The English courts have confirmed that arbitral Tribunals have the discretion to award recovery of third party litigation funding (‘Third Party Funding’) costs. This covers costs incurred by a successful party in pursuit or defence of a claim, including the multiple of funding recoverable by the funder in the event of success.
The Arbitral Proceedings
Norscot Rig Management Pvt Limited (‘Norscot’) commenced arbitration proceedings against Essar Oilfield Services Limited (‘Essar’) in relation to disputes arising from an operations management agreement. The proceedings were governed by the ICC Rules and the Arbitration Act 1996 (‘the Act’).
To finance the proceedings, Norscot obtained £647,000 of Third Party Funding from Woodsford Litigation Funding (‘Woodsford’). The sum was advanced on terms that if the Tribunal found in Norscot’s favour, and ordered Essar to pay a sum to Norscot, Norscot would repay either 300% of the sum advanced or 35% of the damages awarded, whichever was greater.
The Tribunal found that Essar had committed a repudiatory breach of the operations management agreement and issued an award directing that Essar was liable to pay approximately US$12m to Norscot. This included repayment of Norscot’s costs in bringing proceedings on an indemnity basis, including the amount that Norscot had to pay to Woodsford, being £1.94m (300% of the sum advanced).
In determining the scope of Essar’s liability for Norscot’s costs, the Tribunal had recourse to the provisions of the Act and the ICC Rules, which provide that the Tribunal has discretion to determine the recoverable “legal or other costs” of the parties as it sees fit. Exercising this discretion, the Tribunal determined that the Norscot’s Third Party Funding costs fell within the scope of “other costs”, and were accordingly recoverable by Norscot from Essar.
In awarding these costs, the Tribunal gave consideration to Essar’s conduct before and during the arbitration proceedings. In particular, the Tribunal cited the fact that Essar set out to inhibit Norscot’s access to finance, flouted its contractual obligations, behaved in an exploitative manner and persisted in unjustifiable and unfounded attacks against Norscot.
As a consequence of Essar’s conduct, which contributed to Norscot’s impecuniosity, the Tribunal said, “Norscot had no alternative, but was forced to enter into the litigation funding… Essar was undoubtedly aware that Norscot’s costs could not be financed from its own resources”. The Tribunal said that it was “blindingly obvious” to Essar that Norscot would find it difficult if not impossible to pursue the claims without recourse to Third Party Funding.
Essar’s Appeal to the Court
Essar challenged the Tribunal’s award before the High Court on the grounds that Third Party Funding does not fall within the Tribunal’s discretion to award “other costs”. Essar contended that the Act should instead be construed by reference to what a court would, or could, allow by way of costs in litigation proceedings before the English courts. Under the English Civil Procedure Rules (CPR) it is very unlikely that Third Party Funding costs would be recoverable, they said.
The Court roundly rejected Essar’s assertion that the Act should be construed in accordance with the CPR, saying:
“Both arbitration and litigation are forms of formal dispute resolution and there are many similarities, but it is crucial to keep in mind that the Act was designed to be and is a complete code as to the conduct of arbitration.”
Consequently, said the Court, the CPR’s “clearly more limited” definition of recoverable costs was of “little direct relevance” as the Act is not subservient to the CPR. Accordingly, a Tribunal’s discretion is not restricted by what may, or may not, be recoverable in English court proceedings.
Having established that the provisions of the Act governed the Tribunal’s discretion, the Court dismissed Essar’s appeal, accepting that in order to award “other costs”, such costs must relate to the arbitration proceedings. “As a matter of language, context and logic … other costs can include the costs of obtaining litigation funding,” said the Court, the reason being that on a functional analysis, such costs have been incurred in the bringing or defending of a claim.
In explaining its reasoning, the Court also referred to the ICC’s 2015 ‘Decisions on Costs in International Arbitration’ report which noted that:
“In reality, funding arrangements are rarely limited solely to the costs of the arbitration. Usually, the third-party funder will require payment of an uplift or success fee … As a Tribunal only needs to satisfy itself that a cost was incurred specifically to pursue the arbitration, has been paid or is payable, and was reasonable, it is feasible that [the cost owed to a third party funder] may be recoverable.”
Implications for the future
It is too early to predict what the impact of this decision will be, and it is possible that the Court’s decision may be subject to further appeal. However, it is clear that the English courts remain willing to uphold the autonomy of an arbitral Tribunal. In this instance, it specifically emphasised the difference in approach between the Act (and the Tribunal’s discretion thereunder) and the CPR. In circumstances in which arbitration in London is exempt (at least for now) from the costs budgeting regime under the CPR, the recognition that Third Party Funding costs may also be recoverable is a boost for those promoting the use of arbitration as a preferred mechanism for dispute resolution.
Although the decision establishes the principle of recoverability of Third Party Funding, it is important to note the Court’s caution that “whether and, if so, how the arbitrator exercises that discretion in any particular case is an entirely different matter”. There is, therefore, no implication that Third Party Funding must fall within such “other costs” and any award of costs remains subject to the caveat that such costs must have been “reasonably” incurred. It is not necessarily a foregone conclusion that this principle will be applied elsewhere and it is difficult to predict how a Tribunal will exercise the discretion on a case-by-case basis. For example, in the present case, the Tribunal accepted expert evidence that there was “no credible alternative source of funding” for Norscot, and cited the fact that Essar had deliberately conducted matters in such a way as to deprive Norscot of the opportunity of being able to use its own resources to fund the arbitration. It is not clear how a Tribunal would view recoverability in circumstances where a party made a voluntary choice to seek Third Party Funding, rather than fund its own costs, for example, to hedge against its own risk in pursuing a claim. Moreover, in this instance, it was held that the costs of Third Party Funding were “directly and immediately” caused by Essar’s conduct. Whether such costs would still remain recoverable where they were incurred voluntarily or willingly, without a Tribunal making any adverse findings against the opposing party’s conduct, remains to be seen.
Additionally, it is not yet clear how the issue will be treated in different jurisdictions and pursuant to the rules of other arbitral institutions. In this regard, it is important to note that the ICC’s report, which expressly refers to the possibility of recovering such costs, was based on a detailed analysis and evaluation of principles applicable to costs recovery in a number of different jurisdictions and under different institutional rules. The ICC’s report was produced after consultation with and input from a number of prominent institutions, including the London Court of International Arbitration, the Permanent Court of Arbitration, the Stockholm Chamber of Commerce and the Hong Kong International Arbitration Centre. It is, therefore, possible that the ICC’s view on recoverability, as supported by the Court, is reflective of an international consensus regarding recoverability of Third Party Funding costs in arbitral proceedings.
Although the long-term effects of this judgment cannot yet be assessed, the decision may serve to enhance the attractiveness of England as an arbitral seat for parties who intend to enter into Third Party Funding arrangements. The attraction of recoverability may have to be balanced against future developments, including the likelihood that parties will press for the disclosure of Third Party Funding arrangements at the outset of proceedings in order to enable those parties to evaluate their potential exposure to risk and costs.
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