Can a defendant be liable for a plaintiff's litigation funding costs

In a recent decision, Essar Oilfield Services Ltd v Norscot Rig Management Pty Ltd [2016] EWHC 2361 (Comm), the English High Court has found the unsuccessful defendant to an arbitration liable to pay the cost of the successful plaintiff’s funder in addition to damages and legal costs. The decision could have ramifications for both arbitration and litigation here.

Joana Trezise

Background

Essar and Norscot were signatories to an operations management agreement regarding an offshore drilling platform. Essar withheld funds from Norscot. Norscot struggled financially. It ultimately initiated arbitration against Essar, alleging repudiatory breach of their agreement. By the time of the arbitration Norscot was in serious financial difficulty. In order to proceed, it engaged a third party funder. The funder advanced £647,000 on the basis that, were Norscot successful, it would be entitled either to 300% of that amount, or to 35% of the amount recovered from Essar, whichever was the higher.

The arbitration

The arbitration was governed by the ICC Rules but seated in England, so the Arbitration Act 1996 (UK) also applied. The arbitrator found Essar liable to pay Norscot damages for repudiatory breach, and liable for Norscot’s legal costs. More significantly, it also found Essar liable to pay the full sum Norscot owed to its funder, amounting to £1.94 million. Section 63(3) of the UK Act provides that an arbitral tribunal may determine “the recoverable costs of the arbitration on such basis as it thinks fit”. Section 59 provides that “costs of the arbitration” means the arbitrator’s fees and expenses, the fees and expenses of any arbitral institution concerned, and “the legal or other costs of the parties”. This is mirrored in article 31 of the ICC Rules which also provides for the recovery of “reasonable legal and other costs”. The arbitrator held that the UK Act and the ICC Rules conferred upon him a wide discretion to determine which costs could be awarded as “other costs”. He also considered that, in the course of the parties’ commercial relationship, Essar had made unjustifiable personal attacks on and allegations of fraud concerning Norscot’s staff, had exerted commercial pressure on Norscot before and during the arbitral process, and that it had set out to cripple Norscot financially. The arbitrator believed that, due to Essar’s actions, Norscot had been forced to enter into the funding agreement, the terms of which he regarded as reflecting standard market rates and conditions. Under those circumstances, he judged it appropriate for “other costs” to encompass the full amount payable by Norscot to the funder, despite the fact that both damages and legal costs had also been awarded.

The appeal

Essar disputed the arbitrator’s ability to make such an award and appealed to the High Court. The Court held that the award was within the arbitrator’s power. While the arbitrator had referenced England’s Civil Procedure Rules (CPR), and considered the relevance of party conduct to the award of increased and indemnity costs in litigation (CPR 44.2, 44.3 and 44.4) as further bolstering the legitimacy of his own award, the Court considered that the lack of comparable “other costs” wording in the CPR made a comparison between the two irrelevant. Nevertheless, it held that, as a matter of language, context and logic, the costs of the funder could fall under “other costs”, provided they were incurred in order to bring or defend the claim in question, and were reasonable. Essar was therefore obliged to pay the £1.94 million.

Implications

Essar’s negative conduct was a key factor leading to the award. Future arbitrators or courts may consider that the award of funding costs in addition to damages and legal costs is appropriate only when the unsuccessful party has engaged in conduct that is truly unacceptable.

It is interesting to consider whether a similar finding could be made in New Zealand. Under New Zealand’s Arbitration Act 1996, the comparable provision is found at clause 6 of the Second Schedule. This provides that an arbitral tribunal, unless the parties agree otherwise, may award “the costs and expenses of an arbitration, being the legal and other expenses of the parties, the fees and expenses of the arbitral tribunal, and any other expenses related to the arbitration …”. Despite the use of “expenses” in the place of “costs”, there is no reason to believe that this provision could not encompass a funder’s fee in the same way as section 59 of the UK Act. However, given that the focus of third party funders in New Zealand has largely been on class action suits (which do not often proceed by way of arbitration), of greater interest is the decision’s possible application within the litigation sphere. To date, third party funders have primarily been relevant to costs awards in New Zealand only where an unsuccessful plaintiff’s funder has been potentially liable for the costs of a successful defendant. Where a funder is entitled to receive a percentage of the successful party’s recovery, that party would usually pay the amount itself, not include it separately in its claim for costs.

Under New Zealand’s High Court Rules (HCR), costs of or incidental to a proceeding are at the discretion of the court (HCR 14.1). A funding fee could be considered as “incidental to” a proceeding. However, the apparently wide discretion provided by this rule is qualified by the application of the more specific costs rules, from which the courts will not usually depart (see Manukau Golf Club Inc v Shoye Venture Ltd [2012] NZSC 109 at para [7]). Under HCR 14.6, the court has the ability to award increased or indemnity costs where “some other reason exists” to justify the making of such an award. Relevantly, indemnity costs are intended to reimburse the successful party for their “actual” costs, though only where these are “reasonably incurred”. Bad behaviour of the unsuccessful party during the course of the proceeding may be relevant here; however, case law suggests that the pre-proceeding conduct of that party will not (see Paper Reclaim Ltd v Aotearoa International Ltd [2006] 3 NZLR (CA) at para [160]). This may remove a plaintiff’s ability to contend that they were “forced” into a funding arrangement prior to the proceeding and should therefore be compensated for the resulting liability in full. Whether HCR 14.6 could apply to an award of a funder’s fee is likely to depend upon a court’s assessment of whether such an award would be “justified” in the circumstances of the particular case.

HCR 14.12 may also provide scope for the separate award of a funder’s costs. Under this rule, “disbursement” is defined as “an expense paid or incurred for the purposes of the proceeding that would ordinarily be charged for separately from legal professional services in a solicitor's bill of costs”. This explicitly separates the costs claimable under the rule from legal expenses, as does section 59 of the UK Act. Again, this wording may be broad enough to permit a court to conclude that “an expense” should encompass a funder’s fee.

Conclusion

The risk of a court here using the HCR to permit recovery of a funder’s fee as a separate cost in litigation currently appears low. The resulting windfall gain for the plaintiff means it is likely to only be raised as even a possibility in circumstances where a defendant’s conduct has been extremely reprehensible. Such a decision, while encouraging for plaintiffs (and their funders), would be of great concern to defendants, who may unexpectedly find themselves at risk of liability for a far larger sum than anticipated. 

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