English High Court affirms recovery of third party funding costs in ICC arbitration proceedings

Litigation, Arbitration and Investigations Alert

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In our update dated 21 September 2016, we considered the case of Essar Oilfields Services Limited v Norscot Rig Management Pvt Limited, in which the English High Court upheld the decision of the sole arbitrator, Sir Philip Otton, in ICC arbitral proceedings, permitting the recovery of third party funding under section 59(1)(c) of the Arbitration Act 1996 (the "Act") and Rule 31(1) of the ICC Arbitration Rules (the "Rules"). We forecast that this decision could significantly alter the landscape for third party funding of English-seated arbitral proceedings.

The judgment has since been handed down. We consider below the Court’s reasons for upholding the arbitrator’s award in relation to the recoverability of the costs of third party funding.

The Court’s analysis

The issue before the Court, was whether "other costs of the parties" provided for by section 59(1)(c) of the Act included the costs of third party funding of the sort claimed, and whether, if the arbitrator did not have the power to include them in his costs award, there was a serious irregularity under section 68(2)(b) of the Act.

The Court found that there was no serious irregularity within the meaning of section 68(2)(b)of the Act, even if the arbitrator had been wrong in his construction of "other costs" so as to include the costs of third party funding.

On the issue of whether "other costs" included the costs of third party funding, the Court found that it did, "as a matter of language, context and logic". However, the decision as to whether to make such an award remains in the discretion of the arbitrator. In reaching these conclusion the Court made the following findings:

  1. The Act is designed to be a "complete code" as to the conduct of arbitration and sections 59 and 61 of the Act should not, therefore, be construed by reference to what a Court would allow by way of costs in litigation under the English Civil Procedural Rules, with the Act itself and the procedural powers conferred upon the arbitrator providing the sole relevant context. 
  2. Sections 61(1) and 63(3) of the Act provide an arbitrator with a discretion to determine the recoverable costs of the arbitration. Section 59(1)(c) of the Act then deliberately includes a head of costs - "other costs of the parties" - which is separate and distinct from legal costs. 
  3. It was not the correct approach to construe "other costs" euisdem generis with legal costs, so as to cover only such costs as are analogous to legal costs; the appropriate genus was not "legal costs" but, rather, "the costs of the arbitration" in the broad sense. 
  4. Applying a functional approach, the real question was whether (a) the costs related to the arbitration, and (b) were for the purposes of the arbitration. If the costs have not been incurred in order to bring or defend a claim, they would fall outside the scope of "other costs" and would not be recoverable. In this context, the Court considered the ICC's Report from 2015 entitled "Decisions on Costs in International Arbitration" which supported a functional approach to costs recovery in arbitration and also made clear that "the ICC regime is not be regarded as subservient to the CPR regime on such costs issues". 
  5. Even if the Respondent was right that the source of an arbitrator’s discretion to award the costs of third party funding was embedded in its power to award interest under section 49 of the Act (the provisions of which the Court did not consider in any detail), as opposed to sections 59 and 63 of the Act, this would not narrow the application of section 59(1)(c); rather the arbitrator’s power to make an award under section 49 of the Act could exist "side by side" with the powers conferred by sections 59 and 63 of the Act.

The Court's findings in relation to the scope of "other costs" under section 59(1)(c) of the Act did not rely on an analysis of the conduct of Essar in the arbitration, of which the arbitrator had been heavily critical and which the tribunal found left Norscot with no option but to fund the costs of the arbitration through third party funding. The Court did, however, conclude that "it would seem very odd and certainly unfortunate if the arbitrator was not entitled under s.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."

Conclusions

This is an immensely important decision in relation to the use of third party funding in English-seated arbitrations. So far as the tribunal having the power to award third party funding costs as "other costs" is concerned, the judgment is very clear. However, the question of whether and in what circumstances a tribunal will exercise its discretion to exercise this power will inevitably turn on the facts of each case.

It seems inevitable that successful funded parties in English-seated arbitrations (and, indeed, in arbitrations seated in other jurisdictions) will attempt to push the boundaries of that discretion. We must wait to see whether tribunals will be prepared to award funding costs in circumstances where, for example, the conduct of the losing party is not criticised and where the funded party has sought third party funding for reasons other than its impecuniosity.