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Arbitration and third party funding, the better option

Essar Oilfield Services Ltd v Norscot Rig Management PA Limited ([2016] EWCH 2361 (Comm))

The High Court has recently made the decision to allow a successful claimant (Norscot) to recover the whole of its third- party funding in arbitration, including a 300% uplift in addition to damages.

The usual arrangement in third party funding agreements is that legal fees and disbursements are paid in exchange for uplift or multiple of the sums advanced. For a financially smaller party entering into arbitration can be a costly battle where third party funding is the only way to pursue a claim. It allows these smaller parties to pursue a claim without feeling bullied by larger parties who are able to afford prolonged litigation battles. Even with this option prior to this decision the general practice in arbitration was that the payment of costs such as legal fees, disbursements and the third party funders uplift would be deducted at the funded party’s expense usually deducted from damages.

The decision in Essar to allow recovery from the losing party was taken specifically because Norscot was unable to afford to bring arbitration proceedings against Essar in relation to a contractual dispute without the third party funding. It was a financial necessity for them.

Essar challenged the decision on the basis that according to the Arbitration Act 1996, the costs recoverable from the losing party in arbitration is, the arbitrators’ fees and expenses, the fees and expenses of any arbitral institution concerned and the legal or other costs of the parties. The court ruled that “other costs” could include the full costs of third- party funding and this was an exercise of the power awarded under the act. The court also upheld the decision on the basis that the arbitrator was capable of interpreting “other costs” in a more liberal sense to include the full costs of third party funding. The costs were incurred so that the claim could be brought if they were not incurred the claim could not be brought, which would be unfair to Norscot.

It is important to note the court took special notice of the fact that it was Essar’s intention to financially cripple Norscot so that they would be unable to bring any claims against them. The court’s decision was in favour of obtaining a just outcome by working around the disparity in the financial ability of the parties.

For advice on arbitration or a dispute in general please contact Duncan Brown in our litigation department.