Costs of raising third party funding to pursue claims in arbitration can be recovered, says High Court

Litigation and dispute resolution specialist Richard Twomey of Pinsent Masons, the law firm behind Out-Law.com, said the judgment was "very important". Twomey said the issue of third party funding, whether it is permissible, and, if so, the extent to which the costs of that funding can be recovered at the end of proceedings, has "generated a huge amount of interest in the arbitration world in recent years".

The High Court's ruling, reported by Lawtel, came in a case which concerned a dispute between two companies operating in the oil and gas industry.

Norscot Rig Management won an earlier ruling in proceedings brought before a UK arbitrator against Essar Oilfield Services that Essar was responsible for a repudiatory breach of a contract between the companies for the management of the operation of an offshore drilling platform. Norscot had obtained finance from a third party to help it fund the litigation against Essar and applied to recover those costs from Essar following the ruling in arbitration.

The High Court has now confirmed that the costs of obtaining third party funding in arbitrations in England are in principle recoverable from the opposition by a successful party to those proceedings. His Honour Judge Waksman QC, sitting as a High Court judge, said those costs can be classed as "other costs” under the Arbitration Act 1996. It was in the power of the arbitration tribunal to award such costs, he said.

Under the Act, an arbitration tribunal in England has the power to "make an award allocating the costs of the arbitration as between the parties, subject to any agreement of the parties". Section 59 of the Act defines the 'costs of the arbitration' as those including arbitrators’ fees and expenses, the fees and expenses of any arbitral institution concerned and the legal or other costs of the parties.

Twomey said the ruling was "significant" and that the position the High Court has endorsed in principle the recovery of the costs of third party funding in arbitrations is now "very different to the position in litigation before the courts in England where third party funding costs are not recoverable, as part of the general move to make litigation costs more reasonable and proportionate, unless they can be claimed as a head of damage".

Twomey said the implications of the ruling is that companies that lose cases before arbitration in England could end up having to pay multiple times the amount of money it costs funded parties to litigate against them, in addition to potential damages.

Costs expert Keith Levene, also of Pinsent Masons, said: "Third party funding is now becoming an important factor in alternative funding options and litigation risk transfer for a party, albeit that subject to recovery from an opponent, which remains the exception, shifting the risk carries a cost for the funded party by way of a lower net recovery from the claim.”

In the case before the High Court, Norscot obtained £647,000 from a third party to help it fund its claims against Essar in arbitration. The funds were obtained on the basis that Norscot would pay the third party funder three times the value of the money they had advanced or 35% of the value of damages awarded, whichever figure was greatest.

"Although three times the value of funding might be standard in the market, it represents a huge uplift to the paying party, who may well not have been aware that third party funding was in place," Twomey said.

"While this judgment will no doubt generate substantial press on behalf of third party funders emphasising the legitimacy and benefits of funding in arbitration, the specific circumstances of the underlying case need to be borne in mind," he said.

"In particular, the tribunal in the underlying arbitration had awarded 'indemnity costs' against the paying party, normally a sanction employed only against parties whose conduct of the case has been particularly objectionable. The tribunal also found that the paying party had deliberately engineered a situation whereby the funded party could not fund the arbitration from its own resources and had reasonably sought third party funding, which it had obtained on standard market terms," Twomey said.

"So while the payment of a funder’s uplift is in principle possible in arbitrations with the seat in England, one might wonder whether costs awards of this magnitude will become the norm in the absence of other aggravating factors. To put it another way, funded parties in arbitration ought to plan to pay any funding uplift out of damages received and consider it a bonus if the uplift is recovered," he said.