The High Court of Justice in London has handed down a landmark
decision concerning the recovery of third party funding costs in
the case of Essar Oilfield Services Ltd v Norscot Rig Management
Facts of the case
The Claimant (and funded party) ("Norscot") commenced
ICC arbitration proceedings against the Defendant
("Essar") relating to a repudiatory breach of an
operations management agreement concerning an offshore drilling
platform. The arbitrator (Sir Philip Otton) found in Norscot's
favour and held Essar liable for damages under the contract,
totalling over $12 million. Norscot was also awarded indemnity
costs as a consequence of Essar's conduct, both in respect of
the underlying agreement and during the subsequent arbitration
The indemnity costs award not only included the legal costs
incurred in respect of the arbitration proceedings but also
included £1.94 million that Norscot was required to pay to
its third party funder, upon its success in the proceedings.
In reaching this view, the arbitrator held that Essar had
deliberately put Norscot in a position where it could not self-fund
the arbitration and, consequently, it had had been reasonable for
Norscot to obtain third party funding (of £647,000). The
tribunal also held that the terms on which the funding was obtained
(under which Norscot was required to pay the higher of 300% of the
funded amount or 35% of the damages recovered), were reasonable and
were standard terms within the litigation funding market.
In making this award, the arbitrator indicated that he was
exercising his powers under sections 59(1)(c)1 and
63(3)2 of the Arbitration Act 1996 (the "Act")
and the applicable ICC Arbitration Rules.
Essar challenged the award on the ground of "serious
irregularity" on the basis that s. 59(1)(c) did not include
the costs of third party funding and therefore the arbitrator had
exceeded his powers in making the award.
In response, Norscot's primary argument was that the
arbitrator's construction of the Act and the ICC rules was
correct and it was within his power to award the costs Norscot was
obliged to pay to its funder.
HHJ Waksman Q.C., sitting as a judge in the High Court,
dismissed the application and held that the costs payable to the
third party funder were recoverable in principle pursuant to
s. 59(1)(c) of the Act and Article 31(1) of the ICC rules. The
Court held that the arbitrator was right to construe "other
costs" as being sufficiently wide to include the costs of
third party funding. The judge noted however that the Civil
Procedure Rules do not include the same (or equivalent)
"other costs" wording.
This important clarification of the law confirms that an
arbitrator does have, within its powers, the authority to
include the costs of the funder's "return" within the
ambit of an indemnity costs order. This is a significant shift from
the usual position where the "return" is funded out of
the award recovered by the funded party (diminishing its ultimate
This decision confirms the very broad discretion which an
arbitrator has when dealing with issues of costs and is a further
demonstration of the English Courts' generally supportive
approach to arbitration.
1 s. 59(1)(c) states that "References in this Part
to the costs of the arbitration are to...the legal or other costs
of the parties".
2 s. 63(3) states that: "The tribunal may determine
by award the recoverable costs of the arbitration on such basis as
it thinks fit".
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