September 19, 2016

Landmark decision on third-party funding in arbitration: Essar v Norscot

The full transcript of the court's recent decision in Essar v Norscot is not yet available but the High Court of England & Wales appears to have made a 'giant leap' on the recovery of litigation funding in the context of arbitration. This briefing is informed by 4 New Square's briefing on the case (in which they acted).

Background

Following a dispute relating to an operation management agreement relating to an offshore drilling platform, an ICC arbitration was commenced by Essar Oilfield Services Limited (Essar) against Norscot Rig Management Pvt Limited (Norscot). A sole arbitration awarded damages and sums due under the agreement totaling over USD 12 million in Norscot's favour. The arbitrator criticised Essar's counsel's conduct and awarded costs on an indemnity basis including GBP 1.94 million to a third party funder which had funded Norscot's defence. The arbitrator found that Essar had deliberately put Norscot in a position where it could not fund the arbitration out of its own resources and it had been reasonable for Norscot to seek and obtain litigation funding. The funding was for GBP 647,000 on terms that if Norscot was successful it would pay 300% of the amount advanced or 35% of the amount recovered. The arbitrator found this to be standard terms in the market.

Essar applied to the High Court for:

  • Clarification of the basis of the costs award and the arbitrator's powers under Arbitration Act 1996 (AA 1996), s 59(1)(c) and 63(3) and the applicable ICC Rules
  • Challenge under AA 1996, s 68 on grounds of serious irregularity alleging excess of power since 'other costs' in AA 1996, s 59 (1)(c) did not include the costs of third party funding.

Under AA 1996, s 63(3), 'the tribunal may determine by award the recoverable costs of the arbitration on such basis as it thinks fit'. Costs are defined in AA 1996, s 59(1) as "(a) the arbitrators' fees and expenses (b) the fees and expenses of any arbitral institution concerned, and (c) the legal and other costs of the parties". Article 37 of the ICC rules broadly reflects AA 1996, s 59.

Decision of the High Court

Judge Waksman QC in the High Court dismissed the appeal holding that third party costs were recoverable in principle pursuant to AA 1996, 59(1)(c) of the Arbitration Act 1996 and Article 31(1) of the ICC Rules.  He accepted that  the terms of s.59(1)(c) including the phrase “legal and other costs” was wide enough to include the recovery of third party funding costs.

Implications

Until the full judgment is available it is not possible to fully consider the implications of this case. It may also be that the decision is appealed. That said, it opens a very interesting debate (not for the first time) and third party funding in arbitration, for example:

  • If the tribunal's decision is based upon disapproval of Essar's conduct, that may understandably lead to indemnity costs but to extend to the costs of third party funding is a major step-is this welcome or unwelcome though?  
  • Again, if the tribunal's decision is based upon Essar leaving Norscot no option but to seek funding what is the position where a party chooses rather than is forced to seek funding – is it for the tribunal to judge the funded parties' motivations? How could it do so without detailed due diligence and/or disclosure? What does 'forced to seek funding' mean, would it only come into play where a respondent party would be faced with immediate insolvency or would the litigation impeding developments or future projects be sufficient?
  • If the tribunal is willing to award third party funders' success fees, what impact does this have on the Arkin cap in respect of funder’s potential liability for costs?

We look forward to being able to conduct a full analysis of the case and its potential impact for funded parties.