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Arbitration flexes its muscles on costs awards – extra scope for third party funding

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Summary: A decision of the Commercial Court last week, upholding an ICC arbitration tribunal’s unusual award of costs – including the cost of the required return to a third party funder – has set the arbitration community talking. Could this be another blow to litigation in court as arbitration flexes its (ever more flexible) muscles?

More than three years after the Jackson reforms removed the ability to recover CFA success fees and insurance premiums (“additional liabilities”) from losing opponents in most civil litigation, lawyers and clients alike have become used to the new regime. And whilst English law arbitrations may have maintained more flexibility and discretion over costs, the prevailing advice since Jackson has been that parties in an arbitration should not expect to be any better off in terms of costs recovery than a litigating party, and that an attempt to ask a tribunal to award the additional costs of entering into fee or funding arrangements would fail.

But, as my mother always told me, “If you don’t ask, you won’t get”. In a recent ICC arbitration the winning party optimistically took the chance of asking for the costs of its third party funding arrangement. Most unusually, it was awarded them, and last week the English Commercial Court, to whom the matter was appealed, upheld the tribunal’s costs decision. (Essar Oilfield Services Ltd v Norscot Rig Management Pvt Ltd.)

At first blush the decision, and the subsequent endorsement from the English court, appears unusual. It seems the ICC tribunal has the discretion to go above and beyond what a party to litigation in court could ever be entitled to, even before the Jackson reforms. Pre-Jackson, successful litigants could ask for the costs of their additional liabilities to be paid by the other party, but always subject to the court’s assessment as to their reasonableness. Moreover, there was never any entitlement to ask for the cost of the return to any third party funder to be paid by the losing opponent. But this is what the ICC tribunal has awarded, in full.

Delving deeper into the facts, the explanation lies in the power of the tribunal to determine the recoverable costs of an arbitration and the construction of the term “costs of the arbitration” as defined in the Arbitration Act 1996.

The arbitrator heavily criticised the losing party’s conduct both in respect of the agreement giving rise to the dispute and the arbitration proceedings.  He concluded that the losing party had, through its own behaviour, forced its opponent into a position where it was impossible for it to fund the proceedings itself and thus it had been reasonable to seek professional funding.

The funding agreement required a return of 3x the investment or 35% of the damages recovered (not unusual in the funding market). The arbitrator awarded the successful party his costs on the indemnity basis including the funder’s fee of £1.94m as part of the costs of the arbitration on the basis that they formed part of the “other costs of the parties” (s59(1)(c) of the Act).

The losing party challenged the award on the ground of serious irregularity under section 68(2)(b) of the Act alleging that the arbitrator had exceeded his powers since “other costs” within section 59(1)(c) of the Act did not include the costs of third party funding.

The Commercial Court rejected the challenge.  The court held that an arbitrator has the general power to determine the recoverable costs of an arbitration on such basis as it thinks fit (section 63(3) of the Act) and that the arbitrator was right to construe “other costs” (section 59(1)(c) of the Act) as including the cost of third party litigation funding.  

In upholding the award, the Commercial Court emphasised that the Arbitration Act is a complete code, not subservient to the costs rules in the Civil Procedure Rules by which the courts must abide.

The court approached the issue as one of the arbitrator's discretion to determine costs.  So the decision does not necessarily mean that the costs of third party funding will always constitute recoverable costs in all arbitrations.  However, it is a clear indication that they could do so in a given case, under the discretion afforded to arbitrators under section 63(3) of the Act.

Perhaps then these were unique circumstances arising out of the opponent’s bad behaviour rather than a green light to arbitrating parties to recover all of their additional liabilities and make the cost of funding free. (The usual arrangement is payment to a funder only on success, so the logical outcome of this decision would be that win or lose the funded party doesn't have to pay).

Nevertheless, the arbitration community is considerably excited by the decision, and no doubt funders will be watching this space with interest. We may see a surge in the popularity of arbitration based on this decision (if it stands). At the very least it highlights to parties to a dispute the additional flexibility – both on procedure but also increasingly on costs awards - which tribunals may have over litigation in court. 

The question of course remains whether this decision is to be appealed, and, if so, whether the Court of Appeal will attempt to level the playing field between litigation and arbitration again. When English litigation is facing troubled times – Brexit affecting international enforcement of judgments; continuing court fee increases, and the looming prospect of fixed-costs jurisdiction getting ever wider, for example – the appeal of arbitration seems ever stronger.

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