Court confirms third party funding costs may be recoverable in arbitration

Written on 7 Dec 2016

The English High Court has confirmed that an arbitrator was entitled to award the successful party the costs of obtaining litigation funding.  The decision did not go so far as to endorse awarding the costs of third party funding in all cases: this will be a matter of discretion for the arbitrator.  Nevertheless, this decision will be welcomed by those for whom third party funding offers the most (or only) way of pursuing a claim in arbitration.

What was the dispute about?

Essar Oilfields v Norscot Rig Management concerned an ICC arbitration brought by Norscot against Essar.  The sole arbitrator, Sir Philip Otton, found in favour of Norscot, awarding it US$12m (subject to one further award still to be made), which included approximately US$4m in costs.

That award of costs included just over £1.94 million in respect of third party funding costs.  This was the amount owed by Norscot to Woodsford Litigation Funding, which had advanced £647,000 for Norscot to pursue the arbitration.  In exchange, in the event that Norscott succeeded in the arbitration, Woodsford was entitled to a fee of 300% of the funds advanced or 35% of the money that Norscot recovered.

Essar made an application to the High Court under section 68 of the Arbitration Act 1996 to set aside the partial award which related to those third party funding costs.  Essar alleged that the arbitrator had exceeded the powers available to him, and that this constituted a “serious irregularity” which would cause “substantial injustice” to Essar.

What were the issues?

The arbitration was subject to ICC rules and, by virtue of the seat of arbitration being England, the Arbitration Act 1996.  Section 63 of the Act affords the arbitrator, in the absence of an express agreement otherwise, discretion as to the costs of the arbitration that can be awarded.  Section 59 defines “costs of the arbitration“, to include “legal or other costs of the parties“.  In a similar vein, article 31(1) of the ICC Rules states that the costs of the arbitration “shall include the reasonable legal and other costs incurred by the parties for the arbitration.”

Essar argued that, as a matter of construction, “other costs” did not include third party funding costs, in which case the arbitrator had no power to award those costs.

In response, Norscot contended (among other things) that:

  • on a correct construction, “other costs” did include third party funding costs; but
  • if it was wrong about this, there was still no “serious irregularity”; at best, there was an error of law, which did not amount to the arbitrator exceeding his powers.

What did the court decide?

The court found in Norscot’s favour, dismissing Essar’s application.

His Honour Judge Waksman QC started with the question of whether there would have been a serious irregularity if the arbitrator had misinterpreted “other costs”.  He concluded that there was no serious irregularity even if the arbitrator misinterpreted “other costs”.  This would only be an erroneous exercise of power and not an exercise of power that did not exist.

The judge went on to consider whether, the arbitrator was right to interpret “other costs” as in principle extending to the costs of obtaining third party litigation funding.  He “unhesitatingly” found that it did.

Comment

Unless the parties agree otherwise, the English courts are very unlikely to overturn an arbitrator’s decision on whether to award costs of third party funding.  The decision that third party funding is recoverable in principle as “other costs” will make funding an attractive option to parties in arbitration.  The party claiming the costs of third party funding will need to show that the costs relate to the arbitration, are for the purposes of it and are reasonable.