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Third Party Funding: Costs in Arbitration Workshop

London Costs workshop 2 

Following a successful introductory workshop in Hong Kong earlier this year, CIArb’s HQ in London hosted the second of this year’s costs workshops, this time with a focus on third party funding in arbitration.  The workshop also touched on the areas of practical cost budgeting, security for costs, and the award and assessment of costs.

In the welcome address, Peter Rees QC advocated third party funding as the answer to lawyers wondering “how do we get our bills paid regularly and on time?”, and equally to clients wondering “how do we get someone else to pay our bills?”.  Third party funding is, he said, now widely accepted in many jurisdictions, including in Hong Kong and very soon in Singapore.

Costs budgeting

Gillie Belsham of Ince & Co. tackled the first issue of costs budgeting, one of the key preliminary components to obtaining third party funding.  It is a skill lawyers are particularly reluctant to get to grips with, but she advised that the key to effective costs budgeting is knowledge. 

Understanding the litigation/arbitration landscape (which varies according to jurisdiction), and being a realist not an optimist, would ensure lawyers are set up for success in this area.

Gillie advised breaking down costs into milestones, by looking at the various stages of the case, starting with the event, what happened, and the amounts involved, all the way up to hearing and award. 

Other factors to consider are the client (are they responsive and hands on? what are their resources?), other stakeholders (for example, insurers), case strategy, and use of counsel. 

Costs Budgeting Helpsheet

What are the benefits of budgeting?

Gillie pointed to the multiple benefits of costs budgeting for both clients and lawyers alike.  For the client, budgeting offers certainty within specified parameters.  Hence why it is important for lawyers to be clear on the scope of the work, and to also state what is not included in the budget. 

Budgeting also gives clients knowledge and control over the process, a choice of pricing mechanisms, a greater idea of what there is to pay, the risks, where those risks lie, and how to lay it off.

For the lawyer, a budget is empowering and makes for a more engaged client.  It also makes it easier to identify where the profit lies.  The value of budgeting is increased by reassessing it throughout the process; ask the client if it is still working for them, be clear on what it is you need from the client, and at the end always debrief and outline the ‘lessons learnt’.

Third Party Funders

Susan Dunn of Harbour Litigation Funding (Harbour) was next to give some sound advice, this time from the perspective of a third-party funder (TPF).  She has personally overseen 150 funded cases totalling over £3 billion in claim value. A TPF, such as Harbour, pays the legal bills for cases it funds monthly and throughout the life of the case, be it litigation or arbitration. 

If the case is settled or won, and only if monies are collected, Harbour receives a pre-agreed share of the proceeds.  If the claim is unsuccessful, the loss is with Harbour, and no repayment is due by the claimant or their lawyers.

Why use a TPF?

Susan outlined the four key reasons why a client would use a TPF:

  1. they cannot afford the legal costs;
  2. they want to remove or reduce the cost risk;
  3. they have already used their annual legal budget;
  4. They need working capital for other purposes.

What do TPFs look for?

One of the key issues a TPF will look at, when deciding on whether to fund a claimant, is the creditworthiness of the defendant(s).  They will also look at the realistic minimum claim value, whether the case has good legal merits, and the experience of the claimant’s case team in the relevant area of law. 

Susan dispelled some of the myths with regards to TPF’s: TPF’s do not get involved in the way the case is conducted or in any settlement negotiations, and contrary to the belief of many, obtaining the assistance of a TPF is often a straightforward and quick process. 

The terms of the third-party funding may vary according to the TPF, but Harbour agrees upfront a % share of the proceeds with the claimant, which, in their portfolio, ranges from 7.5% - 50% depending on the claim size, budget size, and expected time to resolve the case.

In terms of what TPF need in order to assess whether to fund the case, a legal opinion must be given to them at the outset, setting out:

  • the factual background and legal basis of the claim;
  • the merits (a balanced appraisal of the strengths and weaknesses);
  • a realistic estimate of damages (with a draft expert report if available)
  • the budget; and
  • a plan for enforcement against the defendant’s assets.

When third party funding is agreed, the entire budget offered by Harbour is ring-fenced and protected from day one. 

Susan can only recall a limited number of situations where funding has been withdrawn midway through the case, including the defendant going bust, the claimant disappearing, and the claimant not owning the relevant intellectual property.

Security for costs

Peter Rees QC pointed to CIArb’s Guideline on Security for Costs, recently updated and found on CIArb’s website, as a starting point when considering a security for costs application.

He reminded delegates of the key considerations of any tribunal faced with such an application:

  1. the prospect of success of the claim and defence;
  2. the claimant’s ability to satisfy an adverse costs award and the claimant’s availability of assets to satisfy any such award;
  3. whether it is fair in the circumstances to make the order.

Where third party funding is concerned, it is often questioned whether there should automatically be security for costs where a TPF is used. 

Peter noted that some tribunals do take this view, where the presence of a TPF had been disclosed.  However, if the cause of the impecuniosity is the actions of the respondent, then arguably there should be no security for costs ordered.

One of the issues the tribunal might also look at is whether there is After The Event (ATE) insurance in place in the name of the claimant, to underwrite that TPF’s agreement to pay the respondent’s costs if the claimant loses. 

If ATE insurance is in place, and it is disclosable, the existence of such insurance might appease the tribunal, and no security for costs order would be warranted.

Award and Assessment of Costs

The last workshop of the day was led by Richard Little of Eversheds Sutherland, who stressed the importance of considering costs.  Costs, he said, can be considerable and the tribunal discretion is wide when it comes it liability for costs and quantum. The principles that apply also differ according to jurisdiction. 

Richard surmised that two key considerations when considering costs are: (1) which party should pay the costs of the arbitration; and (2) which costs are recoverable. 

National legislation and any applicable institutional rules will act as guidance.  The parties will be free to agree allocation of costs subject to any mandatory provisions under the lex arbitri (see section 60 of the English Arbitration Act 1996 for example).

What factors should the tribunal consider?

Richard outlined the following as points of consideration by the tribunal:

  • the extent to which a particular party wins or loses the claims and counterclaims;
  • the amount of the costs in relation to the overall claim value (is it proportionate?);
  • the conduct of the parties (e.g. unconscionable conduct by a party in the proceedings, pursuing unmeritorious claims, extravagance in the conduct of the hearing).

Under section 59(1) of the Arbitration Act 1996, procedural costs (arbitrator’s fee, case administration etc.); parties’ costs (lawyers’ fees and expenses, witness and expert evidence expenses); and “other costs” are recoverable.  “Other costs” can include the costs of obtaining litigation funding, but it is specific to the facts and circumstances of the particular case. 

Knowledge of the TPF’s existence will come into play here as a possible challenge to any such costs orders.

With respect to costs orders against TPFs, the tribunal’s jurisdiction is prima facie limited to the parties to the arbitration agreement, though national courts may take a different approach in exceptional circumstances.

Richard ended on the sobering topic of interest, where the framework will come from national legislation, lex causae, arbitration rules and the parties’ agreement.  The English law position is that the availability of interest is a substantive issue governed by the law of the contract.

Richard highlighted some practical considerations to take account of: the source of the arbitrators’ authority to award interest (contract or seat?); simple or compound interest, what rate to award, and what period to award interest for (pre-award and post-award?). With the latter two considerations, the English law position is to look to the law of the seat.