On 15 September 2016 the High Court of England & Wales
handed down a judgment in the case of Essar Oilfields Services
Limited v Norscot Rig Management Pvt Limited (2016) QBD. The
court considered a challenge to the decision of the arbitrator, Sir
Philip Otton, in an arbitration under the ICC rules.
The arbitrator ordered the losing respondent to pay not only the
legal expenses of the claimant, but also the success fee, paid by
the claimant to a third party who had funded its legal costs. The
terms of the funding arrangement envisaged the payment to the third
party of either 300% of the sum advanced or 35% of the sums
recovered in case of success – terms seen as standard in the
market. The sum payable to the third party funder was £1.94m.
The sum advanced by the third party to cover legal fees was
The basis for the challenge (under s 68 of the Arbitration Act
1996) was alleged serious irregularity and exceeding of powers by
the arbitrator. However, the court left the decision in force.
Arbitrator can award not only legal, but also 'other'
The court concluded that the success fee paid to the funder is
not a 'legal cost'. However, under s 59(1)c of the
Arbitration Act 1996 the arbitrator had power to award the payment
by the losing party not only of legal costs, but also 'other
costs' of the winning party (as long as those costs were
connected with the arbitration proceedings).
This decision highlights a key difference between rules
applicable in arbitration and the corresponding rules on allocation
of costs applicable in court proceedings. The Civil Procedure Rules
1998, which contain, inter alia, rules on allocation of legal costs
between the parties, does not contain wording in relation to
The Arbitration Act 1996 gives arbitrators additional powers,
which are not contained in the Civil Procedure Rules. The court
also held that there is no reason to interpret the words 'other
costs' narrowly or by reference to the Civil Procedure
Arbitration goes its own way
This decision also cuts against the general tendency of
developments in the civil procedural law of England & Wales and
the recent attempts legislatively to limit how far the losing party
can be responsible for the costs of the winning party.
Following reforms initiated by Lord Justice Jackson, a success
fee paid under conditional fee agreements with lawyers concluded
after 1 April 2013 is no longer recoverable from the other side as
legal costs. The same goes for premiums payable under ATE insurance
policies in relation to legal costs (previously the policy premium
could be recovered from the other side in the event of success
together with other costs). In the last few years, rules have also
been introduced on the compulsory provision of budgets to the other
side and the approval of costs by the court. It seems unlikely that
success fees paid to other parties will ever be recoverable from
the other side in court.
This decision will probably not change the situation in relation
to court proceedings. However, the court has held that the powers
of an arbitrator to award costs under the Arbitration Act 1996 are
significantly wider in this respect than the powers of a judge.
Nevertheless, arbitrators may assess success fees by reference to
standard rates in the third party litigation/arbitration funding
The respondent asked for permission to appeal, but permission
was denied. In view of the novelty and unexpected nature of the
decision, a follow-up application for permission to the Court of
Appeal may follow.
We will continue to monitor events. At present, the judgment has
not yet been published. The source of the information set out in
this publication is the short summary published on the Lawtel
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On 26 October 2016, the Court of Appeal delivered its judgment in Kazakhstan Kagazy Plc & 6 others v (1) Baglan Abdullayevich Zhunus (2) Maksat Askaruly Arip (3) Shynar Dikhanbayeva  EWCA Civ 1036.
With high cost and inefficiency top of the list of party concerns about the arbitral process, institutions, arbitrators, practitioners and indeed legislators are keen to find ways to address those concerns.
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