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Access To Justice Is Ensured In Arbitration By Third Parties, Who Are Not Subject To Liability For Actions They Did Not Initiate: Delhi High Court

sahithi reddy ,
  07 June 2023       Share Bookmark

Court :
In The High Court Of Delhi At New Delhi
Brief :

Citation :
FAO(OS)(COMM) 59/2023 and CM Nos. 14793/2023 & 14794/2023

CAUSETITLE:

TOMORROW SALES AGENCY PRIVATE LIMITED V SBS HOLDINGS, INC. AND ORS

DATE OF ORDER:  

29-05-2023

JUDGE(S):.

VIBHU BAKHRU, AMIT MAHAJAN

PARTIES:

Petitioner:TOMORROW SALES AGENCY PRIVATE LIMITED

Respondent:SBS HOLDINGS, INC. AND ORS

SUBJECT 

The Division Bench granted the appeal and overturned the impugned judgment of a Single Judge, which instructed the appellant to disclose its assets and provide security for the sum awarded under the Arbitral Award, as well as to refrain from alienating or encumbering its assets. The Court also stated that "whether a party was funded by a third party was a relevant fact in determining whether an order for securing the other party was required." Allowing enforcement of an arbitral judgment against a non-party who had not assumed any such risk, on the other hand, was neither desirable nor allowed."

BRIEF FACTS 

  • The proprietors of SBS Transpole Logistics Pvt. Ltd. ("Transpole") approached Tomorrow Sales Agency Pvt. Ltd. ("Funder") to provide funding for a claim against SBS Holdings Inc. ("SBS"). The promoters claimed that SBS's actions were to blame for Transpole's financial difficulties. In an arbitration supervised by the SIAC Rules, the Funder agreed to finance the promoters' and Transpole's around INR 2,500 million claims against SBS. For this reason, a Bespoke Funding Agreement (or "BFA") was signed by the Funder and the promoters.
  • Due to their failure, Transpole and its promoters were ordered to cover SBS's legal fees as well as the costs of the entire arbitration process. SBS sought that the Funder pay the awarded costs because Transpole and the promoters had neglected to do so and because Transpole was in financial trouble. As a result, SBS filed a petition under Section 9 of the Arbitration & Conciliation Act, 1996 ("Arbitration Act") requesting that the Funder provide information on its assets and bank accounts as well as security for an amount totaling INR 96,208,119 ("Requested Reliefs").

ISSUE 

Whether a third party funder, who was neither a party to the arbitration procedures nor the arbitral award, might be made accountable for payments under an arbitral award?

ANALYSIS OF COURT 

  • There was no duty to pay any amount under the Arbitral Award, and the Arbitral Tribunal had awarded costs in favor of SBS and against the Claimants, rather than against the appellant.
  • The Court further stated that Section 9 of the Act permitted temporary measures and that resorting to Section 9 of the Act was possible to enforce the arbitral judgment. However, in this case, the Arbitral Award was not against the appellant and could not be enforced under Section 36(1) of the Act. The Court also noted that SBS had not instituted any action to determine the appellant's responsibility, and hence an application under Section 9 of the Act to secure the amount in question against the appellant was not maintainable in the present case.
  • This Court disagreed with the Single Judge's judgment that the appellant was required to pay costs under the Bespoke Funding Agreement ('BFA'). The Court observed that none of the BFA Clauses required the appellant to support an unfavorable award. The Court further noted that there were no guidelines for awarding costs against third parties in this Court's proceedings, and there was no procedure for impleading third parties for the sole purpose of calculating costs.
  • The Court noted that Order XXI of the Code of Civil Procedure, 1908 contained provisions for costs, and Rule 2 of Order XXI provided that the costs should be by any rules made by the High Court in that regard and that this Court had not framed any rule contemplating recovery of costs from persons who were not parties to the suit/action. As a result, accepting that the method contemplated by the Civil Method Rules, 1998 in the United Kingdom for imposing costs on non-party(ies) applied to civil proceedings in India proved challenging.
  • The Court observed that SBS sought interim measures to aid in the execution of the Arbitral Award rather than costs against third parties in a suit. As a result, the Court recognized that the court's ability to award costs in a trial would be irrelevant in evaluating whether the awarded sum may be recovered from someone who was not a party to the arbitral proceedings or the arbitral judgment.
  • The Court found that it was critical to preserve transparency and that party funding was not exploitative. The Court also stated that "whether a party was funded by a third party was a relevant fact in determining whether an order for securing the other party was required." Allowing execution of an arbitral judgment against a non-party who had not assumed any such risk, on the other hand, was neither desirable nor allowed. While there was no doubt that certain rules for transparency and disclosure about funding arrangements in arbitration proceedings were required, it would be counterproductive to introduce an element of uncertainty by burdening third-party funders with a liability that they had not agreed to bear."
  • The Court granted the appeal and reversed the impugned judgment insofar as it required the appellant to reveal its assets and provide security for the sum awarded under the Arbitral Award, as well as to refrain from alienating or encumbering its assets.

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