AWARDING COSTS OF THIRD PARTY FUNDING – HAS THE HIGH COURT JUST REINTRODUCED RECOVERABILITY OF SUCCESS FEES?
the Commercial Court, a division of the High Court, in refusing to set aside part of an arbitrator’s award held that an arbitrator’s general power to award costs included the power to award the costs of third party funding.
In an International Chamber of Commerce Arbitration, the arbitrator ordered Essar to pay costs on an indemnity basis, including £1.94 million which Norscot had paid to a third party funder.
The arbitrator held that Essar had deliberately put Norscot in a position where it could not fund the arbitration from its own resources and therefore it was reasonable for Norscot to obtain third party funding.
That funding consisted of an advance of around £650,000.00 on the basis that if successful, Norscot would repay either 300% of that sum, that is £1.94 million, or 35% of the damages.
Essar challenged the award on the basis of serious irregularity under Section 68(2) (b) of the Arbitration Act 1996 but the High Court rejected that challenge and held that the third party costs were recoverable in principle under Section 59(1) (c) of the Act and the relevant International Chamber of Commerce Arbitration Rules.
The High Court held that the third party costs fell within the definition of “other costs” as referred to in Section 59(1) (c).
The court said that as a matter of language, context and logic, “other costs” could include the costs of obtaining litigation funding, given that they were related to, and for the purpose of, the arbitral proceedings.
It was entirely a matter of discretion whether a tribunal awarded such costs in any given case.
The judge expressly distinguished the position under the Civil Procedure Rules, where there is no similar provision enabling a court to order a losing party to pay “other costs” as compared with legal costs.
Thus the general view is that this case has no application to ordinary litigation.
I am not so sure.
Generally the position in English law has been that the cost of financing litigation has been irrecoverable as an item of costs, and is rather reflected in an award of interest – see for example Motto v Trafigura Ltd  1WLR 657 for comments on the fact that the cost of funding is not recoverable.
See also Simcoe v Jacuzzi  1 WLR 2392 which explains that the purpose of an award of interest on costs is to compensate for the cost of financing that litigation.
However, until this case, everyone would have said the same about arbitration awards. It is worth noting that this decision was made under an Act of Parliament of the United Kingdom, namely the Arbitration Act 1996 and I see no reason why a court should not construe the Civil Procedure Rules in a way consistent with that Act of Parliament.
After all there can be no logic whatsoever in a matter which could be referred to arbitration, or could be heard by the conventional court system having entirely different rules as to what costs are recoverable and what costs are not recoverable.
Also, the statement that I set out above, which reflects the general view, that the cost of funding has never been recoverable in English law is not in fact correct. Success fees and After-the-Event insurance premiums clearly represented the cost of funding, rather than funding itself, and were recoverable between 2000 and 2013, because an Act of Parliament said so.
It is true that recoverability has been repealed by the Legal Aid, Sentencing and Punishment of Offenders Act 2012, but it does show that Parliament was prepared to allow recoverability of the cost of funding.
Nowhere in English law is there any specific prohibition of recovery of the cost of funding and as we have seen the Arbitration Act 1996, as interpreted by the High Court in this case, specifically allows, in appropriate cases, the recovery of the third party funder’s fee from the losing party.
Commentators argue that the difference between arbitration and the Civil Procedure Rules is that Section 59(1)(c) of the Arbitration Act 1996 allows for the recovery of “the legal or other costs of the parties”, whereas in the Civil Procedure Rules there is no such reference to “other costs”.
Incidentally the fact that the Arbitration Act provides for “the legal or other costs of the parties” suggests that you cannot recover both legal costs and the costs of funding. If that was the case the wording should be “the legal and other costs of the parties”.
Thus it is strongly arguable that Parliament intended that phrase to mean, essentially, the costs of litigants in person.
Leaving that aside, let us look at the definition of costs in CPR 44.1(1). It reads:-
“‘costs’ includes fees, charges, disbursements, expenses, remuneration, reimbursement allowed to a litigant in person under rule 46.5 and any fee or reward charged by a lay representative for acting on behalf of a party in proceedings allocated to the small claims track;”
The new Shorter Oxford English Dictionary defines “expense” in the following terms:-
“1. The action or an act of expending something; the state of being expended; disbursement; consumption; loss;
- Money expended; an amount expended;
- Burden of expenditure; the charge or cost involved in or required for something; the charges etc. incurred by a person in the course of working for another or undertaking any enterprise; the amount paid in reimbursement.”
It seems to me beyond doubt that “expenses” could in an appropriate case include the cost of third-party funding.
Hence my comment in my original piece that if a success fee is in fact called a third-party funder’s fee then potentially recoverability is back.
The facts of Essar were unusual and the arbitrator was extremely critical of the conduct of the litigation by the losing, and therefore paying party and that was the main basis for the award of the third-party funder’s fee.
However if those facts arose in an appropriate case before the ordinary civil courts, then my view is that that court would have the power to make the same order.
At paragraph 69 of the judgment here the High Court said:-
“As a matter of justice, it would seem very odd and certainly unfortunate if the arbitrator was not entitled under s.59(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.”
What would be wrong with the following statement in a judgment arising from ordinary civil litigation rather than arbitration:-
“As a matter of justice, it would seem very odd and certainly unfortunate if the judge was not entitled under CPR 44.1 to include the costs of obtaining third-party funding as part of “charges” or “expenses” where they were so directly and immediately caused by the losing party.”
Has the High Court just reintroduced recoverability of additional liabilities? If so, call it a third party funder’s fee and not a success fee, and hey-ho recoverability is back