The current approach to recovering third party funding costs in arbitration

It has been over five years since the landmark decision in Essar v Norscot ^[1] where the English High Court upheld an ICC tribunal’s award requiring that the respondent meet the claimant’s costs of procuring third party dispute finance pursuant to which the funder covered the claimant’s costs of the arbitration (Third Party Funding Costs).

As outlined in this blog, our experience is that arbitral tribunals are now increasingly familiar with funded parties (and third party funders) and so are more comfortable when faced with exercising their wide discretion to award Third Party Funding Costs.  The ability to recover Third Party Funding Costs means that the funded party is able to retain all or more of the upside in the event its claim succeeds and so is an important consideration for parties when weighing up the benefits of third party funding.    

Third Party Funding Costs refer to the funder’s return on investment (also known as “success fee” or “funding premium”) which may form part of a funder’s entitlements if the funded party’s claim succeeds.  This is in addition to reimbursing the funder for the legal and arbitration costs that it paid on the funded party’s behalf during the course of the arbitration.  The latter costs can be recovered direct from a losing party by way of a costs award but what was less clear until Essar was whether Third Party Funding Costs could also be recovered in this way (as opposed to out of the funded party’s claim proceeds). 

In Essar, after deciding it had jurisdiction to award Third Party Funding Costs (under both the ICC Rules and the English Arbitration Act 1996 (Act)), there were three main circumstances that the tribunal brought attention to when awarding Third Party Funding Costs: (i) the respondent’s “reprehensible conduct going far beyond technical breaches of contract” which had driven the claimant to commence arbitration; (ii) the claimant’s impecuniosity; and (iii) the relationship between that impecuniosity and the actions of the respondent (meaning the claimant had no option but to obtain funding).^[2]

Following Essar, claims for the recovery of Third Party Funding Costs are now a common and accepted feature of the arbitration landscape and other tribunals sitting under different arbitral rules / national laws have also held they have the power to award Third Party Funding Costs.  For example, in a recent publicly reported Singapore-seated SIAC award, the tribunal held that a provision in the SIAC Rules which provides that “The Tribunal shall have the authority to order in its award that all or a part of the legal or other costs of a party be paid by another party” is “extremely broad” such that it “provides the Tribunal with authority to award recovery of the Claimants’ legal and other costs, including [Third Party Funding] Costs, as long as those costs are incurred in connection with the arbitration.”^[3]  We can also confirm that a party funded by Omni Bridgeway in a recent Singapore-seated arbitration under the ICC Rules was awarded its Third Party Funding Costs on similar grounds.^[4] As for exercising the power to award Third Party Funding Costs, the increasing trend by tribunals appears to be a less stringent application of the various matters which the tribunal analysed in Essar (as referred to above) towards a broader approach. 

For example, just prior to going to press with this blog, the English High Court upheld an award of Third Party Funding Costs by an ICC tribunal seated in London as “other costs” of the arbitration based on the provisions of the Act and ICC Rules.^[5]  The tribunal held that the principal matter that it needed to decide regarding the claimed Third Party Funding Costs was “whether [the Third Party Funding Costs] are “reasonable” in two respects: as to the principle of the Claimant having recourse to this type of funding and as to the amount”.  As to the first issue, the tribunal held that “it is not, in the Tribunal’s view, a determining factor whether the Claimant’s financial difficulties, which are not disputed, were caused exclusively by [the defendant’s actions]” such that “[the claimant’s] position does not have to be on all fours with that of Norscot in relation to Essar in order for [the claimant’s] funding choice to be considered reasonable”. A specific factor in this case was whether it was reasonable for the claimant to have obtained funding by way of a shareholder loan as opposed to from other sources  – the tribunal held that it was “not inherently unreasonable” to do so.   As to the second issue, the tribunal held that a return of one times (1x) of the claimant’s legal and arbitration costs of USD1.3m, plus a variable fee of approximately USD214k, was reasonable.

Other tribunals post-Essar have been alive to the fact that third party funding is increasingly utilised out of choice as a commercial tool (for example, to offset the risks of arbitration) and not just for impecuniosity reasons  – the tribunal in the SIAC case referred to above noted that it is “entirely commercially reasonable” for a claimant of considerable means to turn to third party funding.  In other words, the reason for procuring third party funding was not a determinative factor for the tribunal when deciding whether to exercise its power to award Third Party Funding Costs. 

Other observations from post-Essar arbitral awards on the recovery of Third Party Funding Costs include:

1. Early disclosure in the arbitration of the existence of the funding agreement is generally to be preferred.Indeed, legal professional conduct rules in some jurisdictions (for example, Singapore and Hong Kong) require such disclosure.This entails referring to the fact that a party has been funded and the name of the funder in pre-action correspondence or the Notice of Arbitration (or as soon as practicable after a third party funding contract has been entered into).Failing to disclose the funding arrangement at an appropriate time in the proceedings (or at all) may be seen by the tribunal as putting the other party at a disadvantage by denying them knowledge at a meaningful stage of the extent of their potential exposure in the event of an adverse Third Party Funding Costs award.A tribunal may not look favourably at this when exercising its discretion to award Third Party Funding Costs although it may not be an absolute bar to Third Party Funding Costs being awarded.^[6]
2. Tribunals have been willing to include in an award of Third Party Funding Costs the costs of any after the event insurance (ATE) premium which the funder or funded party procured to insure their exposure in the event of an adverse costs award.One tribunal recently held that the claimants’ ATE premium was an “integral and necessary” component of their Third Party Funding Costs and was therefore recoverable on the same basis as their other Third Party Funding Costs.
3. Tribunals have looked at the “reasonableness” of the amount of Third Party Funding Costs being sought when exercising their discretion to award Third Party Funding Costs.In Essar, for example, the Third Party Funding Costs awarded equated to three times (3x) Norscot’s legal and arbitration costs.

As a final comment, we have seen that clauses in commercial agreements that indemnify an innocent party against legal costs that might be incurred because of another party's breach are increasingly being drafted in broad terms so as to cover all legal and arbitration costs, including Third Party Funding Costs (whether expressly or by implication).  This compliments the fact that third party funding in arbitration continues to move mainstream – in an ever growing number of jurisdictions – as an option for individual claimants and corporates, whether procured for impecuniosity, risk / capital mitigation and/or other commercial reasons.

Whatever a party’s reason for procuring third party funding, Essar has certainly paved the way for the award of Third Party Funding Costs in even broader circumstances, potentially only subject to a test for reasonableness of the amount being sought.  Tribunals are increasingly cognizant of the question of the recovery of Third Party Funding Costs and their discretion to award it.  Additional expansive (as opposed to restrictive) guidance from arbitral institutions on how a tribunal may exercise this discretion would also assist with that endeavour.^[7]

If you are considering third party funding – whether for a proposed or pending arbitration – our arbitration specialists at Omni Bridgeway can guide you through issues such as the recovery of Third Party Funding Costs and advise you on how our funding could help you and your business.  If you are interested to discuss this further, please contact one of our global offices.