Canada: High Court Upholds Recovery Of Third Party Funding Costs From Opponent

Last Updated: October 24 2016
Article by David Breslin and Tom Price

In the recent decision in Essar Oilfields Services Limited v Norscot Rig Management Pvt Limited [2016] EWHC 2361 (Comm), the High Court upheld an arbitrator's award which ruled that nearly £2 million of arbitration funding costs were "other costs" within the meaning of the Arbitration Act 1996 (the "Act") and were therefore recoverable from the Claimant. In doing so, the Court signalled that there is a different recoverability regime for parties to arbitration.

Background - the Arbitral Award

On 17 December 2015, the sole arbitrator, Sir Philip Otton, made a fifth partial award (the "Award") in arbitral proceedings between the parties. The Award concerned the costs payable by Essar to Norscot following the arbitrator's finding that Essar was liable for repudiatory breach of an agreement with Norscot.

As part of the Award, the arbitrator ruled that Norscot was entitled to recover from Essar the costs of funding, which it had obtained from a third party litigation funder. These amounted to c.£1.94 million, including the principal sum advanced (£647,000) and a contractual fee of 300% payable to the funder.

Essar sought clarification from the arbitrator as to the basis on which the Award had been made. On 3 March 2016, the arbitrator clarified that the Award had been made on the basis that, under s.59(1)(c) of the Act, he had discretion to make an award for "legal or other costs of the parties", and that Norscot's litigation funding costs were "other costs".

Essar's application to the High Court

Essar applied to the High Court to set aside the Award, arguing that:

  • The wording "other costs" in the Act and in the ICC Rules does not include litigation funding costs;
  • The arbitrator therefore had no power to include them in his order and exceeded his powers in doing so;
  • It would cause substantial injustice to Essar to have to pay the sum ordered;
  • Therefore there was a serious irregularity under s.68(2)(b) of the Act.

In response, Norscot argued:

  1. The arbitrator's construction of "other costs" was correct;
  2. Even if the arbitrator's construction was incorrect, that amounts only to an error of law and the erroneous exercise of a power he had, not a serious irregularity;
  3. Even if there was a serious irregularity, it would not cause Essar substantial injustice;
  4. Essar's application to the Court had been made out of time; and
  5. Essar had waived its right to bring the claim under the Act.

The Court's judgment

Serious irregularity

The Court agreed with Norscot's position that the arbitrator had discretion to make an award of costs under s.59(1)(c) of the Act. Therefore even if the arbitrator's construction of "other costs" was incorrect, that would amount only to an error of law. Ordering Essar to pay the third party funding costs would therefore have been the erroneous exercise of a power the arbitrator had, not the exercise of a power he did not have. That could not amount to a "serious irregularity".

Essar's application could have been dismissed on that basis alone. However, the Court nonetheless went on to address the other issues.

Construction

In support of its argument on construction, Essar argued that references to "other costs" in the Act and the ICC Rules must be construed by reference to what the Court would allow in litigation, and subject to common law rules on recoverability under the Civil Procedure Rules ("CPRs"). The Court rejected that argument, saying that "the Act was designed to be and is a complete code as to the conduct of arbitration", and that the reference in s.59(1)(c) of the Act to "other costs" has no parallel in the CPRs. He also rejected Essar's contention that "other costs" had to be construed in the context of the words preceding it and therefore must be analagous to "legal costs".

The Court accepted that ""other costs" [had] to be seen as other costs which relate to the arbitration proceedings", but considered that it must take a functional view of what that meant by asking whether "the costs relate to the arbitration and are they for the purposes of it?"

The Court added: "If the costs have not been incurred in order to bring or defend the claim in question, I would accept that they fall outside the definition of "other costs" and they would not relate to the arbitration – but that is not the case here."

Accordingly, the Court found that "other costs" could include the costs of obtaining litigation funding.

Substantial injustice

Given the Court's findings on serious irregularity and construction, this point did not arise. However, the Court indicated that, had Essar succeeded in arguing that there had been a serious irregularity, then it would have caused substantial injustice for them to have paid the third party funding costs.

Time

In addition to its substantive arguments, Norscot argued that that Essar's application was out of time, as it was made more than 28 days after the Award. The Court did not agree on this point, finding that the clarification sought by Essar was material to Essar's decision whether or not to make an application, and therefore that Essar's time did not start to run at the date of the Award, but only when the Award was clarified on 3 March 2016.

Waiver

Finally, Norscot argued that although Essar had contended that Norscot was not entitled to its costs of litigation funding, it had not specifically raised the issue of serious irregularity within the arbitration itself, but had instead continued to participate in the proceedings. As such, Norscot argued Essar had waived its right to bring the application under s.68(2) of the Act. Although it was not relevant given the Court's findings on construction and serious irregularity, the Court indicated that it would otherwise have found there had been a statutory waiver by Essar.

Conclusions

This case raises a number of important points.

1.Recoverability of third party litigation funding

First is, of course, the decision that the wording "other costs" in the Act and the ICC Rules includes the costs of third party litigation funding, and the signal from the Court costs recovery under the CPRs and under the Act are separate regimes. This finding would appear to extend to other arbitral institutions, whose rules contain similar wording giving the tribunal discretion to award payment of, for example, "legal or other expenses".

2.Reasonableness

It is worth noting that, while accepting that "other costs" could include litigation funding costs, the Court was at pains to make clear that an arbitrator's discretion to order them was still subject to an overall requirement of reasonableness. In that regard, it is also notable that the arbitrator in this case was critical of Essar's conduct, and found that it had left Norscot no option but to obtain third party funding if it was to pursue its claim. In those circumstances, in this case the arbitrator and Court plainly considered it just and reasonable that Norscot should be able to recover the costs of that funding from Essar.

The arbitrator's criticism of Essar's conduct does perhaps therefore give room for the Court to decline to follow this example in other cases. It also leaves unanswered the question whether it would be reasonable to allow a party who actively chooses to seek litigation funding for reasons other than necessity (e.g. as a means of allocating risk) to recover the costs of doing so.

3.Waiver

The Court's indication that it would have found there was a statutory waiver by Essar is a salutary reminder that parties who wish to make an objection concerning the jurisdiction, conduct of the Tribunal or other irregularity, must make that objection clear in the arbitral proceedings themselves at the time they become aware of grounds for objection. Failure to do so may be taken as a statutory waiver (under s.73 of the Act) of the right to challenge the perceived irregularity either in the arbitration or in the Courts.

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.

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