UK: Recovery Of The Costs Of Litigation

Last Updated: 4 January 2017
Article by Marko Kraljevic and Anousheh Bromfield

Most Read Contributor in UK, October 2017

In a recent landmark case, the Court has upheld an arbitration award providing for the recovery of third party funding costs. We discuss the case and the repercussions for traders today.

The Court, in Essar Oilfield Services Ltd v Norscot Rig Management Pvt Ltd [2016] EWHC (Comm) 2361 (judgment handed down on 15 September 2016), dismissed an application brought by Essar against an arbitral award that provided for the recovery of Norscot's finance costs in obtaining third party funding.

Norscot commenced London-seated ICC proceedings against Essar for repudiatory breach of an operations management agreement and entered into a financing arrangement with a litigation funder to bring the claim. Norscot was successful in the arbitration and sought its legal fees and the costs of the finance of those fees. The third-party funding consisted of an advance of GBP 647,086 with repayment to be the greater of 300% of the sum advanced or 35% of the damages awarded.

The Arbitration Act 1996 (the "Act") provides tribunals with a broad discretion when awarding "other costs" (see section 59(1)(c) of the Act). In the Essar case, the arbitrator concluded that Essar had set out to "cripple" Norscot financially and that it was as a result of Essar's conduct that Norscot was forced to enter into litigation funding. The arbitrator held that those costs were within his discretion to award and were consequently recoverable (and it should be noted that the parties' conduct was a significant factor in both the arbitration and the High Court rulings).

Essar applied to the High Court pursuant to section 68(2)(b) of the Act, seeking to challenge the arbitrator's ruling on the grounds that it constituted an excess of power amounting to a serious irregularity. The High Court held that the arbitrator's decision as to costs was within the discretion afforded by section 59(1)((c) of the Act and Article 31(1) of the ICC Rules. In particular, the High Court held that the reference to "legal and other costs" in section 59(1)(c) of the Act was broad enough to enable the recovery of finance costs incurred in obtaining third party funding.

One of the criticisms of the decision in the Essar Oilfield case is that the uplift payable to the funder is neither a "cost" nor a reflection of "damage" suffered; it is instead the result of a contractual bargain reached between the funder and litigant taking into account the risk and potential reward of the litigation. Consequently, some have questioned whether recovery of the costs of this type of funding effectively amounts to the awarding of punitive damages. It is important to bear in mind, therefore, that both the arbitrator's ruling and the High Court's judgment, emphasise the respective conduct of the parties and note that Norscot was forced to enter into the funding arrangement as a result of Essar's conduct and, also, that the terms of that arrangement were reasonable and consistent with market practice.

Given that the possibility of recovering the costs of third party funding has now been firmly established, this may well give rise to additional disclosure requests in arbitrations, relating to the existence and details of funding arrangements.

Another issue thrown up by the outcome of the Essar Oilfield case is the disparity between arbitrations and Court proceedings when it comes to the exposure of third party funders to adverse costs orders.

Generally speaking, an arbitral tribunal has no power to make a costs order against a third party funder because the tribunal's jurisdiction extends only to the parties to the arbitration. This can be contrasted with the Court proceedings in England where section 51 of the Senior Courts Act 1981 (SCA) allows for the possibility of third party costs orders being made in certain circumstances; namely where a non-party is not merely funding the proceedings but also substantially controls or benefits from them (see Arkin v Borchard Lines Ltd and others [2005] EWCA Civ 655] and Excalibur Ventures LLC v Texas Keystone Inc and others [2014] EWHC 3436 (Comm)).

Prior to the Essar Oilfield case, this disparity between the recoverability of costs from third party funders in court and arbitration proceedings was matched by a perceived inability to recover the costs of obtaining third party funding in arbitration proceedings. This equilibrium has now been disturbed with the result that arbitration is a significantly more attractive option for third party funders.

Recovery Of The Costs Of Litigation

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