Arbitration: High Court allows recovery of third-party funding costs

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

The High Court recently upheld an arbitrator’s decision to allow a successful party to recover the costs of obtaining third party funding in an English-seated ICC arbitration (Essar Oilfields Services Limited v Norscot Rig Management Pvt Limited). The decision paves the way for arbitrators to exercise their discretion on costs in future cases to order unsuccessful parties to foot the bill not just for the sum borrowed by their funded opponent, but also the uplift charged by the funder, which can be substantial.

Background and decision

The claimant had procured funding of approximately £647,000. If the claimant succeeded in the arbitration (which it did), the funder was entitled to a fee of the greater of 300% of the amount advanced or 35% of the damages. The arbitrator accepted evidence from an expert in brokering third-party funding that the facility was consistent with market rates and terms.

The claimant prevailed in the arbitration and was awarded the costs of the funding, consisting of both the advance and the funder’s fee. The defendant appealed, but the High Court upheld the decision, finding that funding costs were within the arbitrator’s general costs discretion and were recoverable as “other costs” for the purposes of s.59(1)(c) of the Arbitration Act 1996 and Article 31(1) of the 1998 ICC Rules. This contrasts with the position in English litigation, where third-party funding costs are not recoverable under the Civil Procedure Rules.

Unsuccessful party’s conduct

A key feature of the case was the arbitrator’s criticism of the defendant’s conduct, both at the time of the events giving rise to the underlying dispute and during the course of the arbitral proceedings. The defendant’s actions, which included withholding payments due under its contract with the claimant, had deprived the claimant of the ability to fund the arbitration itself and left it with no option but to enter into a funding arrangement. The arbitrator ordered the defendant to pay indemnity costs – a sanction imposed on the paying party which generally leads to a higher percentage recovery of costs for the receiving party than under the standard basis on which costs are ordinarily assessed.

Implications

The decision is an important one as it has the potential, if followed, to significantly inflate a paying party’s costs exposure when confronted with a funded opponent who is successful in arbitral proceedings. Taking the present case as an example, assuming a claimant’s costs of funding a case are £647,000 and the basic terms as to the level of the funder’s fee are the same, a defendant could be ordered to pay costs of up to £2,588,000 (the amount advanced plus a 300% uplift), or an even higher amount still if 35% of the damages exceeds this sum.

It is too early to tell whether in practice the incidence of tribunals allowing the recovery of third-party funding costs will actually start to increase as a result of the decision. It is possible that the High Court’s decision could be successfully appealed. Also, awards on costs are, by their nature, discretionary. The outcome may be different in the majority of cases where the paying party’s conduct does not justify an indemnity costs order, depending on how a tribunal exercises its discretion or the way in which jurisprudence in this area develops. It is not clear, therefore, whether the present case will be the exception or the norm.

Third-party funding costs will continue to be irrecoverable in English court proceedings, but those with an interest in the market for third-party funding for English-seated arbitrations will be keeping a watchful eye on the situation to see what happens as a result of this decision.