Overview

Thanks to the Jackson reforms, when a matter is litigated in a UK court, the fees associated with third party funding are not recoverable. However, the question of whether these costs should be recoverable in an arbitration (and whether a decision to award them amounted to a serious procedural irregularity under Section 68 of the Arbitration Act (the “Act“)) had not been addressed. Until now.

In the recently heard case of Essar Oilfields Services Limited and Norscot Rig Management PVT Limited[1], the court upheld the award made by the ICC arbitrator in relation to costs and, in doing so, emphasised the separation of the arbitral process and the autonomy of the arbitrators who operate within it.

Background & the decision of the arbitrator

In December 2015, the arbitrator held that Essar Oilfield Services Ltd (“Essar“) was in repudiatory breach of an operations management agreement (the “Agreement“) between Essar and Norscot Rig Management PVT Limited (“Norscot“) and made a partial award ordering Essar to pay damages and costs on an indemnity basis. The costs amounted to over US$12 million.

These costs included £1.94 million that Norscot had paid to obtain third party funding for the arbitration. Norscot had paid around £647,999 to Woodsford Litigation Funding (“Woodsford“) to fund the arbitration, on the terms that, if Norscot were successful, Woodsford would receive the greater of 300% of the funding or 35% of the amount recovered.

The partial award was made pursuant to section 63(3) of the Arbitration Act 1996 (the “Act“), which gives the tribunal a general power to award costs as it sees fit, and section 59(1)(c) of the Act, which provides that costs can include “legal and other costs of the parties“.

The arbitrator made it clear that he regarded the costs of the third party funding as falling within the scope of “other costs” and noted that:

  1. Essar had conducted itself badly both under the Agreement and throughout the arbitral proceedings. It was found to have exerted intense commercial pressure on Norscot in what was described as a ‘David and Goliath’ battle. This conduct included baseless allegations of fraud and dishonesty being levied at Norscot’s management, which amounted to “unjustified, personal attacks“;
  2. Essar had deliberately put Norscot in a position whereby it was unable to fund the arbitration and was left with “no alternative” but to enter into a third party funding agreement. Essar was said to have set out to “cripple Norscot financially” by refusing to make certain payments (e.g. to cover the cost of crew wages and suppliers), thereby creating a “vicious circle” for Norscot and resulting in the managing director having to remortgage his home; and
  3. The rates and terms upon which Norscot obtained the funding were standard in the market.

The challenge to the Award

Essar challenged the award on the basis that there had been a “serious irregularity” under section 68(2)(b) of the Act, arguing that the arbitrator had exceeded his powers by construing “other costs” to include those associated with third party funding.

Decision of the court

The Court upheld the partial award and rejected Essar’s attempt to set it aside on the grounds of “serious irregularity”. The court observed that in order for there to be a serious procedural irregularity, the tribunal would need to have purported to exercise a power which it did not in fact have. The court was comfortable that, in the present case, the arbitrator exercised a power that he did have (i.e. the power to award costs). To characterise the decision of the arbitrator in any other way would be “wholly unrealistic and artificial”.

This decision not only provides authority for the recovery of third party funding costs in an arbitration context, it also showcases the court’s respect for both the arbitral process and the decisions made by those who operate within it. It also serves as a useful reminder of the narrowness of section 68 and the differences between litigation and arbitration. Goliath may well have fared better if the battle with David had been played out before the courts.

Having concluded that there was no serious procedural irregularity, the court was not obliged to consider the remaining points raised in any detail. However, the court did go on to make several interesting obiter comments (i.e. comments that are not binding for future cases but may have some weight). For example, the court did not accept that an error regarding construction had been made and “unhesitatingly concluded” that the arbitrator’s interpretation of “other costs” was correct. The court rejected Essar’s argument that the Act should be construed with reference to the costs that would be awarded in a litigation context under the Civil Procedure Rules (the “CPR“). In doing so, the court noted that the Act is intended to be a complete code as to the conduct of arbitration, and is not intended to be subservient to the CPR. The approach taken by the courts under the CPR as to what can and cannot be awarded by way of costs was therefore of little relevance. Further, the court went on to suggest that even if the arbitrator had made a mistake in construing “other costs” as including those associated with third party funding, this error would fall some way short of being a procedural “serious procedural irregularity“.

Conclusion

This decision not only provides authority for the recovery of third party funding costs in an arbitration context, it also showcases the court’s respect for both the arbitral process and the decisions made by those who operate within it. It also serves as a useful reminder of the narrowness of section 68 and the differences between litigation and arbitration. Goliath may well have fared better if the battle with David had been played out before the courts.