Third Party Funding Under the New ACICA Rules: Can Claimants Have Their Cake and Eat It Too?

Liam McInerney and Lisa Loechel

A far cry from the traditional illegality of champerty and maintenance, claimants and arbitral institutions alike continue to embrace third party funding arrangements.  Despite arbitration being heralded as a cost-effective alternative to litigation, many complex commercial arbitrations remain costly and resource‑intensive for potential claimants.

Claimants may rely on third party funding to bring meritorious claims that they would otherwise lack the means to pursue, often due to losses that would be the subject of their claim.  Other companies utilise third party funding as a tool to manage risk associated with disputes.

The Australian Centre for International Commercial Arbitration (ACICA) has joined the Hong Kong International Arbitration Centre (HKIAC) in introducing rules that expressly allow tribunals to award the costs of obtaining third party funding.  An English High Court decision lends weight to the argument that “third-party funding costs” could, in certain circumstances, include the full amount due to the third party funder over and above the amount awarded to the successful claimant.

Arbitral rules make express provision for recovery of third party funding costs

The 2021 ACICA Rules came into effect on 1 April 2021.  Among other changes, the Rules serve to clarify the powers of tribunals and obligations of parties in relation to third party funding, particularly as to the recovery of funding costs.  Both the 2016 and 2021 ACICA Rules define “costs of arbitration” as “the parties’ legal and other costs”, and provide examples of costs falling within that definition.  In the 2021 Rules, “third-party funding costs” were, for the first time, expressly included within this definition.  The relevant rule (48.2) also requires that costs be directly incurred in conducting the arbitration.  Parties are also required by rule 54.2 to disclose the existence of third party funding and the identity of the funder to the tribunal, ACICA and the other parties.

The 2018 HKIAC Administered Arbitration Rules have similarly included a new rule 34.4, which allows a tribunal to “take into account any third party funding arrangement in determining all or part of the costs of the arbitration”.

The new ACICA Rules do not specify whether “third-party funding costs” will cover just the costs associated with arranging the funding, or extend to include something more.  The decision of the English High Court in Essar Oilfield Services Ltd v Norscot Rig Management Pvt Ltd [2016] EWHC 2361 (Comm) (Essar) suggests that in certain circumstances, a claimant could recover the full amount owed under a funding agreement, including both the administrative costs associated with obtaining the funding as well as the funder’s uplift, upon recovery.

Essar Oilfield Services Ltd v Norscot Rig Management Pvt Ltd [2016] EWHC 2361 (Comm)

His Honour Judge Waksman in Essar declined to set aside an arbitral award, which awarded a successful claimant the full amount due to a third party funder.  Under the funding agreement, the claimant (Norscot) was required to pay to the funder 35% of the recovery or 300% of the funding amount advanced, whichever was greater.  Having advanced the sum of approximately £647,000 for the running of the arbitration, Norscot was required to pay £1.94m to the funder.  The arbitrator awarded the full amount of £1.94m to be paid by the respondent (Essar), as such costs were “other costs” for the purpose of s 59(1)(c) of the Arbitration Act 1996 (UK).

Essar sought to have the relevant award set aside on the basis that “other costs” do not include the costs of funding.  Therefore, Essar contended there was a “serious irregularity” in the award, the arbitrator had exceeded his powers and it would cause substantial injustice to require Essar to pay the amount, particularly given the high sum.  Judge Waksman rejected Essar’s submission that “legal and other costs” should be “construed narrowly so as to cover only those costs that are truly analogous to legal costs.”  Instead, his Honour suggested that the “limiting factor … is the functional one.  Do the costs relate to the arbitration and are they for the purposes of it?

His Honour concluded that “other costs” could include the costs of obtaining funding, and therefore those costs were within the arbitrator’s general costs discretion.  His Honour also noted that this discretion is subject to the overall requirement of reasonableness, which “can act as an important check and balance”.

The arbitrator was highly critical of Essar’s conduct towards Norscot, prior to and during the conduct of the arbitration.  Waksman J noted the arbitrator’s observation that “Essar had set out to cripple Norscot financially by resolutely refusing to make payment and it had flouted its agreement to pay the crew wages.’  The arbitrator referred to Essar’s conduct as ‘exploitative’ and opined that Norscot had “no alternative, but was forced to enter into the litigation funding.”  On the other hand, the arbitrator opined that Norscot’s “conduct throughout … cannot be faulted.  Justice and the merits point in [the direction of the claimant’s]”.  The arbitrator took account of the conduct of the parties in exercising its general costs discretion.

Award + third party funder uplift in full?

Given Waksman J’s finding in Essar that funding costs fall within the definition of “legal and other costs”, it is arguable that such costs are recoverable under the former ACICA Rules, and that the 2021 Rules merely serve to clarify this position.   Tribunals will be influenced by a variety of factors in determining which costs are incurred reasonably and directly as a result of the arbitration.   In Essar, the respondent’s conduct throughout the contracting period and the arbitration appeared to frustrate the arbitrator, causing the arbitrator to award indemnity costs and also apparently contributing to the decision to award the full amount payable to the third party funder.

Returning to first principles, an award for costs typically represents the fees incurred by a party during the course of a dispute.  In this context, there is a tension that arises in conceptualising funder uplifts as costs; that is, because they represent a premium paid to a third party, rather than a cost incurred by the party to the arbitration.  It may be that a funder’s uplift will not satisfy the requirement in the 2021 ACICA Rules that costs are “directly incurred by any party in conducting the arbitration”.  According to Essar, in certain circumstances an award that includes all costs of obtaining funding may be reasonable where parties have no alternative but to obtain third party funding in order to arbitrate disputes arising from the wrongful conduct of another party.  Then again, the statutory framework applicable in Essar was somewhat more expansive, extending to include “the costs of or incidental to any proceedings to determine the amount of the recoverable costs of the arbitration” (Arbitration Act 1996 (UK), s 59(2)).

Costs awards are always tempered by a test of reasonableness.  Essar appears to be at the favourable end of the spectrum in terms of costs awards, and each case will depend on its unique facts and circumstances.  However, Essar paves the way for parties to argue that it is open to a tribunal to award the full funder’s fee and premium as “costs”, particularly now that the ACICA Rules make express provision for the recoverability of third party funder costs.

Observations

The Court in Essar inquired into whether the funding arrangement in that case was on “industry standard” terms.  While each funding arrangement will be unique in its structure, terms and context, any funding arrangements which fall outside the “industry standard” may not be considered “costs”, or may not be reasonable, such that those amounts may not be recoverable.  It is likely that tribunals, in exercising their discretion to award costs under the ACICA rules, will similarly require third party funding arrangements to be on commercial, “industry standard” terms in order to be recoverable.  Certainly, the new ACICA rules do not give carte blanche to parties to enter into funding arrangements on otherwise uncommercial or non-standard terms in anticipation of recovering the premium payable as costs.

When seeking legal advice in relation to the merits of potential claims, parties should seek advice in relation to costs and consider the potential benefits and risks associated with obtaining third party funding.  Parties considering third party funding may also seek advice in relation to structuring funding arrangements in such a way that tribunals are more inclined to view funding premiums, fees and interests as recoverable “costs”.

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