UK High Court Affirms Arbitral Ruling that Party Can Recover Litigation Finance Costs

Arbitration continues to grow in popularity as a method of dispute resolution and I am often asked if Lake Whillans will finance a claim to be pursued in arbitration.  The answer is “yes,” Lake Whillans has and will finance arbitration claims.  That question is sometimes followed by “are litigation funding costs recoverable in arbitrations?”  Last month, the UK High Court answered the question affirmatively.

The High Court decided an appeal brought by Essar Oilfield Services, which challenged an award granted in an ICC arbitration to Norscot Rig Management, in which the arbitrator directed Essar to pay not only Norscot’s damages and attorneys’ fees, but also Norscot’s costs of litigation financing.  In the dispute between the two oil and gas companies, Norscot used financing to pay for its £647,000 in attorneys’ fees, and, as a result of the successful arbitration, Norscot was obligated to the funder for three times that amount.   Essar challenged the arbitrator’s authority to award the litigation finance costs in the High Court.

The governing legislation in the UK, the Arbitration Act 1996, provides that an arbitrator can award “costs” and defines “costs” to include the “legal or other costs of the parties” (See Section 59(c)(1) of the Act).  The High Court agreed with Norscot that the “other costs” language was broad enough to permit the recovery of third party funding costs.  The same language appears in the ICC rules, and the Court supported its decision by citing the 2015 ICC Commission Report “Decisions on Costs in International Arbitration,” which advised that a tribunal could discretionarily award the “reasonable” costs of a third-party funder to a successful party.

The arbitrator was motivated to award Norscot’s financing costs both because Essar’s liable conduct was egregious and because Essar engineered a situation in which Norscot was forced to seek litigation financing to pursue its claim.  While the facts that led the arbitrator to conclude that Norscot was forced to seek financing “if it was to secure justice,” are unique, the premise is common.  As a funder, we often see companies with impaired cash flows and a stunted ability to raise traditional capital because of the events surrounding a lawsuit, so it’s not surprising that Norscot’s need for funding was caused by the defendant’s conduct.  With that lens, the costs of a funder might be viewed as a type of consequential damages not unlike other types of indirect damages that must be compensated in order for a party to be made entirely whole.  Indeed, the High Court reasoned that “[a]s a matter of justice, it would seem very odd and certainly unfortunate if the arbitrator was not entitled under s59(1)(c) to include the costs of obtaining third party funding as part of ‘other costs’ where they were so directly and immediately caused by the losing party.”

It’s too soon to predict what the implications of this decision will be on arbitrations in the UK generally or on ICC arbitrations outside the UK or in other jurisdictions with similar statutes.  The decision may be successfully appealed or it may be that others considering this issue are not persuaded by the ruling and this type of award remains rare or non-existent.  Alternatively, the decision may embolden arbitrators to more frequently award these costs in the right circumstances.  In the meantime, for prevailing parties in arbitrations who hope to recover the costs of litigation financing, the old adage “it never hurts to ask” may apply.

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The best way for companies and their counsel to determine if litigation finance is an attractive option is to discuss it with us.

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