Essar Oilfields Services Ltd v Norscot Rig Management Pvt Ltd [2016] EWHC 2361
Whilst only a couple of years after the disasters of Excalibur, after this case litigation funders began to lick their lips and look seriously into commercial arbitration. The reason was that the Court held that a costs order could include the funding costs of an arbitration. It is right to say that in the underlying arbitration the arbitrator was highly critical of Essar, the defendant in the arbitration, so as to justify an order for indemnity costs. The arbitrator held, among other things, that Norscot, the claimant in the arbitration, was entitled to the costs of litigation funding which it had obtained in order to bring the arbitration. Woodsford had made an agreement with Norscot in 2011 whereby it advanced the sum of c £650k. The agreement entitled Woodsford to a fee of 300% of the funding or 35% of the recovery, whichever was higher. Norscot therefore sought as against Essar the sum of £1.94m which was the sum owed to Woodsford. The arbitrator held that he was entitled to order the payment of these costs because they were covered under the Arbitration Act 1996 (the Act) as being “other costs of the parties”. Similar language is to be found in the ICC Rules.
Essar’s challenge was simple – “other costs” as defined in the Act did not include the costs of litigation funding such that the arbitrator had no power to include them in his costs order. He had committed a serious irregularity that could be corrected by the Court under section 68 of the Act. Essar’s claim was always going to be a tough one because the power of the Court to permit such applications is so narrow – Section 68 is only available in extreme cases where “the tribunal has gone so wrong … that justice calls out for it to be corrected.” It can only apply where the tribunal has purported to exercise a power which it did not have. The erroneous exercise of a power could not be seen to be an excess of that power.
The Court recounted the fact that the arbitrator had found as a fact that Norscot had no alternative, but was forced to enter into the litigation funding arrangement because of the exploitative manner in which Essar had acted. As the arbitrator held “It was blindingly obvious to [Essar] that the claimant was at a distinct financial disadvantage … and would find it difficult if not impossible to pursue its claims by relying on its own resources. The respondent probably hoped that this financial imbalance would force the claimant to abandon its claims".
The Court found no serious irregularity, and therefore rejected the challenge, but did express a view on what “other costs” meant. The Court accepted that these costs had to be costs that related to the arbitration proceedings. The Court could not see how litigation funding costs, incurred so as to enforce legal rights, were to be excluded for all purposes from the expression. A guiding test was perhaps whether the costs related to the arbitration and were they for the purposes of it? If the costs had not been incurred in order to bring the claim, then they would fall outside the definition. If the costs were in principle covered by the definition, it then became an exercise of the arbitrator’s discretion as to whether to include them in a costs order.
From a funder’s perspective, the more interesting question is whether the costs of funding would be included in a costs claim if the arbitration proceeded merely pursuant to contract without any poor conduct from a respondent. In other words, if it was a case outside of the indemnity scale. If the claimant is compelled to seek litigation funding to enforce its rights, it is hard necessarily to penalise that choice even if a respondent then acts according to the arbitration agreement. There therefore should be reasonable grounds of making a claim, although so much will be fact dependent. It will be more difficult if the defendant does not know that the claimant is funded.
Under the funding agreement, the litigation funder’s recourse will be against the successful claimant. The benefit to a funder of this decision is that the costs immediately fall within a Court order to be paid by the defendant. It does not follow, of course, that the costs will be paid and so the funder may still need to look to the claimant. Nonetheless, enforcement becomes considerably easier if there is a breach of a Court order to pay a specific level of costs. In practical terms, what may happen is that the claimant is more willing to pay the funder because it knows it has a direct claim against the defendant. It is unlikely that a funder will willingly wait to be paid as a consequence of the defendant’s compliance with the order.