Recovery of Litigation Funding Costs in Arbitration

Wednesday 23 November 2016

The High Court in England has upheld an arbitrator’s decision to award a claimant their costs of taking out third party litigation funding.

In Essar Oilfields -v- Norscot [2016] EWHC 2361 (Comm) the court held that the phrase in s.59(1)(c) of the Arbitration Act 1996, “legal or other costs of the parties”, could include the costs of obtaining funding, and that whether to award such costs was a matter of discretion for the arbitrator.

The decision applies only to arbitration, and not to litigation generally. The Court specifically noted that there was no parallel provision in the Civil Procedure Rules, and that the CPR’s own definition of costs in 44.1 was clearly more limited.

Whilst the judge’s principal finding was that there was no serious irregularity in the arbitrator’s construction of “other costs”, they went on to consider the arguments put to them on construction of the phrase. The judge found that the expression “other costs” should be looked at from a functionality point of view i.e. did the costs relate to the arbitration and were they for the purposes of it?  The answer to both in this case was “yes”.

That Court’s conclusion meant that such litigation funding costs fall within the arbitrator’s general costs discretion. In this particular case, the arbitrator ruled that Essar’s own “reprehensible conduct” drove the Claimant into expensive litigation in order to vindicate its rights, and furthermore, the Claimant had no option but to obtain the funding in order to pursue those rights.

However, this judgment does not necessarily mean that the arbitrator will always use that discretion in relation to funding costs, and the overall requirement of reasonableness will also act as a check and balance.

It therefore remains to be seen to what extent such discretion is exercised in the future. One factor that the arbitrator will take into account is clearly the parties’ conduct. Other factors that may be relevant to such discretion could include whether the claimant’s only option was to take out funding, or whether it simply took out funding to hedge its risk. Whether the respondent was aware of the potential additional cost may also have a bearing.

It is certainly arguable that the facts of this particular case were exceptional, and it may not be easy to persuade other arbitral tribunals to follow it, but it will certainly trigger further interest in third party funding for arbitration.

See the full judgment here