Recovery of third-party funding costs in arbitration

By Jeremy Glover, Partner, Fenwick Elliott

The right of a successful party to his costs in arbitrations governed by the UK 1996 Arbitration Act is provided by sections 59–65. The essential features of the costs rules (almost all of which are subject to contrary agreement) are as follows:

• The Tribunal must award costs on the general principle that costs follow the event, except where it appears to the Tribunal that in the circumstances this is not appropriate in relation to the whole or part of the costs.
• This applies not only to the legal or other costs of the parties, but to the arbitrators’ fees and expenses and the fees and expenses of any arbitral institution concerned.
• The Tribunal may (and normally will) determine by award the recoverable costs of the arbitration on such basis as it thinks fit. In practice, the award quantifying the costs will have to come after the substantive award, so that the parties can make their submissions as to the amount of costs.
• If the Tribunal does not quantify the costs, the court can either do so, or order how they are to be determined.
• The basic principles most Tribunals will adopt are that (a) there shall be allowed a reasonable amount in respect of all costs reasonably incurred, and (b) any doubt as to whether costs were reasonably incurred or were reasonable in amount shall be resolved in favour of the paying party.

Until recently, there had not been any English decision where a Tribunal awarded the successful party the third-party funding costs it had incurred as well as the more traditional legal and experts’ fees. Third-party funding can mean many different things.  Typically, third-party funders offer to provide funds for a party’s costs in return for a percentage of any damages recovered or a bonus multiple of the sums advanced. If the claim is unsuccessful, the funder recovers nothing. 

However, in a decision which is currently unreported1 made by the Commercial Court in September 2016, Judge Waksman QC held that third-party costs were recoverable in principle pursuant to section 59(1)(c) of the 1996 Arbitration Act and Article 31 (1) of the ICC Rules.  

Section 59(1)(c) provides that the costs of an arbitration include:

“the legal or other costs of the parties”.

Article 31 (1)2 of the old 1998 ICC Rules provides that:

“Decision as to the Costs of the Arbitration

The costs of the arbitration shall include the fees and expenses of the arbitrators and the ICC administrative expenses fixed by the Court, in accordance with the scale in force at the time of the commencement of the arbitral proceedings, as well as the fees and expenses of any experts appointed by the Arbitral Tribunal and the reasonable legal and other costs incurred by the parties for the arbitration.”

In the arbitration in question, Norscot, the successful party, had sought its costs in the usual way. However, its claim included the costs of the litigation funding which it said it had been forced to incur in order to pursue the claim. The third-party funding consisted of an advance of £647,086, which was repayable either at 300% of the sum advanced from the damages recovered, or 35% of the damages, whichever was the greater.

Essar disputed the Tribunal’s jurisdiction to make an award in respect of third-party funding. Having lost before the Tribunal, it obtained permission to appeal from the High Court. But giving the substantive judgment last week, HHJ Waksman QC accepted that the terms of section 59(1)(c) and the reference to “legal and other costs” were wide enough to permit the recovery of third-party funding costs.

It is understood that the Tribunal had awarded indemnity costs against the unsuccessful party which is likely to have influenced the Tribunal’s decision to allow the recovery of the third-party funding.  For example, if the conduct had been such that Norscot had had no option but to turn to third-party funding to continue with the arbitration, then that might have been a factor that influenced the Tribunal.

Therefore whilst it is important to bear in mind the specific circumstances of the decision, until the full transcript has been released, the consequences of the judgment cannot be fully assessed. That said, the decision is potentially a very significant one and we will be reporting in detail on the decision in Issue 20 of IQ.

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• 1. Although unreported, the case has provoked much discussion, and our summary of the case is based on information from 4 New Square, Nicholas Bacon QC having acted for the successful party.  See http://www.4newsquare.com/news/article.aspx?Id=305
• 2. See also, Article 37 of the 2012 ICC Rules.