English High Court Rules on Recovery of Third Party Funding Costs in Arbitration Proceedings
On 15 September 2016, the English High Court (the Court) dismissed a request to set aside an arbitral award under section 68(2)(b) of the U.K. Arbitration Act 1996 (the Act), holding that a sole arbitrator in an ICC arbitration did not commit a “serious irregularity” by including the costs of a third party funder within a costs award. The ICC arbitration was seated in England and was therefore subject to the Act.
The case arose out of arbitration proceedings brought by Norscot Rig Management Pvt Limited (Norscot) against Essar Oilfields Services Limited (Essar) for repudiatory breach of an operations management agreement. The arbitrator, who was highly critical of Essar’s conduct towards Norscot, awarded the latter various sums, including the costs of third party litigation funding which it had obtained in order to bring the arbitration.
The funding agreement, which was for GBP 647 000, entitled the funder to the greater amount of either 300% of the funding or 35 % of the damages recovered. The arbitrator accordingly ordered Essar to pay somewhere in the region of GBP 1.94 million (precise quantification pending) to Norscot, as the sum owed to the third party funder. In making the award, the arbitrator relied on what he considered was his discretion to regard third party funding as falling within the meaning of section 59(1)(c) of the Act. This provision grants arbitrators the power to award costs for “legal or other costs of the parties“.
Disappointed by this ruling, Essar brought an action for annulment against this arbitral award under Section 68(2)(b) of the Act.
Section 68(2)(b) of the Act allows a party to seek the annulment of an arbitral award for, among other things, excessive exercise of power, “on the ground of serious irregularity affecting the tribunal, the proceedings or the award“. To be successful under section 68(2)(b), the party must further show that this “has caused or will cause substantial injustice to the applicant“. In its challenge against the arbitral award brought under this provision, Essar argued that the arbitrator had committed a “serious irregularity” given that the concept of “other costs” in section 59(1)(c) of the Act did not include the costs of third party funding, so that the arbitrator had, in fact, exceeded his powers by including them in his costs order.
In order to respond to those allegations, the Court found it necessary to focus “intensely on the power concerned” and concluded that the relevant power at issue here was the “undoubted power” to award costs.
Referring to the leading case Lesotho v. Impregilo – which stated that a “serious irregularity” within the meaning of section 68(2)(b) only arises where the tribunal “has purported to exercise a power which it did not have, [and] not where it erroneously exercised a power that it did have” – the Court found that the power to award third party funding costs did not amount to an exercise of power which the arbitrator did not have. As a result, there could be no “serious irregularity” within the meaning of section 68(2)(b).
The consequence of this finding was that it was not possible for Essar to bring a challenge under section 68(2)(b) and, therefore, its application could have been dismissed on this point alone. Nevertheless, as both an academic exercise and as a means of showing respect, the Court went on to consider the other arguments raised in the case, including the meaning of “other costs” under section 68(2)(b) of the Act.
The Court following a careful consideration concluded that “as a matter of language, context and logic“, “other costs” can include the costs of obtaining funding so that there had been no error of law in the arbitrator’s decision. It pointed to the fact that the Act conferred discretion on the arbitrator to determine the recoverable costs “as he sees fit” and the fact that section 59(1)(c) deliberately included a head of loss, other than legal costs to support this conclusion. It also regarded as highly pertinent the fact that the ICC Commission Report of 2015 entitled Decisions on Costs in International Arbitration made repeated references to the role of third party funding in arbitration. It also rejected Essar’s argument that the Act must be construed essentially by reference to the English Civil Procedure Rules because the Act was designed to be a complete and separate code for the conduct of arbitration.
While the Court had noted that the Act conferred discretion on the arbitrator to determine the recoverable costs, the question of how the arbitrator exercised that discretion also remained to be considered as an “entirely different matter“. In this respect, the Court referred to the fact that Essar’s own reprehensible conduct was found, by the arbitrator, to have forced Norscot to vindicate its rights though expensive proceedings which it could only finance using third party litigation funding. The Court therefore described that case as a “telling example of the good sense of reading “other costs” in this way“. The Court added that it would be “very odd and certainly unfortunate” as a matter of justice, if the arbitrator could not include the third party funding costs as part of “other costs” “where they were so directly and immediately caused by the losing party“. According to this reasoning, the Court found that there was no error of law in the arbitrator’s interpretation of “other costs” under section 59(1)(c) of the Act.
For English practitioners, this judgment is important because it highlights that – under English law – an error of law in the exercise of an arbitrator’s power to award costs will not be sufficient to make a claim for “serious irregularity“. It therefore stresses the high threshold that must be reached in order to bring a section 68 challenge. Moreover, the judgment confirms that “other costs” under section 59(1)(c) can, but does not necessarily have to, include the costs of litigation funding. On a more general note, the Court’s ruling affords arbitrators a wide discretion to determine what “other costs” should be included in an award. Such interpretation can be a source of inspiration for other jurisdictions.