Landmark third-party funding decision for international arbitration

December 2017 | EXPERT BRIEFING | LITIGATION & DISPUTE RESOLUTION

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Third-party funding is where an entity or group with no prior connection to the dispute agrees to finance all or part of the legal costs of the litigation or arbitration, in return for a fee payable from the proceeds recovered by the funded party. It is available for claims brought within the UK courts and for arbitrations seated within the UK (as well as, to a more limited extent, for international arbitrations seated within other jurisdictions). Third-party funding is often used alongside ‘after the event’ insurance, which protects against the risk of a party having to pay its opponent’s costs if it loses the case or is unable to recover sufficient damages.

Over recent years, the UK courts have been increasingly ready to recognise third-party funding as a legitimate means of financing disputes, and the end of 2016 saw a particularly significant decision for the funding of arbitration seated in the UK.

Arbitration funding – the Essar case

In Essar v. Norscot, Essar had been found liable to pay damages to Norscot for the serious breach of an oil rig operations management agreement between them. The dispute was resolved via an International Chamber of Commerce arbitration, pursuant to which the arbitrator found for Norscot and was highly critical of Essar’s behaviour. In particular, the arbitrator found that Essar had sought to financially cripple Norscot and that Norscot had no option but to fund the dispute with third-party funding.

The terms of Norscot’s third-party funding provided that, in the event that Norscot was successful, the funder would be entitled to recover a sum equivalent to 300 percent of the funding or 35 percent of Norscot’s recovery, whichever was the greater, from the unsuccessful party. Norscot adduced evidence that these funding terms were market-standard.

Section 61 (1) of the Arbitration Act 1996 (AA 1996) allows the arbitrator to allocate between the parties the “costs of the arbitration”. Section 59 (1) of the AA 1996 provides that the “costs of the arbitration” comprise the “legal or other costs of the parties”.

When the arbitrator made a costs award against Essar, Essar brought proceedings in the High Court to challenge that award, arguing that “other costs” should not include litigation funding costs.

Outcome and implications

The court disagreed with, and dismissed as arbitrary, Essar’s various submissions. The court decided that: (i) the real test is whether the costs relate to the arbitration and whether they are for the purposes of it – if so, they might well be recoverable; (ii) in addition, there is an overall requirement of reasonableness, which is an important check and balance on the arbitrator’s discretion to award costs.

In this case, Essar’s repressive conduct and Norscot’s evidence of market-standard funding terms were relevant. The High Court held that section 59 (1) AA 1996 can include litigation funding costs, and that the arbitrator’s award was reasonable.

Insight

The ability for a party to effectively shift its legal costs on to a funder is a significant benefit of English litigation and arbitration. Apart from enabling a party to pursue a claim or counterclaim in circumstances where it might not otherwise be able to afford to do so, third-party funding can facilitate settlement, as the fact that a third-party has assessed and invested in a claim can be a powerful indication of its prospects of success, as well as illustrating that the claim is fully funded to a final hearing. Third-party funding can also level the financial playing field, minimising the scope for a well-capitalised party to utilise cost pressure as a means of defeating an otherwise valid claim. From a commercial point of view, shifting legal costs on to a third-party can also help to alleviate pressure on a business’ finances.

The recent Essar case gives a powerful reason for choosing England as a seat for international arbitration cases, since it enables a claimant to pursue a claim with third-party funding on a non-recourse basis – not only can you recover your costs of proceedings if you arbitrate in England, you can also recover your costs of funding. A funded claimant therefore minimises his risk in such a dispute, with the funder paying costs if the claim fails and the potential for the unsuccessful defendant to pay costs – including funding costs – if the claim is successful. This is because the AA 1996 gives arbitrators in English arbitrations a broad discretion as to which costs are recoverable (whereas, by comparison, funding costs are not recoverable in English court proceedings).

The Essar decision is likely to prompt an increase in the number of successful parties seeking recovery of their funding costs; and opponents to third-party funded arbitrations may be increasingly more wary of the cost implications of losing a case.

Malcolm Simpson is a partner at Walker Morris LLP. He can be contacted on +44 (0)113 283 2500 or by email: malcolm.simpson@walkermorris.co.uk.

Malcolm Simpson

Walker Morris LLP