Recoverability of third party funding costs in arbitration

The Global Legal Post | 9 November 2016

Recoverability of third party funding costs in arbitration

by Andy Ellis

A recent landmark appeal ruling is likely to encourage more parties to engage in arbitration, writes Practico Ltd managing director Andy Ellis.

A significant appeal decision has recently emerged dealing with the recoverability between the parties of third party funding (“TPF”) costs in arbitral proceedings - Essar Oilfield Services Limited v Norscot Rig Management Pvt Limited.

Essar concerns a long-running ICC arbitration where the successful party, Norscot, further succeeded in an application to recover its costs of litigation funding.
The case is being hailed as a landmark judgment in some quarters and is expected to encourage more parties to engage in arbitration, especially if they have TPF. The equal and opposite is also true.

Essar Oilfield Services Limited v Norscot Rig Management Pvt Limited

For the uninitiated, TPF arrangements usually allow the Funder, in return for taking on risk, to recover from the successful client either a percentage of damages or a multiple of advanced funds, whichever is greater. In this case the funding advanced to Norscot amounted to £647,086. A multiple of three times that outlay was the applicable product of the funding formula in this case which landed Norscot with a liability north of £1.9 million in return for the Funder having shouldered the lion’s share of the litigation costs risk.
It is uncontroversial that none of that £1.9m would have been recoverable had the dispute been litigated rather than arbitrated.

Under definitions found in s59(1)(c) of the Arbitration Act 1996 the Arbitrator may however use his discretion to award ‘legal or other costs of the parties’. Sir Philip Otton, the former Lord Justice of Appeal who acted as Arbitrator, found the third party costs to be recoverable as they properly fell within the ambit of ‘other costs’. This decision was appealed to the Commercial Court and was upheld.

A key circumstance in the case, which may suggest an infrequent application of the principle, was the heavy criticism of the conduct of Essar in relation to both the Arbitration itself and the repudiatory breach of contract that gave rise to it. Sir Philip held that there had been a ‘blatant attempt to drive Norscot from the judgment seat’ forcing it to undertake a ‘huge financial burden and gamble into entering into the funding arrangement’. Costs were awarded on the indemnity basis.

The position taken by Sir Philip was supported by HHJ Waksman on appeal who found the judgment to be ‘detailed and robust’, going on to say that it would be ‘odd and certainly unfortunate’ if the arbitrator was not entitled to include third party costs as part of ‘other costs’ as well as finding that ‘the expression should not be confined by some legal straightjacket imposed by reason of what a court might or might not be permitted to order’.

Agreeing with Sir Philip that ‘legal and other costs’ is sufficiently wide to enable the recovery of the third-party funding. HHJ Waksman stressed that there was no basis for a narrow interpretation of ‘legal and other costs’ in the context of the Act. The Commercial Court held that the appropriate test was to consider what the incurred costs for bringing or defending the claim. The High Court upheld the award for the third party costs incurred pursuant to section 59(1)(c) of the Act and Article 31(1) of the ICC Rules.

Potential implications

The fuller implications of this award are yet to be seen. There will no doubt be a slew of applications for the recovery of funding costs. However, whether a Tribunal is likely to award such costs will be fact-dependent and in all probability reactive to extreme conduct. It does not follow that such a costs windfall will become the norm.

Whether there is scope for further appeal on legal grounds is an intersting question. Many think not because the wording on the Act is wide and deliberately so. One cannot argue that the effect of the judgement is to put the successful party closer to the positon they were in before the dispute.

But where does it go next? I wonder if this will be followed by claims in arbitration for the costs of management time in addition to funding costs – another no-go area in litigation but now up for grabs in arbitration.

From a public policy perspective, it does seem incongrouous for the chasm to be quite so wide between the potential costs outfall in arbitration as opposed to civil litigation in situations when both are governed by English law. Just as the Jackson reforms have progressively removed the right to recover additional liabilities in litigation, it is odd timing to see the equivalent jurisdiction in arbitral proceedings travelling a considerable distance in the opposite direction.

Andy has more than 25 years’ experience in the costs industry and oversees the senior management team at Practico. A key industry figure, Andy is the go-to costs lawyer for many leading law firms and general counsel who value his incisive input and direction on what are often complex technical and strategic issues arising within high value costs litigation.