The Gift Of Gold - Recovery Of The Costs Of Third Party Funding In Arbitration

On 15 September 2016 the Commercial Court gave its decision in Essar Oilfields Services Limited v Norscot Rig Management PVT Limited [2016] EWHC 2361 (Comm). A headline in The Times (27 October 2016) described the decision as a "game changer". This probably puts it too high, but the case certainly highlights an important practical distinction between litigation and arbitration, which those who are responsible for drafting and negotiating dispute resolution clauses and managing disputes would do well to remember.

The case confirms that arbitrators have the power to award a party not just its legal costs, but also the cost of third party financing for those costs - which cannot be recovered in court litigation. Good news for third party funders and the businesses which use them, less so for businesses which might find themselves on the receiving end of claims which are financed in this way.

Funders

A small number of investment funds specialise in providing non-recourse funding to prospective claimants. The funder will agree to provide the claimant with money to fund a claim in court or arbitration claim. If the claim is successful, the claimant must pay a substantial sum to the funder, typically a multiple of the funding provided, or a proportion of the monies recovered.

Costs in English High Court litigation

The Civil Procedure Rules 1998 ("CPR") apply to all civil proceedings in the courts of England and Wales. They are frequently amended. Many rules are supplemented by a "Practice Direction" and these are frequently changed or supplemented. The leading published version of the CPR and Practice Directions runs to around 6,000 pages with commentary. The CPR includes extensive, detailed and highly formalistic rules about costs.

The general rule is that the unsuccessful party will be ordered to pay the costs of the successful party. A complication arises because of what are known as "Part 36 Offers", whereby parties to litigation may make offers to settle, in a particular form, on a "without prejudice" basis, which will only be shown to the judge once the claims have been decided.

The detail of how these work is somewhat beyond the scope of this article. But, broadly, a claimant which recovers less than a defendant had previously offered to pay will generally not recover its own costs, and will have to pay the defendant's costs, from the date of the offer. A defendant which is ordered to pay more than a claimant had previously offered to accept will generally be ordered to pay a greater proportion of the claimant's costs, and a higher rate of interest, as from the date of the offer.

A court may order that costs be paid either on the "standard basis" or the "indemnity basis". In both cases, the court will disallow costs which were "unreasonably incurred or unreasonable in amount". When costs are to be assessed on the "standard basis" the court will only allow costs which are "proportionate to the matters in issue", and costs which it was "reasonable to incur".

The way that the English courts treat costs seems somewhat at odds with the approach it takes to compensation. If a party breaks a contract or commits a civil wrong and so causes me loss, I am entitled to recover that loss, insofar as I could not reasonably have acted to avoid it. If the defendant wishes to avoid paying some part of the claimed loss, it is for the defendant to prove that the claimant could reasonably have acted to avoid it. The courts tend to treat any argument that the claimant could reasonably have acted to avoid loss with a healthy degree of scepticism.

If the wrongdoer denies liability, and I am forced to pursue the matter in court all the way to a judgment, then one might have thought the costs of my doing so were as much the wrongdoer's fault as the rest of my loss - and so I should recover that too. Why should I be left out of pocket because the wrongdoer did not pay what he owed, and forced me to go to my lawyers?

The reality is that - while the successful claimant who has acted reasonably will recover all his loss - he rarely, if ever, recovers all the legal costs which he has been forced to incur in order to get the money he is owed. Invariably, a proportion of the costs claimed will be disallowed as either having been "unreasonably incurred", "unreasonable in amount" or "disproportionate".

There is a lack of data about what proportion of the costs claimed by a successful party is typically recovered. The appendices to Lord Justice Jackson's Review of Civil Litigation Costs: Preliminary Report (May 2009) included a schedule of recent cases supplied by the Commercial Court Users Committee showing that, where costs had been awarded or settled, parties had recovered anything between 40% and (very rarely) 100% of their costs, with the mean recovery being around 70%. Lord Justice Jackson also referred to a submission from TecSA setting out data from recent Technology and Construction Court decisions. His Lordship commented that "... the percentage of costs recovered by the winning party is generally quite high, often in the region of 75% or more". Anecdotal evidence suggests that a successful party's recovery is more typically of the order of 60 to 70% of total costs, and it is common practice for lawyers to advise clients to expect costs recovery in that range.

It appears that some successful litigants spend 25% to 40% more on their claim than the courts consider it would be "reasonable" or "proportionate" to have spent. It might be thought that this is unfair, and that the wrongdoer should be responsible for whatever it has cost the successful party to enforce its rights. The other side of the coin is that it seems equally unfair to give the successful party (or their lawyers) free reign as to how much they will spend on the litigation. The unsuccessful party (who may well have litigated in good faith) should have some protection from having to pay costs that are excessive or exorbitant. The only way in which a balance can be struck that protects both the unsuccessful and the successful party is through a review of costs by the Court. That said, however, whether a discount of between 25% to 40%, regularly applied, strikes the right balance is a different question.

Funding costs in English high court...