A recent landmark arbitration ruling, involving two companies within the gas and oil space, is causing quite the stir in the world of funding. In this article, Funds expert at Keystone Law, Tom Blackburn, examines the significance of Essar v Norscot.
In the case of Essar Oilfield (Defendant) v Norscot Rig Management (Claimant), the appeal arbitrator (Court of Appeal Judge Sir Philip Otton) allowed the successful Claimant to recover the cost of funding its case – in this case the Claimant used Third Party Funding (“TPF”). The Defendant appealed to High Court Judge HHJ Waksman QC, who dismissed the appeal.
HHJ Waksman QC upheld the original decision, as both he and Sir Philip Otton ruled that TPF costs were recoverable under section 59(1)(c) of the Arbitration Act 1996 and article 31(1) of the ICC Rules, which state that “legal and other costs” can be recovered by a successful party. Both judges felt that “other costs” was a sufficiently wide definition to allow the recovery of TPF costs.
The decision and appeal ruling are receiving widespread attention. As an expert in costs as well as funding, it’s like the discovery of the Higgs boson to me: interesting, ground-breaking, and changing the way that everyone should look at arbitrations.
However, what struck me was the absurd and frankly distasteful TPF agreement which the Claimant had signed up to. The Claimant, who had borrowed £647,086 from the funder to bring the claim, was liable, if successful, to pay back to the funder either:
a) 300% of the sum advanced; or
b) 35% of the damages,
Whichever was the greater!
Let that sink in: 300% of the sums lent or 35% of the damages. Not the lower of the two, but the greater. As a funder and as a practitioner, as well as an infrequent purchaser of legal services, I find that agreement offensive.
We don’t know the individual circumstances of the case. It may have been a very risky action, or the Defendant’s ability to pay may have been borderline. Something may have made the case different from the ‘norm’. But what can be said for certain is that I have never funded a case, advised a client or brokered such a bad deal for the Claimant, who is effectively punished for winning big.
Now TPF is not helping itself here. Any sector which claims that it doesn’t need regulation and that it will regulate itself, doesn’t have a good PR firm advising it. Furthermore, there isn’t a price comparison website for TPF. Indeed in the many cases I have funded and advised on funding, price is not the key selling point; funders simply don’t compete on price.
The best model I have used, and continue to recommend, is something called “staged funding”. TPF’s call it “tranched funding” (the finance world loves to be different). Put simply, a Claimant doesn’t need £640k upfront at the start of the case; a Claimant needs its costs paid as it goes along, because 94% of cases conclude prior to trial. Accordingly, funders which only provide lump sums to Claimants right at the outset, make not only the cost of funding expensive, but also effectively punish a Claimant for settling and not going to trial.
Tranched funding, as you will have guessed, releases the funds needed, as and when they are needed. Counsel’s brief fee for trial isn’t required until the eleventh hour. Accordingly, it isn’t lent until the eleventh hour. Therefore, if the case doesn’t progress to that particular point, the Claimant doesn’t pay for borrowing something it didn’t need.
There are many clever tricks that less scrupulous funders use, to make the cost of providing funding more expensive and thus line its own pockets. Until regulation is forced onto this sector or a price comparison website is launched, anyone who requires TPF remains exposed to the piranhas – unless, of course, they instruct an expert to assist.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.