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How is third-party funding used in UK arbitration?

by Philip McMullan on 17 Nov 2016

third-party_funding

The use of third-party funding in UK arbitration has grown significantly in recent years, with some funders now reporting that their portfolio of cases is equally weighted between litigation and arbitration matters.

At a recent Q&A, Ruth Stackpool-Moore, director of litigation funding and head of Hong Kong at Harbour Litigation Funding, explained that the past 12 months have seen further exponential growth in the use of third-party funding generally and, particularly, an increase in the number of enquiries regarding arbitrations - especially from large, well-capitalised companies.

Now a decision of the High Court has further advanced the cause of litigation funding for arbitration in the UK. In Essar Oilfields Services Limited v Norscot Rig Management Pvt Limited, the High Court upheld an arbitrator's award, which ruled that nearly £2 million of arbitration funding costs were "other costs" within the meaning of the Arbitration Act 1996 and so were recoverable from the claimant. While the facts of the case are such that they may not amount to strong authority, the Court signalled that there is a distinct recoverability regime for parties to arbitration.

The details of the case

At the end of 2015, Sir Philip Otton, sitting as a sole arbitrator, made a partial award in arbitral proceedings between the parties. The award concerned costs payable by Essar to Norscot on a finding of repudiatory breach by Essar.

As part of the award, the arbitrator ruled that Norscot could recover the costs of funding, which had been obtained from a third-party litigation funder. The costs came to £1.94 million – consisting of £647,000 initially advanced by the funder and a contractual fee of 300 per cent.

Essar asked the arbitrator for clarification on what basis the award had been made. In March 2016, the arbitrator clarified that under s.59(1)(c) of The Arbitration Act 1996, he had discretion to make an award for "legal or other costs of the parties" and that Norcsot’s litigation funding costs were "other costs" within the meaning of the act.

Essar applied to the High Court to set aside the award, arguing that the wording "other costs" in the 1996 Act and in the ICC Rules does not include litigation funding costs. The claimant contended that the arbitrator, therefore, had no power to include them in his order and exceeded his powers in doing so - and that it would cause substantial injustice to Essar to have to pay the sum ordered. Therefore, the arbitrator's award amounted to a serious irregularity under s.68(2)(b) of the Act.

In response, alongside other issues around the timing of the application, Norscot argued that the arbitrator's construction of "other costs" was correct and that even if the arbitrator's construction was incorrect, that amounted only to an error of law and the erroneous exercise of a power he had, not a serious irregularity. Further, even if there was a serious irregularity, it would not cause Essar substantial injustice.

The decision

In his judgement, His Honour Judge Waksman QC quoted from Lord Steyn in the leading case of Lesotho v Impregilo 2006: "Section 68 is really designed as a longstop, only available in extreme cases where the tribunal has gone so wrong in its conduct of the arbitration that justice calls out for it to be corrected.

"It must always be borne in mind that the erroneous exercise of an available power cannot by itself amount to an excess of power."

The Court agreed with Norscot's position that the arbitrator had discretion to make an award of costs under s.59(1)(c) of the 1996 Act.

Essar had argued that references to "other costs" in the Act and the ICC Rules must be construed by reference to what the Court would allow in litigation, and subject to common law rules on recoverability under the Civil Procedure Rules. The Court rejected that argument, saying that "the Act was designed to be and is a complete code as to the conduct of arbitration", and that the reference in s.59(1)(c) of the Act to "other costs" has no parallel in the CPRs.

It is worth noting that the arbitrator in the case was critical of Essar's conduct, and found that it had left Norscot no option but to obtain third-party funding if it was to pursue its claim.

Arbitrators are still bound by an overall requirement of reasonableness and the question whether it is reasonable to allow a party to recover litigation funding costs for reasons other than necessity has been left unanswered. What is certain is that the court has signalled that arbitration has a distinct recoverability regime in the UK and that third-party funding costs can be awarded in some circumstances. Expect to see further developments in this area as third-party funding continues to grow.

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Topics: ADR, Arbitration

Philip McMullan

Written by Philip McMullan