The recent case of Essar v Norscot has clarified that an arbitrator’s general power to award costs includes the power to award the costs of third party funding. In so doing, has arbitration gained an unexpected advantage over litigation for claimants that require third party funding?
On 15 September 2016, the High Court held in Essar Oilfield Services Ltd v Norscot Rig Management Pvt Ltd, that an arbitrator’s general power to award costs included the power to award the costs of third party litigation funding as part of “other costs” within the wording of section 59(1)(c) of the Arbitration Act 1996 (AA 1996).
Sir Philip Otton, sitting as sole arbitrator in a London-seated ICC arbitration, found Essar to be in repudiatory breach of a management agreement with Norscot. The arbitrator criticised Essar’s conduct and ordered it to pay damages of over $12 million, plus costs on an indemnity basis. Included in the costs award was £1.94 million, which Norscot owed to a third party funder who had supported Norscot’s case. The arbitrator held that Essar’s conduct had prevented Norscot from self-funding the arbitration and therefore the costs award was justified.
Whilst the precise terms of the third party funding are not yet known because the case is unreported, it appears from unofficial sources that the funder advanced £647,000 to Norscott. We can assume that the finance was non-recourse, meaning that if the case was lost, the funder would be owed nothing; but if the case won (generally through a settlement or a final award), the funder would be entitled to a share of the recovery, being the greater of 300% of the amount advanced, or 35% of the amount recovered. The arbitrator held that these were standard pricing terms in the market.
Essar obtained leave to appeal the costs award to the High Court on grounds of serious irregularity under section 68(2)(b) of the AA 1996, arguing that the arbitrator had exceeded his powers in misconstruing the meaning of “other costs” in section 59(1)(c). HHJ Waksman QC held that the arbitrator was right to construe “other costs” to include third party litigation funding. Importantly, Waksman held that the AA 1996 was a complete code distinct from the costs provisions of the Civil Procedure Rules (CPR). Waksman held that the correct test was to consider what other costs were incurred in bringing or defending the claim. He found that as a matter of language, context and logic, “other costs” could include third party litigation funding.
Means-tested recoverability of litigation funding costs?
It appears that the arbitrator decided that awarding an element of litigation funding costs in the costs award was reasonable where:
- The defendant’s conduct justified a costs award on an indemnity basis.
- Third party funding was the claimant’s only viable route to justice.
- The funding was provided on terms that were standard for non-recourse litigation finance.
As to the second point, this raises an interesting dichotomy. Should preferential treatment be given to the impecunious user of arbitration funding, as compared to a company that has the capital but would rather share the risk or spend it on business operations? Litigation funding is no longer the domain of impecunious litigants. Will we see “means-tested recoverability” emerge as a theme in costs awards?
As to the third point, it is worth noting that the arbitrator did not award the entire costs of the litigation funding, just the minimum multiple. The £1.94 million awarded is three times the £647,000 spent. The litigation funding deal entitled the funder to either the multiple figure, or 35% of the recovery, whichever is greater. On an award of $12 million, the funder would have received a return of £3.25 million (on today’s exchange rates). Therefore, the arbitrator did not impose all litigation funding costs on the losing party.
If the recovery of the return payable to a third party funder becomes common place, additional disclosure may be required by the party claiming litigation funding costs to establish that the other party left it with no choice but to use third party funding, and to demonstrate that it obtained funding on standard market terms.
A reminder that the Jackson Reforms and the CPR costs provisions do not apply to arbitration
HHJ Waksman’s clarification that the AA 1996 is not subservient to the CPR costs provisions highlights a key difference between litigation and arbitration which may have been overlooked. Whilst the costs regime for litigation in England and Wales has been altered by the Jackson Reforms of April 2013 (which eliminated the recovery from the losing party of lawyers’ success fees under conditional fee agreements and deferred contingent premiums for adverse costs insurance (or after the event (ATE) policies) these reforms do not apply to London-seated arbitrations. With the rise in the costs of ATE premiums and no way to recover these amounts from the defendant, the Jackson Reforms have strained the economic viability of many claims, particularly those of impecunious claimants. Arbitration may have an upper hand in this regard as “other costs”, as construed under HHJ Waksman’s functional test, must also permit a claimant to recover the uplifts under conditional fee agreements with lawyers, and ATE insurance premiums.
If the decision of HHJ Waksman QC is allowed to stand, it is a development that will no doubt be of interest to claimants seeking arbitration funding and adverse costs cover, and may make London a more attractive arbitration seat for such claimants. Tribunals must of course continue to use their discretion in awarding “other costs” in a fair manner and to only pass on these costs to defendants if their conduct justifies a costs award on an indemnity basis.