Essar Oilfield Services Limited v Norscot Rig Management Pvt Limited (2016)

In a decision that may come as a surprise to many, the High Court has upheld an arbitrator's decision to allow recovery of a third party funder's success fee from the unsuccessful party.

The claimant in the arbitration, Norscot Rig Management Pvt Limited ('Norscot'), had been awarded more than $12m in damages by the arbitrator, Sir Phillip Otton, who also ordered the defendant, Essar Oilfield Services Limited ('Essar'), to pay Norscot's costs on an indemnity basis.

Norscot's costs included a sum of £1.94m, payable by the claimant to its funder, amounting to 300% of the funder's finance of £647,000. The terms of the funding provided for Norscot to pay either 300% of the funding advanced or 35% of the amount received, whichever was greater.

Recovery of costs under the Arbitration Act 1999

Essar challenged Sir Otton's decision under s68(2)(b) of the Arbitration Act 1996 ('1996 Act') on the basis that the arbitrator had exceeded his power giving rise to a 'serious irregularity'. However, according to s59(1)(c) of the 1996 Act, the costs of the arbitration include 'legal or other costs of the parties'. Under s63(3) of the 1996 Act, the tribunal has discretion to determine the recoverable costs of the arbitration on such basis as it sees fit.

High Court decision

In the High Court, Judge Waksman QC held that the reference to 'legal and other costs' in s59(1)(c) was sufficiently wide to permit recovery of the third party funder's success fee. Accordingly, Sir Otton was entitled to use his discretion to determine that the costs of litigation funding were recoverable from the defendant in this case.

Potential impact of decision

Third party funding has become increasingly popular in recent years with creative solutions facilitating access to funding. In the post-Jackson era, parties in court proceedings have accepted funding in the knowledge that any success fee is not recoverable from opponents; it must instead be paid out of damages received.

The judgment in Essar v Norscot may lead to more parties seeking arbitration clauses in their agreements. Additionally, it could cause other parties, who are most likely to be on the receiving end of a contractual claim, to steer away from arbitration for fear of a substantial costs award.

Funders who offer After the Event ('ATE') insurance are likely to view this development as a double-edged sword, as success fee recovery is likely to leave ATE insurers paying this as part of an adverse costs award, unless expressly carved out. This will undoubtedly have an impact on the costs of ATE insurance premiums in arbitration.

With funding costs now recoverable in arbitrations, parties and their legal representatives will have to take extra care to ensure that the agreement reached with funders is reasonable, as it will no doubt be subject to scrutiny by the other side and the arbitrator. It is inevitable in the light of the judgment that more parties will seek to recover their funding costs from the other side in arbitrations.

Finally, it is important to note that this was a case in which the defendant was ordered by the arbitrator to pay costs on the indemnity basis.

The arbitrator was critical of the defendant's conduct and determined that Essar had intentionally orchestrated a situation in which Norscot was prevented from using its own resources to fund the arbitration. A different arbitrator in a different case could exercise his discretion in another way.