Third Party Funding in Arbitration Proceedings in England

Obtaining information about trends in Arbitration is not an easy task as, by their nature, Arbitration proceedings are subject to confidentiality and most are conducted “behind closed doors”.

Occasionally parties seek to challenge all or part of an Arbitrator’s Award in the Courts.  The opportunity to do so under English Law is very limited with both the Arbitration Act, and the policy of the Courts, being to discourage challenges except where it is clear that there has been something seriously wrong with the process or application of the law.

Very recently, the Commercial Court was asked to give permission to Appeal an Arbitrator’s Award and to set aside part of this in a substantial commercial case.  This was on the basis that the Applicant considered that the Arbitrator had exceeded his powers, thereby being guilty of a “serious irregularity” in the way in which he awarded the costs of third party funding.

The case, Essar Oilfield Services Limited v Norscot Rig Management Pty [2016] was the subject of a Judgment delivered in September 2016.

The case involved a substantial commercial dispute relating to an off-shore drilling platform and the award of damages and other sums was for a total in excess of $12M.

In order to fund the Arbitration, Norscot obtained third party funding which was advanced on the basis that the funder, if successful, would receive 300% of the amount advanced or 35% of the amount recovered.  The Court indicated that they understood that to be the “standard terms in the market”.

The third party funder provided funding of £647,000 and the Arbitrator awarded Norscot, as part of it’s cost recovery against Essar, the cost of the funding.

The Arbitrator did so by applying S.59.1(c) and S.63(3) of the Arbitration Act 1996.

S.59.1(c) provides that the costs of Arbitration includes “the legal or other costs of the parties”.  S.63 gives the Tribunal power to award the costs of the Arbitration as it thinks fit.

Had the matter proceeded by way of litigation in the English Courts, the costs of third party funding would not be recoverable from the other side under the Civil Procedure Rules.  However the Court made it clear that those rules do not apply to Arbitration and considered that he had power to make such an Award and did so.

The Commercial Court agreed with the Arbitrator.  The Court decided that not only did the Arbitrator have power to award these costs but there were no grounds for upsetting the Award and so the Court refused to give permission for an Appeal.

This is clearly potentially a very important development.  The use of third party funding generally, and particularly in the context of Arbitration, appears to be on the increase.  One restraining factor has been that, particularly in cases where the damages are potentially much smaller than those in the Essar case, it may be difficult for a party to take out funding if the end result is that it will have to forego a substantial amount of any damages it recovers in order to repay the funder if the claim succeeds.

If however this cost is potentially recoverable from the other side, not only would the use of third party funding be much more attractive but, also, it would provide a potentially strong bargaining tool by increasing risk to the opponent.

It will be interesting to see how this develops as the concept of recoverability seems to run contrary to recent policy decisions in England in the litigation sphere where, for example, the recoverability of success fees and after the event insurance premiums from losing Defendants ceased to be possible after 1st April 2013.