Arbitrator justified in making losing party pay £2m cost of third-party funding, High Court rules

Bacon: acted for successful party

Bacon: acted for successful party

A defendant whose conduct forced the claimant to seek third-party funding to take its case to arbitration has to pay the £2m owed to the funder following the claim’s success, the High Court has ruled.

HHJ Waksman QC, sitting as a High Court judge, said litigation funding costs fell within the arbitrator’s general costs discretion, which was not to be confined by what may or may not be allowed in a court governed by the CPR.

We reported the outline of Essar Oilfield Services Ltd v Norscot Rig Management Pvt Ltd last month, but the full ruling ([2016] EWHC 2361 (Comm)) has now been released (it can be downloaded from the website of 4 New Square here).

Norscot was the successful claimant in an ICC arbitration – the arbitrator was former Court of Appeal judge Sir Philip Otton – and was awarded around $12m, of which $4m was the costs order.

The case concerned Essar’s repudiatory breach of an operations management agreement. Sir Philip was highly critical of Essar’s conduct both during the currency of the agreement and also for most of the arbitration period. He said Essar had set out to cripple Norscot financially in not making payments under the contract and then exerted commercial pressure throughout the arbitral process.

It was a “David and Goliath battle”, he said, and Essar made a “blatant attempt to drive Norscot ‘from the judgment seat’”. Nonetheless, Norscot pursued its claims “with courage and determination” and Sir Philip accepted that it was forced to seek third-party funding.

The third-party funder, Woodsford Litigation Funding, advanced £647,000, which was repayable either at 300% of the sum advanced from the damages recovered, or 35% of the damages, whichever was the greater. As a result, Norscot sought from Essar the £1.94m due to Woodsford.

Sir Philip held that he had the discretion to make such an order, because they were “other costs” for the purposes of section 59(1)(c) of the Arbitration Act 1996. This defines the costs of the arbitration as including the “legal or other costs of the parties”.

Essar challenged this. HHJ Waksman rejected Essar’s contention that Sir Philip had exceeded his powers in making the order, and went on to find that “as a matter of language, context and logic, it seems to me that ‘other costs’ can include the costs of obtaining litigation funding”.

He continued: “The expression should not be confined by some legal straightjacket imposed by reason of what a court might or might not be permitted to order.”

The judge described this case as a “telling example of the good sense of reading ‘other costs’ in this way”.

He explained: “This was a case, perhaps unusual, where the arbitrator ruled in detailed and robust terms that Essar drove Norscot into this expensive litigation because of its own reprehensible conduct going far beyond technical breaches of contract, in order to vindicate its rights.

“Further, as the tribunal found, Norscot had no option, but to obtain this funding from this third-party funder. As a matter of justice, it would seem very odd and certainly unfortunate if the arbitrator was not entitled under section 59(1)(c) to include the costs of obtaining third-party funding as part of ‘other costs’ where they were so directly and immediately caused by the losing party.”

Laura Beagrie, a professional support lawyer at Surrey firm Stevens & Bolton, said: “It is notable that the only requirement for the recovery of the third-party funding costs (an ICC arbitration with an English seat) is one of reasonableness (article 31(1) of the ICC Rules).

“This arbitrator thought it was reasonable based on the fact that the Essar had behaved in an reprehensible manner which had forced Norscot to take out third party funding, but other ICC arbitrators in other disputes could in theory find that recovery is reasonable without making any adverse findings against the unsuccessful party.

“This decision should enhance the attractiveness of England as an arbitral seat for those who wish to take out third-party funding. Those involved in the arbitration and third-party funding industries will no doubt want to review the chances of recovery of third-party funding costs in other seats and under other arbitral rules.

“It does make you wonder whether recovery of third-party funding costs really is impossible in English litigation. The Civil Procedure Rules don’t specifically disallow it, has it ever been argued and what might the chances of success be?”

Nick Bacon QC of 4 New Square and Chirag Karia QC of Quadrant Chambers (instructed by Davies Johnson) acted for Norscot, while Andrew Hogan of Ropewalk Chambers in Nottingham (instructed by Squire Patton Boggs) represented Essar.

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