07 April 2017

New opportunities for arbitration funding

In recent months, the scope for using third party funding in arbitrations has expanded - arguably to the benefit of those who need it most, say Steven Friel and Charlie Morris.

A number of recent developments across the globe indicate a growing readiness to embrace third party funding in arbitration. In particular, the two leading Asian arbitral seats, Singapore and Hong Kong, have taken steps to liberalise their third-party funding regimes, fearing that they would be left at a competitive disadvantage if they did not.  Arbitral institutions have also embraced the concept. For example, the ICC’s International Court of Arbitration has recently signalled that third-party funding should be regarded as a positive force in dispute resolution and, following the legislative changes in Singapore, the Singapore Institute of Arbitrators has released draft guidelines for funders. This unambiguous endorsement of the concept has been applauded by the entire funding community.

Significant development

But perhaps the most significant recent development for the arbitration funding industry was the decision of the Commercial Court of England & Wales in Essar v Norscot [2016] EWHC 2361 (Comm) handed down in September last year. In this decision, the Court upheld the decision of ICC arbitrator, Sir Philip Otton, who had ordered Essar – the losing party in the arbitration – to pay Norscot’s costs, including the costs it had incurred in obtaining third party funding from Woodsford. Weighing heavily on Sir Philip’s decision on costs was Essar’s unreasonable conduct. In his highly critical ruling, Sir Philip found that Essar had deliberately sought to cripple Norscot financially by withholding payments due under an agreement between the two parties and had, in effect, left Norscot with no choice but to seek third party funding in order to pursue its claim.

Gamechanger

The decision that Essar should pay Norscot’s costs – including a ‘success fee’ due to Woodsford – was described by The Times of London as “a game-changer for the litigation funding market”. We agree.  As the dust has settled post-Essar, the arbitral world has begun to realise that the case has opened up the possibility that unreasonable conduct by a party to arbitration may result in them suffering adverse cost consequences beyond simply having to pay the reasonable legal costs of its opponent. If an arbitrator decides that a party’s misconduct causes the other party to seek third party funding to support their case, the former may ultimately be held liable for the latter’s funding costs.

It is perhaps not surprising that the arbitrator in Essar is a former judge in the English Court of Appeal. Nor is it surprising that his costs decision was later upheld by the English High Court. The English Courts have a long history of using costs sanctions as a way of influencing the behaviour of litigants. Essar was just another example of this principle being applied – in this case, by refusing to interfere with an arbitrator’s decision and endorsing an arbitral costs award.

Certain commentators have suggested that Essar was an exceptional case and that the costs decision made in that case is unlikely to be repeated. We do not necessarily share that view.  In our experience, it is not at all uncommon that a party to arbitration conducts itself unreasonably in order to drain the resources of its opponent and stymie what might otherwise be a meritorious claim.  The findings in Essar may therefore be more widely applicable than first thought.  

New funding options available to parties

Following the decision in Essar, third-party funding may now be suitable and attractive to those involved in arbitration in the following circumstances:

Firstly, when the respondent fails to pay their share of the advances payable to an arbitral institution. In international arbitral proceedings, these costs can be significant – sometimes in excess of US$100,000 per party. Yet, in order to commence (and continue with) its claim, a claimant is often forced to pay the respondent’s share of the arbitration fees should the respondent fail to do so. In such circumstances, and particularly if the payment of the respondent’s costs causes the claimant cash-flow difficulties, we believe it may be reasonable for the claimant to seek funding.  If the claimant obtains funding and does so and goes on to succeed in its claim, it would in our view have good grounds for arguing that the respondent should be held liable for its third party funding costs.  Whether or not such an argument would ultimately succeed before another arbitrator, merely advancing it can add a useful tool to the claimant’s armoury in settlement negotiations.

Secondly, when a respondent is facing an unmeritorious claim bought by a well-resourced claimant. Some many find it surprising that a funder would agree to support a respondent in an arbitral dispute. However, we see no reason why the principles set out in Essar should not also benefit respondents. If a respondent faced with an unmeritorious claim cannot afford to defend it without adversely affecting its cashflow, seeking and obtaining third party funding for its defence costs could be regarded as reasonable. In due course, if the respondent’s defence ultimately prevails, its funding costs may be recoverable from the claimant.  Again, merely advancing the argument could assist the respondent in leveraging a favourable settlement before the claim is determined.

Redress

In both of these scenarios, justice is served by allowing the party which has been subjected to unreasonable conduct to achieve redress. And, thanks to arbitration funding reforms in locations such as Singapore and Hong Kong, and judgments such as Essar v Norscot, arbitration funding support can now make arbitration risk management and access to justice a reality in an increasing number of arbitration venues around the world.

Steven Friel is Chief Executive Officer at Woodsford Litigation Funding. Charlie Morris is a Senior Investment Officer at Woodsford Litigation Funding. Woodsford Litigation Funding provides tailored litigation and arbitration financing solutions for businesses, individuals, and law firms. This includes both single case and portfolio funding. Visit www.woodsfordlitigationfunding.com or follow on Twitter @WoodsfordLF or LinkedIn.