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Published 23 January 2017
In the recent decision of Essar Oil Fields Services Limited v Norscot Rig Management PVT Limited  EWHC 2361 (Comm), the court has given what has been commonly described as a "landmark" decision allowing the recovery of third party funding costs in arbitration proceedings. Third party funding arrangements typically involve a funder agreeing to advance legal costs and disbursements and, in the event of the claimant recovering damages, receiving either a multiple of the sum advanced or a percentage share of the damages recovered. In allowing the recovery of such costs, it seems that arbitration may now provide litigants with more flexible costs orders that the courts (which do not have the power under the Civil Procedure Rules to make similar Orders). The decision has caused some controversy.
This case arose out of an ICC arbitration that was based in England and Wales and, therefore, the provisions of the Arbitration Act 1996 ("the 1996 Act") applied. The claimant, Norscot, was awarded approximately $12 million, and in a separate partial Award, was awarded $4 million in costs, part of which were advanced under a third party funding agreement. Pursuant to the third party funding agreement Norscot was obliged to pay a fee of 300% of the sum advanced or 35% of the damages recovered, whichever was the greater. The sum advanced amounted to £647,000 and, accordingly, the sum payable under the third party funding agreement was approximately £1.941m. The arbitrator awarded Norscot the sum of £1.941 million pursuant to s 59(1) of the 1996 Act and Article 31(1) of the ICC Arbitration Rules 1998 (which is expressed in the substantially the same terms as s 59(1)), which gave the arbitrator power to award "…legal or other costs of the parties" (emphasis added).
As the Defendant, Essar, was unable to appeal the arbitrator's decision under s 69 of the 1996 Act (as the ICC Rules excluded the right of appeal), Essar contended:
In considering whether there had been a serious irregularity, the court noted that s 68(2)(b) was only available in extreme cases where the tribunal had purported to exercise power that it did not have. Section 68 could not be relied upon where a tribunal had erroneously exercised the power that it did have. The judge acknowledged that the arbitrator had been highly critical of Essar's conduct during the course of the arbitration. Essar had sought to cripple Norscot financially, had made unjustifiable attacks on the Norscot's directors and employees and had deliberately caused or substantially contributed to the Norscot's impecuniosity. In those circumstances, the arbitrator considered that Norscot had no credible alternative but to enter into a funding arrangement in order to pursue its legitimate claims. Essar was aware of the fact that as a consequence of its conduct, Norscot could not finance its own costs from its own resources and had been forced into a third party funding arrangement, and the agreement entered into was on market standard terms. An arbitrator has a general power to award costs pursuant to s 63(3) of the 1996 Act. Section 59(1)(c) defined what costs could be awarded. The judge noted that the power that was being exercised by the arbitrator was the power to award costs. If the arbitrator had fallen into error, the error concerned whether third party funding costs amounted to "other costs" under s 59(1)(c). However, the arbitrator was not purporting to exercise a power that he did not have. Accordingly, there was no serious irregularity.
Whilst that decision effectively determined the appeal the judge went on to consider the meaning of "other costs" and decided that it was broad enough to include third party funding costs. The court contrasted the wording of s 59(1)(c) of the 1996 Act and Article 31(1) of the ICC Rules with the provisions of CPR Rule 44.1(2)(a), which is more limited and does not provide for the recovery of "other costs", and considered that there was no justification for construing s 59(1)(c) narrowly so as to exclude costs other than legal costs and disbursements. In considering what costs were recoverable under s 59(1)(c), a tribunal merely had to establish and be satisfied that the costs related to the arbitration and were for the purposes of it. As a matter of justice it would seem odd if the arbitrator was not entitled to award the third party funding costs under s 59(1)(c) as they were "directly and immediately caused by" Essar. Once that question had been decided it was then a matter for the arbitrator's discretion as to whether specific costs should be awarded in any given case and the overall requirement of reasonableness.
Some commentators have criticised the categorisation of third party funding costs as "other costs". It has been suggested that in circumstances where a claimant's impecuniosity has been caused by a defendant's breach of contract, then such costs are more properly described as damages. However, there will be cases where a claimant's impecuniosity is not caused by a breach of contract. In such cases, it will be a matter for the arbitrator to consider whether to award third party funding costs would be appropriate. In this case, the arbitrator awarded the third party funding costs having regard to Essar's attempts to stifle Norscot's claims and its attempts to actually cause, or significantly contribute to, Norscot's impecuniosity. Essar would have foreseen that by reason of its conduct, Norscot would be unable to fund the litigation from its own resources and would require the assistance of a third party funder in order to pursue its legal rights. Whether the effect of this decision will be confined to extreme cases of misconduct, and whether arbitrators will require the need for a party to enter into a third party funding agreement to be foreseeable, will be the subject of future argument. In the meantime, claimants seeking to enter into these arrangements should perhaps consider making earlier disclosure of that fact.
The decision makes a clear distinction between costs that are potentially recoverable in arbitration proceedings (which may now include third party funding costs) from costs recoverable in litigation (which do not allow recovery of third party funding costs under CPR Rule 44.1(2)(a)). Whether the provisions of the CPR will ultimately be amended and expanded in scope will need to be considered. In the meantime, whilst some have suggested that this more flexible costs arrangement may prove to be attractive to litigants, whether this power makes arbitration proceedings a more attractive dispute resolution procedure remains to be seen and may depend upon a party's perspective. In the meantime, and even in cases where, as a matter of discretion, an arbitrator considers that the third party funding costs should be recovered, it is hoped that arbitrators will consider the reasonableness of the uplift under s 63(5) of the 1996 Act and that this decision is not seen by the third party funding industry to seek ever higher returns.
Annabel Walker, Imogen Jones, Jonathan Brogden, Alistair Cooper