A Critical Analysis of Third Party Funding (TPF) in Arbitration

By Digvijay Dam*

The author has separately dealt with two of the most controversial issues relating to TPF namely, “ordering security for costs in TPF” and “awarding successful claimants their costs of TPF”. However, as of now they are only of an academic deliberation and does not have a definite legal standing, due to conflicting precedents and multifarious views of eminent scholars/arbitrators.

THE ISSUE OF ORDERING ‘SECURITY FOR COSTSIN TPF

The inclination towards using third party funding (TPF) to pursue an arbitration claim is usually engaged by namely two types of claimants i.e. financially sound (as a part of corporate strategy to reallocate risks) and impecunious ones (those who don’t have the resources). Regarding the latter, the presence of TPF will usually alert the respondent of the uncertain financial situation of the claimant and raise concerns leaning towards the claimant’s capability to honor an adverse costs award. The genesis of this uncertainty arises from the jurisprudence that, tribunals cannot prima facie order costs against third party funders, as they are customarily not a party to the arbitration agreement. Thereby, the main issue for contemplation is whether, the presence of a TPF agreement should, or should not, incentivize arbitral tribunals to grant such ‘security for costs’ as an interim measure, for the sake of balance of convenience. This issue is indeed a complex one, wherein a conscientious balance is demanded between the claimant’s right of access to justice and minimizing respondent’s apprehension regarding enforcement of an award.[2] The author here shall indulge in scrutinizing both of these viewpoints and lay down the various prerequisites for each one of them.

  1. When TPF should become a criteria for awarding ‘security for costs’

The International Chamber of Commerce report suggests that to “put both parties on equal footing in respect of any recovery of costs,” the non-funded party might decide to apply to the tribunal early in the proceedings for interim or conservatory measures, including seeking security for costs or “some form of guarantee or insurance.”[3] Herein, notable commentators like Hamid Gharavi of Derains & Gharavi International, have expressed the view that the presence of third party funders should influence the tribunal’s decision to grant security for costs. One reason for arbitrators to adopt this approach is that, prima facie they don’t have any jurisdiction to award costs against these funders, unless explicitly stated in the arbitration agreement. Thus, when a third party funder has agreed in the forefront to cover security for costs, and there is an equal chance for each party to succeed, ordering security seems a pragmatic solution in order to access justice. However, we should also contemplate that security for costs should only be granted with the ‘greatest reluctance’[4], especially when TPF is involved. There are several observations made by tribunals on circumstances warranting order for ‘security for costs’, some of them being, claimant’s lack of funds for pursuing arbitration[5], the assets of the claimant ceasing to be located in a country which is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards[6] and when the 
claimant presents a fraudulent request for arbitration after making all the necessary arrangements, like transferring all its assets, or even filing for bankruptcy, in order to ensure that an arbitral decision rendered against it will actually not be enforceable[7] [8]. Further, another prerogative for taking TPF into account while granting ‘security for costs’ is that, when the TPF agreement between the funder and the funded party is fundamentally an ‘hit and run’ scheme, wherein the claimant’s arbitration fees and expenses are being covered by a related entity or individual who stands to gain if the claimant wins, but would not be liable for any costs that might be made against the claimant, if the claim goes south. This was held by the ICC tribunal in X v. Y and Z[9] case, wherein the tribunal granted ‘security for costs’ against a claimant on the basis that, inter alia, the funding agreement did not cover adverse costs and allowed the funder to “terminate the agreement at any time, entirely at its discretion”.[10] These scenarios have been described by arbitrators and commentators alike as particularly compelling grounds for ordering ‘security for costs’.[11]

  1. When TPF should not be considered while awarding ‘security for costs’

The main issue with ordering ‘security for costs’ by the tribunals is that this would encourage respondents to systematically apply for security, thus delaying the procedure and increasing the risk of blockading genuine claims. In the ICSID arbitration of Ron Fuchs v. Republic of Georgia[12] [13] and its sister case of Ioannis Kardassopoulos v. Republic of Georgia[14], the tribunal indicated that it knew ‘of no principle why any such third party financing arrangement should be taken into consideration in determining the amount of recovery by the Claimants of their costs’.

This view was confirmed in RSM Production Corp. v. Grenada[15], which stated:

‘..that such an arrangement should not be taken into account when considering the amount to be recovered by the claimants for their costs’.

Further, the tribunal in EuroGas Inc. and Belmont Resources Inc. v. Slovak Republic[16] denied the request for security for costs, distinguishing the facts of the case from the “exceptional circumstances” in RSM Production Corporation v. Saint Lucia[17]. Similarly, the Tribunal in South American Silver Ltd v Bolivia[18] recently rejected the request for security for costs which Bolivia had requested, inter alia, on grounds of TPF, noting that:

“If the existence of [TPF] alone, without considering other factors, becomes determinative on granting or rejecting a request for security for costs, respondents could request and obtain the security on a systematic basis, increasing the risk of blocking potentially legitimate claims.”

Also, in Hamester ICSID case, the tribunal refused to grant security for costs, ruling that an order for security for costs would not serve its purpose without cancelling or postponing the hearing, which was neither requested nor practicable at that stage of the proceeding.[19]  Further, ordering for ‘security for costs’ might result in a delay as a consequence of an additional deadweight on the ongoing proceedings. Although security in Hamester was refused, the application for security nevertheless creates a negative impact on the proceedings as a repercussion of counter-productive work involved.[20] Also a financially strained claimant might be unwilling to increase the percentage of the amount borrowed, since it would increase the success fee charged by the funder proportionately[21].

THE ISSUE OF AWARDING SUCCESSFUL CLAIMANTS THEIR COSTS OF THIRD PARTY FUNDING

The recent decision of the High Court of England in Essar Oilfield Services Limited v. Norscot Rig Management Private Limited[22] has sent massive shockwaves across the arbitration community, wherein for the first time ever, the court allowed the successful claimant to recover the entire cost of its TPF, which included a 300% uplift, in addition to damages.[23]  In this case, the court directed Essar to pay £ 1.94 million to Norscot, which Norscot owed to Woodsford Litigation Funding (Woodsford) it’s funder, for having advanced £ 647,000 to pursue it’s arbitration claim against Essar.[24] The author views this unprecedented move as a bittersweet experience, which renegades the ethos of arbitration, by opening a Pandora’s box having a beguiling future prospective. Here, the arbitrator held that Norscot was entitled to the litigation funding costs, which was disputed by Essar on ground of serious irregularity. His Honour Judge Waksman QC dismissed the appeal and held that Norscot’s litigation funding costs were recoverable in principle pursuant to s.59(1)(c) of the UK Arbitration Act of 1996 and Article 63(3) of the ICC Rules. HHJ Waksman QC rejected Essar’s submission that the relevant section of the Act need not be construed in what a court would or could allow by way of costs in litigation under the Civil Procedure Rules of 1998.[25] Herein, he relied on the previous authority of Lesotho v. Impregilo[26], wherein if an arbitral tribunal’s award is erroneous, this does not mean that it has exceeded it’s powers.

security-for-costs

Further, the author would like to explain how learned Judge Waksman QC might have possibly erred in the interpretation of the terms “the legal or other costs of the parties” by using the rules of interpretation of statutes[27]. Salmond describes interpretation or construction as the process by which courts seek to ascertain the meaning of the legislature through the medium of authoritative forms in which it is expressed.[28] Further, Chief Justice Jervis in Abley v. Gale[29] has explained the expression ‘literal meaning’, wherein, he points out that “if the precise words used are plain and unambiguous, in our judgment we are bound to construe them in their ordinary sense even though it too leads in our view of the case to an absurdity or manifest injustice”. Hence from the above interpretations, from nowhere could the learned arbitrator or the judge reasonably concur the same to include ‘costs of third party funding’ within the domain of ‘other costs’.

Further, the meaning of a word is also affected by it’s context, which is reflected in the legal maxim noscitur a sociis which means that the meaning of an unclear word or phrase should be determined by the words immediately surrounding it.[30] Now, the principle of ejusdem generis is a facet of the principle of noscitur a sociis. Hence, by using the doctrine of ejusdem generis[31] wherein general words (viz. other costs[32]) follows an enumeration of persons or things (viz. the arbitrator’s fees and expenses[33] and the fees and expenses of any arbitral institution concerned[34]), such general words are not to be construed in their widest extent, but are to be held as applying only to persons or things of the same general kind or class as those specifically mentioned.[35] This is a principle, which arises from the linguistic implication by which words having literally a wide meaning are treated as reduced in scope by their verbal context. Hence, the author agrees with the line of reasoning given by Essar that the Act sought to deal with the “costs of the arbitration”, whereas “third party funding” was not a cost of the arbitration but a process of “funding the arbitration”.[36]

However the author firmly believes that, this decision should not be held as the watershed moment, referring to which an inclination could emerge in recovering the costs of arbitral funding. I believe that it’s a sui generis case especially wherein the arbitrator had been very critical of Essar’s conduct, below mentioned are some of his key observations:

 “[Essar] intended to exert and did, in fact, exert commercial pressure on Norscot before and throughout the arbitral process and it was a David and Goliath battle, and such conduct forced Norscot’s managing director to re-mortgage his home for the best part of $1 million.”

“… for over three years, Essar made and persisted in unjustifiable personal attacks and allegations of fraud and dishonesty … which were so serious and without foundation that Norscot was entitled to costs on an indemnity basis.”

It was blindingly obvious to [Essar] that the claimant was at a distinct financial disadvantage … and would find it difficult if not impossible to pursue its claims by relying on its own resources. [37]

Therefore to conclude, this convoluted decision in Essar has the potentiality to cause a massive chaos in arbitrations seated in England, wherein this could proliferate to other unorthodox methods of funding an arbitration like conditional fee arrangement (CFA), after the event (ATE) premium, litigation funder’s return, insurance agreements etc. and nobody would know, when and where to put a definite halt to it.[38]

________________________________________________________

[*] Fourth Year, Gujarat National Law University (GNLU), Gandhinagar.

[2] Patricia, Gary Lim, Dharshini Prasad, Antony Crockett, and Daniel Mills, “Security for Costs in International Arbitration: What’s Missing from the Discussion? – Kluwer Arbitration Blog”, 2017.

[3]  http://www.iccwbo.org/Advocacy-Codes-and-Rules/Document-centre/2015/Decisions-on-Costs- in-International-Arbitration—ICC-Arbitration-and-ADR-Commission-Report/.

[4] Webster, Thomas H, Handbook of ICC arbitration (1st edn, Sweet & Maxwell/Thomson Reuters 2014).

[5] Case Report, Procedural Order No. 3 of July 4, 2008 in an ICC Arbitration with its seat in Berne between X S.A.R.L., Lebanon (Claimant), and Y A.G., Germany (Respondent), with Franz Kellerhals Acting as the Sole Arbitrator, 28 ASA Bull. 37, para. 19 (2010).

[6] P.A. Karrer & M. Desax, “Security for Costs in International Arbitration: Why, when and what if…- Böckstiegel, Karl-Heinz, and Robert Georg Briner, Law of International business and dispute settlement in the 21st century (1st edn, Carl Heymanns Verlag 2001), at 37-45, para.18.

[7] A. Reiner, Les mesures provisoires et conservatoires et l’arbitrage international notamment l’arbitrage CCI, J.D.I. 4 893–94 (1998)

[8] P. Fouchard, E. Gaillard, B. Goldman, Fouchard, Gaillard & Goldman, International Commercial Arbitration 688, para. 1256 (E. Gaillard & J. Savage eds., Kluwer L. Intl. 1999

[9] Procedural Order of 3 August 2012

[10] Brekoulakis, Stavros, S.I. Strong, and Tamara Manasijević, “The Impact of Third Party Funding on Allocation for Costs and Security for Costs Applications: The ICCA-Queen Mary Task Force Report – Kluwer Arbitration Blog”, 2017.

[11] J.E. Kalicki, Security for Costs in International Arbitration, 3 Transnatl. Dispute Mgt. (2006).

[12] Ioannis Kardassopoulos & Ron Fuchs v. Republic of Georgia (ICSID Case Nos. ARB/05/18 and ARB/07/15), Award of Mar. 3, 2010.

[13] P.M. Barrett, Trapped in Tbilisi, Bloomberg Week Mag. (Feb. 24, 2011).

[14] Ioannis Kardassopoulos, supra note 11.

[15] RSM Production Corp. v. Grenada (ICSID Case No. ARB/05/14), Annulment Proceedings, Order of the 
Committee Discontinuing the Proceeding and Decision on Costs, Apr. 28, 2011, 18–19, para. 68.

[16] ICSID Case No ARB/14/14

[17] ICSID Case No. ARB/12/10

[18] PCA No.2013-15

[19] Gustav F.W. Hamester GmbH & Co. K.G. v. Republic of Ghana (ICSID Case No. ARB/07/24) Arbitral Award of June 18, 2010.

[20] William Kirtley, Koralie Wietrzykowski, “Should an Arbitral Tribunal Order Security for Costs When an Impecunious Claimant Is Relying upon Third-Party Funding?- Journal of International Arbitration”, 2013.

[21] S. Khouri & K. Herford, Third Party Funding in International Arbitration: Balancing Risks and Benefits, Prac. L. Co. 37 (July 2012).

[22] [2016] EWHC 2361 (Comm).

[23] “Costs of third-party funding awarded in arbitration – Publications – Allen & Overy”, 2017.

[24] “The Gift of Gold – Recovery of the Costs of Third Party Funding in Arbitration: Andrews Kurth Kenyon LLP”, 2017.

[25] Arbitration: litigation funding costs | Kennedys”, 2017.

[26] [2006] 1 AC 221.

[27] Endlich, G. A, and Peter Benson Maxwell, A commentary on the interpretation of statutes (1st edn, F.D. Linn 1888).

[28] Salmond, John W, and P. J Fitzgerald, Salmond on Jurisprudence (1st edn, Sweet & Maxwell 1966).

[29] 20 L.J.C.P (N.S) 233 (1851).

[30] Garner, Bryan A, and Henry Campbell Black, Black’s law dictionary (1st edn, Thomson Reuters West 2016).

[31] Maxwell, supra note 26.

[32] S.59(1)(c) of the UK Arbitration Act, 1996.

[33] S.59(1)(a) of the UK Arbitration Act, 1996.

[34] S.59(1)(b) of the UK Arbitration Act, 1996.

[35] Grotius, Hugo, H. Grotii Sacra, in quibus Adamus Exul, tragœdia, aliorumque ejusdem generis carminum cumulus, 1601.

[36] Hailsham of Saint Marylebone, Quintin Hogg, and Hardinge Stanley Giffard of Halsbury, Halsbury’s Laws of England (1st edn, Butterworths 1996).

[37] Andrews Kurth Kenyon LLP, supra note 23.

[38] Jhangiani, Sapna, Rupert Coldwell, Rupert Grothaus, and Gordon Blanke, “Third-Party Funding for International Arbitration in Singapore and Hong Kong – A Race to the Top? – Kluwer Arbitration Blog”, 2017.

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