Arbitration: litigation funding costs

Essar Oilfield Services Ltd v Norscot Rig Management Pvt Ltd [15.09.16]

The High Court has held that an arbitrator’s general power to award costs includes the power to award the costs of third party litigation funding, on the basis that these are "other costs of the parties" within s.59(1)(c) Arbitration Act 1996 (the Act).

In doing so, the court appears to have significantly extended the scope of recoverable costs in arbitration proceedings. The court did not consider itself constrained, in interpreting the Act, by what a court would allow by way of costs in litigation under the Civil Procedure Rules (CPR). 


The underlying dispute was a contractual one concerning breach of an operations management agreement between Essar, the owner of an offshore drilling rig, and Norscot, acting as the rig’s operations manager.

Norscot initiated arbitral proceedings against Essar under the ICC Rules. Having succeeded in the arbitration, Norscot sought its costs from Essar. It included within the claim for costs the costs of the litigation funding that it had been forced to incur in order to pursue the claim. The third party funding costs amounted to £647,000. This had been advanced on the basis that if Norscot was successful it would repay the greater of either 300% of the amount advanced or 35% of the sum recovered.

The arbitrator held that Norscot was entitled to the litigation funding costs.

Essar disputed the finding, on the basis that the arbitrator had exceeded his powers in making this award as third party funding costs fell outside the scope of the relevant provision of the Act, and this amounted to a serious irregularity. Essar argued that what the Act sought to deal with were “costs of the arbitration” whereas third party funding was not a cost of the arbitration but a cost of funding the arbitration, which was distinct.


His Honour Judge Waksman QC dismissed the appeal. He held that Norscot’s litigation funding costs were recoverable in principle pursuant to s.59(1)(c) of the Act and Article 63(3) of the ICC Rules.

HHJ Waksman accepted that the correct test to be applied when considering the scope of s.59(1)(c) was a “functional one” and required consideration as to whether the costs being sought were incurred in bringing or defending the claim. There was nothing in the language of that clause and the words “other costs” which precluded third party litigation funding, and accordingly there was no basis for a narrow construction to be applied. He expressly rejected Essar’s submission that the relevant section of the Act had to be construed by reference to what a court would or could allow by way of costs in litigation under the CPR. The relevant context for consideration was the Act alone.


Whether to award costs under the Act is always a matter of discretion for the arbitrator.

The arbitrator’s award in this case appears to seek to address an imbalance of power between the parties, on the basis that Essar had deliberately put Norscot in a position where the only manner in which it could fund the arbitration was by use of a third party funder. The arbitrator considered there would be substantial injustice in denying Norscot recovery of the costs of securing third party funding. The High Court has now confirmed that the Act is sufficiently broad, as a matter of construction, to permit this recovery as part of the arbitrator’s general costs discretion.

Insurance coverage disputes are frequently to be resolved by way of arbitration in accordance with policy terms. Insurers could now face greater exposure for costs associated with disputes with their insureds, where insureds obtain litigation funding.
Read other items in Professions and Financial Lines Brief - October 2016

Read other items in Professions and Financial Lines Brief - October 2016