforcing arbitration against non-signatories was not well-founded. It emphasized that consent was a crucial aspect of arbitration.

•    Although, the Tribunal may allocate cost among parties, it cannot award costs against third-party funder.

•    The Court rejected the contention that third-party funders fund litigation to derive benefits of claimants succeeding in their claim; thus, they should also be liable to pay costs where such claim fails.

•    It added that third-party funding is pivotal to ensure access to justice and hence they cannot be mulcted with liability, which they have neither undertaken not are aware of. If they are made liable, it would dissuade them to fund litigation adversely affecting claimants with legitimate claims