February 14, 2018

The impact of dispute funding on security for costs applications

A recent decision of the Commercial Court has highlighted the (potential) added complexity of the involvement of a third party funder in applications for security for costs. The decision shows that existence of funding does not necessarily make assets 'available' to satisfy an adverse costs award. As such, it does not preclude the ability to obtain security for costs – this will depend on the funder's obligation to meet any adverse costs and the ability of the beneficiary of the security to access it.

Impact for disputing parties

The decision in Progas v Government of Pakistan (discussed below) is fact-specific, however, it contains important lessons for both funded parties and those facing funded parties. For the former, while the main focus will always be on funding the party’s own costs of the dispute and the financial arrangements upon winning the case, serious consideration needs to be given to how any costs award made against it will be paid. The prospect of an adverse costs award may form part of the funding agreement or could be dealt with by separate insurance. However, as this case shows, it should certainly not be ignored as the financial ability to pursue a case, inclusive of the risk of facing an adverse costs award is of critical concern for tribunals and the courts.

On the other side of the dispute, when facing a funded opponent, a party is unlikely to know the details of the opponent’s funding arrangement. It is important to take steps to ensure that it has the ability to satisfy any award, including costs awards, made against them – be that via funding, insurance or otherwise.

Applications for security for costs from both tribunals and courts are often hard-fought and can be difficult to obtain. The increasing prevalence of funding in arbitration adds a new 'layer' to these applications and funders and funded parties need to be clear about their obligations and the consequences of their relationship.

Progas v Government of Pakistan

In Progas v Government of Pakistan, the latter had succeeded in defeating the former’s claim and had received an award of its costs of the arbitration, plus interest. Progas challenged the award in the English court under Arbitration Act 1996, s 68 (AA 1996, s 68) on grounds of serious irregularity. The Government of Pakistan made applications for security in relation to (i) the costs of the s68 application and (ii) for the costs and interest awarded in the underlying arbitration (AA 1996, s 70(6)-(7)). Progas had been funded in the arbitration by a subsidiary of Burford Capital but did not have adverse costs cover.

(i) Security for s68 challenge costs

In the application for costs of the s68 challenge the court considered two letters from Burford stating that although Progas did not have adverse costs insurance, Burford would satisfy any adverse costs award against Progas in s68 proceedings (subject to a cap) if Progas did not. The court considered the letters but, in short, did not see that an ability to pursue a third party based on a letter which was not addressed to it, and in the absence of any contractual obligation, as sufficient to make assets 'available' to the Government of Pakistan should Progas fail to satisfy an order. Buford's letters would not enable Progas to recover costs awarded in their favour without delay or other difficulty.

The court therefore ordered Progas to provide security for the costs of its s68 application.

(ii) Security for the costs and interest awarded in the arbitration

In the s70(7) application the court assessed whether the s68 challenge would in in some way prejudice the Government of Pakistan's ability to either enforce the award or diminish Progas's ability to honour the award. Finding no evidence of the dissipation of Progas’s assets, the court was concerned that Government of Pakistan not be put in a better position by virtue of the s68 application that it would have been had the challenge not been made (i.e. simply able to enforce against the security that would not have been there but for the challenge).

The court found that if a respondent was in no worse position by virtue of the fact that there is an arbitral challenge than it would be were there no such challenge, then an order under section 70(7) ought not to be made.

So far as the relationship with a third party funder was concerned, in the context of an application under AA 1996, s70(7) the court did not see that there should be any different or special position simply because third party funders were involved (this being the first time an application in these particular circumstances had been before the court).

The court refused the application.

This judgement demonstrates that the court will likely look to the specifics of funding arrangements in the context of security for costs applications. It serves as an important reminder for parties to disputes to carefully consider their funding arrangements in advance of proceeding to engage in active dispute resolution.