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  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
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
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  EWCA Civ 655] and
Excalibur Ventures LLC v Texas Keystone Inc and others  EWHC
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.
The UK Supreme Court last week issued the latest decision in a long-running attempt to enforce a US$150 million Nigerian arbitration award (IPCO (Nigeria) Limited v. Nigerian National Petroleum Corporation...
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