Can a successful claimant recover the costs of a funding agreement from the defendant? No in litigation but yes in arbitration, according to the Commercial Court in Essar Oilfields Services Limited v Norscot Rig Management PVT Limited. This decision has sent shockwaves through the arbitration community.
Norscot and Essar entered into a contract in 2007. Their commercial relationship ended badly and Norscot brought various claims against Essar under an arbitration agreement which incorporated International Chamber of Commerce (ICC) Rules. The arbitrator, Sir Philip Otton, awarded damages and sums due under the contract to Norscot. He was highly critical of Essar’s conduct during the contract and during the arbitration, and had gone as far as saying that Essar had set out to cripple during the contract and had exerted commercial pressure on Norscot during the arbitration. The key point arising from these findings was that the arbitrator found that Norscot was entitled to indemnity costs.
The financial state of Norscot was such that it had financed its case through third party litigation funding. Under its funding agreement the funders advanced costs of around £647,000 and Norscot agreed to pay, if successful, a fee of three times the costs invested or 35%, whichever was the higher. In the event, Norscot paid its funders £1.94 million as the fee for the risk that the funders took.
Norscot sought to recover the £1.94 million from Essar (in addition to its actual legal costs). The arbitrator made an award ordering Essar to pay the £1.94 million. That matter was then brought before the Commercial Court as Essar applied to set aside that award undersection 68 of the Arbitration Act 1996 (AA 1996).
The arbitrator’s factual findings
In addition to being highly critical of Essar’s conduct, the arbitrator found that:
“as a consequence [of that conduct] Norscot had no alternative but was forced to enter into the litigation funding… Essar was undoubtedly aware that Norscot’s costs could not be financed from its own resources… [and] probably hoped that this financial imbalance would force the claimant to abandon its claims… [and was] a blatant attempt to drive Norscot ‘from the judgment seat’”.
The costs provisions in the ICC Rules and the AA 1996
The ICC Rules included a provision granting the arbitrator power to give an award under which one party may be ordered to pay the “reasonable legal and other costs incurred” by the other, and in doing so, “to take into account such circumstances as it considers relevant”.
The AA 1996 provides that:
- The tribunal may make an award allocating the costs of the arbitration as between the parties, determining the recoverable costs on such basis as it thinks fit.
- Costs include “the legal and other costs of the parties”.
Norscot’s argument was clear: “other costs” included the costs of the funding and the arbitrator had a discretion which he exercised in its favour. At least as recorded in the Commercial Court judgment, Essar contended that the AA 1996 must be construed by reference to what a court would or could allow by way of litigation costs under the CPR.
The Commercial Court agreed with the tribunal’s decision and held that the costs of litigation funding fell within “other costs”, both under the ICC Rules and under section 59 AA 1996.
It would be fair to say that this decision was not anticipated by arbitration lawyers and is likely to be the subject of an attempt to appeal it. The ICCA/Queen Mary College task force, which published its draft report in November 2015, had not anticipated it stating at paragraph C.2 that it is not appropriate for tribunals to award funding costs (such as aconditional fee, after the event (ATE) premium or litigation funder’s return) as they are not procedural costs incurred for the purpose of the arbitration.
What is significant about the ICCA/QMUL report is that it drew no distinction between a conditional fee, uplift, a funder’s return or an ATE premium. Presumably a full contingency fee agreement (CFA) between party and lawyer (a damages based agreement in litigation) would be treated in the same way.
Plainly the arbitrator and the Commercial Court have both taken a different view in respect of the litigation funder’s return. In principle, it is difficult to see any difference between the funder’s return and various other forms of funding, such as conditional or contingent fees, or very high rates of interest for more conventional lending.
However, there is a clear distinction in type between an ATE premium and the other categories as the ATE premium is not required to bring the claim but is an optional extra for the comfort of the claimant.
If this decision is left undisturbed it will lead to a number of issues:
Limits on the discretion:
- for example, on the facts of this case the tribunal’s decision was driven by Essar’s conduct and the finding that Norscot had no choice other than litigation funding;
- are such findings necessary or would one or the other or neither factor be required? and
- would an entirely elective decision to benefit from third party funding qualify?
How arbitral bodies may react:
- will they welcome the new business that might arise from contracting parties seeing arbitration as providing a more flexible costs regime than the English court?
- will they move to amend arbitral rules to reverse the effect of the decision in order to re-introduce a larger measure of predictability into costs recovery?