Erin Miller Rankin, Head of Construction – Middle East and Asia at Freshfields Bruckhaus Deringer talks to Yasmin Mohammad, Senior Counsel at Vannin Capital about the landmark decision in Essar Oilfields Services Ltd v Norscot Rig Management Pvt Ltd awarding the costs of funding to a claimant.

Yasmin Mohammad (YM): First and foremost, what is your gut reaction to this landmark decision awarding the costs of funding to a claimant?

Erin Miller Rankin (EMR): While this is clearly a positive step for third party funding (TPF), I think the outcome of this case should be viewed with cautious optimism, largely due to the fact-intensive analysis supporting the conclusion that the recovery of costs under the Arbitration Act "can" include the costs of obtaining litigation funding. As Judge Waksman QC noted in his decision, "all that this conclusion entails is that ... litigation funding costs fall within the arbitrator's general costs discretion." Accordingly, while TPF costs should be considered by an arbitrator, this does not necessarily mean that they will (or should) be awarded. It is worth noting that this particular claimant was essentially left with no choice but to use TPF due to the respondent's behaviour. Accordingly, while this decision is undoubtedly helpful for TPF, it remains very much within the discretion of the tribunal to decide whether TPF costs should be awarded.

YM: As you are aware, arbitral rules remain divided between those where "costs follow the event" (LCIA, CIETAC, UNCITRAL) and those where a tribunals are given the power to order costs as they deem appropriate and reasonable (ICC, HKIAC, SIAC, SCC). In many popular arbitration seats, the legislation is either silent or expressly allows a tribunal to decide upon costs as they deem appropriate. As a matter of philosophy, the key rationale for awarding costs was to not unfairly diminish the amount owed to a claimant simply because the respondent has forced it to litigate (and expend costs) to get financial retribution. Symmetrically, a righteous respondent should not be left out of pocket because an unscrupulous claimant commenced legal proceedings. As you say, this decision has clarified that a tribunal "can" award a funder's costs under the 1996 Arbitration Act. You, as most commentators, highlight the factual matrix of this dispute as particular and conclude that the outcome should not be over enthusiastically generalised. However, it seems to me that a factual matrix where a respondent acts unfairly pushing a claimant to financial distress both during the contractual relationship and the arbitration proceedings happens only too often.

YM: What is your view concerning the reasoning of the arbitrator when awarding the funding costs? Should the parties conduct be taken into account?

EMR: I tend to agree with the measured approach adopted by the arbitrator and echoed by the Judge. On the one hand, you have parties who are forced to resort to TPF due to the abusive conduct of the counterparty, as was Norscot in this case. On the other hand, one can foresee a scenario involving a liquid party leveraging TPF to raise the cost of arbitration against a counterparty with the ultimate view of pricing them out of justice. Awarding TPF costs to the prevailing party as a matter of default could unwittingly encourage such strategy. Leaving it within the Tribunal's discretion to determine whether TPF costs should be awarded should safeguard against abuse of procedure by inventive parties.

YM: More and more "liquid" parties resort to third party funding as you mention. An access to justice argument seems to emerge from this decision and your comments. Put simply, if a party has no other choice but to resort to third party funding to resolve its dispute, it would seem fair and appropriate to award to that party the actual costs of defending its rights which will include a funder's premium or maybe part of that premium. Two clear conditions seem to emerge from the Essar v Norscot decision: (1) impecuniosity of the claimant and (2) the respondent's abusive behaviour.

EMR: While both impecuniosity and abusive behaviour were important factors in the Norscot case, I would expect whether the conduct of the respondent impacted the claimant's ability to fund a disputes process to weigh more heavily in determining whether to award TPF costs as there are other methods commonly deployed to penalise parties who engage in abusive behaviour such as moral damages or a higher proportion of costs awarded.

YM: What is your view of the analogy at paragraph 88 of the award and para 33 of the decision which analyses that pre-award interest which is universally accepted is very similar in principle to awarding the cost of funding? What if a claimant is not impecunious?

EMR: I have to admit that I am a bit puzzled by this analogy. The Judge said that "it was difficult to see the difference between...recover(y) of pre-judgment interest costs...and allowing a party to recover the interest it has had to pay to the third party to cover those prejudgment legal fees..." While pre-judgment interest is set and applied at a predetermined published rate in many jurisdictions, the rates at which TPF is provided is a privately contracted outcome. The most significant impact is that the respondent may have to pay more than it would have paid without TPF. Due to this, the analogy does not seem to work. Perhaps a better justification for awarding TPF costs would be that it makes more sense that the respondent pays for such costs if the respondent is arguably responsible for the claimant's seeking of TPF. Conversely, if relying on TPF was largely unrelated to the respondent's actions, then the respondent should not be burdened by the additional cost of TPF.

YM: Increasingly, Tribunals are considering with more care the issue of pre-judgment interest and what it is exactly supposed to compensate. Many different positions have been articulated on this issue. Broadly, on the one side, commentators argue that pre-award interest is intended to compensate only the time value of money and sometimes the risk that a respondent will not pay in a timely fashion. On the other side, the argument has been made, successfully in many instances, that pre-award interest should compensate the claimant for its loss of chance of having invested the money it should have earned or recovered but for a respondent's actions. These positions and outcomes need to be taken in context of the dispute naturally:

  • contractual arbitration? was alterative investment at all foreseeable at the time of the breach?
  • investment treaty arbitration? No definite solution has emerged to date largely because the specificities of each dispute seems to warrant slightly different solutions.

Another more concerning issue is that many counsel do not take the time to argue this fundamental point and many arbitrators do not take the time to consider them precisely. The more the rationale of pre-award interest is discussed and argued, the more clarity parties will have on possible outcomes and as a consequence, there will be more clarity on whether the analogy with funding costs is appropriate. For the moment, it is clear that the argument needs to be repeated as often as possible to develop an appropriate jurisprudence on these issues.

YM: Can this decision be transposed to the other jurisdictions in which you operate?

EMR: We have done work in almost all jurisdictions around the world so let me offer you a short answer. The first hurdle is the doctrine of champerty and maintenance which some jurisdictions still subscribe to. This would potentially void the TPF contract as a matter of public policy. Other jurisdictions do not outright ban TPF but it is not yet accepted as common practice nor understood sufficiently for this decision to be transposed at this time. For those jurisdictions where TPF is legal and accepted, we would consider whether the relevant arbitration laws and rules gives the tribunal the broad discretion to award costs, as found in the UK Arbitration Act.

YM: Will this decision change your approach to funding? Do you think it will change client's views?

EMR: I think the case represents a step toward the right direction and I think more clients will consider TPF especially where the conduct of the respondent has made an impact on their ability to fund a disputes process.

YM: This decision is certainly changing the way that funders approach the financial matrix of funding. Until now, funders have systematically been applying a 1-10 rule ratio when considering whether a case is appropriate for funding. In other words, if a case was going to cost 1 million, it would need to possess a solid 10 million quantum prospect. Otherwise, we exposed ourselves and the client with risk that the funder would walk away with the lion's share of the proceeds. This is an undesirable outcome. With the possibility of recovering the cost of funding, clients who do not meet that 1-10 ratio can now nonetheless contemplate the possibility of obtaining funding for their claims.

Originally published in Funding In Focus, Issue 4, 2017

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.