The text of this article first appeared in the December 2016 issue of Litigation Funding.
The recent decision of HH Judge Waksman QC in the Commercial Court in the case of Essar Oilfields Services Limited v Norscot Rig Management PVT Limited  EWHC 2361 (Comm) repays careful reading, as it is the one of the few decisions of the High Court on the measure of recoverable costs in an international arbitration, albeit one conducted in London under the auspices of both the ICC Rules and the Arbitration Act 1996.
The case is notable chiefly for the endorsement by the court of the recovery of the charges made for the provision of third party funding to the winning party, as an item of “other costs” by the receiving party, under section 59 of the Arbitration Act 1996.
The background facts can be briefly stated.The case involved hard fought arbitral proceedings before Sir Philip Otton sitting as the arbitrator, concerning the commercial dispute arising out of the breach of an Operations Management Agreement relating to the sem-submersible offshore drilling platform “Wildcat”. Essar lost those proceedings. Essar had indemnity costs awarded against it. Norscot obtained from Woodsford, a third party funder, the sum of £647,086.49 on the basis that either 300% of the sum advanced would be paid by way of fee, or 35% of the total recovery, whichever was the higher.
The point which arose from the Fifth Partial Award and it’s Addendum, was whether the arbitrator’s award of this sum, the charge made for litigation funding, as part of the costs of the arbitration constituted a serious irregularity on the part of the arbitrator in that he had no power through a combination of sections 59 and 63 of the Arbitration Act 1996 to award this sum.
The parties had excluded a right of appeal on a question of fact or law, by their agreement to use ICC Rules.
Although issues of a time bar, waiver and whether the challenge was properly to be construed as an appeal on a point of law, rather than an irregularity challenge, the principal point of interest of the judgment, lies in whether the charge for litigation funding was a sum the arbitrator had power to award as an item of “other costs”.
Essar’s case was straightforward: the argument ran as follows. Properly construed neither the combination of section 59 nor 63 of the Arbitration Act 1996 or rule 31 of the 1998 ICC Rules gives an arbitrator the power to award the charges made for funding the costs of the arbitration. There is a clear distinction between “the costs of the arbitration” and the “cost of financing the costs of the arbitration”. The two are conceptually distinct and it is the former that are recoverable but not the latter.
The wording “other costs” in the relevant section. when considered in context, should not permit the recovery of the “cost of financing the costs of the arbitration”: rather its focus was narrower and directed at permitting for example, litigant in person costs, costs of managerial time, costs of employees acting as experts or other analogous categories of costs.
Rather, the “cost” of financing arbitration costs is properly to be considered in the context of an award of interest on costs under section 49 of the Arbitration Act 1996
Developing the argument, section 59 of the Arbitration Act 1996 states as follows:
1)References in this Part to the costs of the arbitration are to—
(a)the arbitrators’ fees and expenses,
(b)the fees and expenses of any arbitral institution concerned, and
(c)the legal or other costs of the parties.
(2)Any such reference includes the costs of or incidental to any proceedings to determine the amount of the recoverable costs of the arbitration (see section 63).
The starting point when considering this section is that it gives the arbitrator power to make an award of “the costs of the arbitration”.
Secondly that it specifies the type of costs that can be awarded by reference to subsections (1)(a) to (c) of which the words “other costs” are residual words.
Thirdly that it does not expressly provide for the charges for financing the “costs of the arbitration” to be recoverable.
Fourthly that the section as a whole and the particular words of the residual category of “other costs” which the Defendant has to rely on, to justify the award of the cost of litigation funding has to be interpreted according to the canons of statutory construction: in particular was it intended to include in 1(c) for example some “other costs” and also the cost of financing such “other costs”?
The better view, Essar contended is that “other costs” is to be construed narrowly to include categories of expenditure other than purely legal costs, with the cost of financing that expenditure dealt with under section 49 as an award of interest?
The award of costs was made in the context of an arbitration, not litigation, but the issue on is primarily concerned with the construction of an English statute made by Parliament: the statute does not stand in a vacuum, and the ultimate question is what did Parliament intend when enacting this statute in order to determine its construction.
The position in English law generally, is that the cost of financing litigation, has always been irrecoverable as an item of costs and is reflected instead in an award of interest. See Motto.v.Trafigura Ltd  1 WLR 657 at paragraphs 104 to 107 with its observations on the irrecoverable nature of the cost of funding and the case of Simcoe.v.Jacuzzi  1 WLR 2393 at paragraphs 39 to 42, which explains the purpose of an award of interest on costs is to compensate for the cost of financing the litigation.
The cost of litigation funding is a paradigm example of a cost of funding that has never been recoverable. Other examples are general or bridging loans, or less obviously, success fees and ATE premiums, which required statutory intervention through the Access to Justice Act 1999, to be recoverable as a cost inter partes.
The Access to Justice Act 1999, in force from 1st April 2000 to 1st April 2013, permitted the recovery of success fees and ATE premiums: costs which were otherwise irrecoverable at common law. The repeal of those provisions by the Legal Aid Sentencing and Punishment of Offenders Act 2012, means that the situation in the English courts, is as it always was prior to the 1999 statutory experiment: the cost of funding litigation costs is irrecoverable as a head of costs.
It is trite law that in litigation only legal costs can be recovered at common law: see London Scottish Benefit Society.v.Chorley  XIII QB 872. Thus the time of a layman conducting litigation, loss of managerial time, the cost of employees acting as experts are not recoverable.
In respect of litigants in person, statutory intervention has occurred to ensure they can recover costs in respect of the time that they spend conducting their litigation: absent CPR rule 46.5 such costs would prove irrecoverable. This is the backdrop, to which it must be contended by the receiving party, that Parliament intended, to permit the charges for financing “the costs of the arbitration” to be recoverable.
An enactment by implication imports any principle or rule of law (whether statutory or non-statutory) which prevails in the territory to which the enactment extends and is relevant to its operation in that territory. As a general rule Parliament must have been taken to have legislated against the background of the general principles of the common-law (Bennion on Statutory Interpretation 6th edition at 929-937).
The Latin words ejusdem generis (of the same kind or nature) have been attached to a principle of construction whereby wide words associated in the text with more limited words are taken to be restricted by implication to matters of the same limited character. The principle may apply whatever the form of the association, but the most usual form is a list or string of genus describing terms followed by wider or residuary sweeping up words (Bennion on Statutory Interpretation 6th edition at 1105 to 1108)
The court seeks to avoid a construction that cures the mischief the enactment was designed to remedy only as the cost of setting up a disproportionate counter-mischief, since this is unlikely to have been intended by Parliament. Sometimes however, there are overriding reasons for applying such a construction, for example where it appears that Parliament really intended it or the literal meaning is too strong (Bennion on Statutory Interpretation 6th edition at 901 to 904).
The starting point must be that the purpose of the section is to award the “costs of the arbitration”. A charge made for financing the “costs of the arbitration” is conceptually distinct from the “costs of the arbitration”. A clear analogy is to be drawn with the “costs of the litigation” and the cost of financing the “costs of the litigation”. On this point alone, it is clear that the ambit of sections 59 and 63 cannot stretch to anterior costs, or wide categories of economic loss arising from engaging in arbitral proceedings.
The residuary category “other costs” is readily capable of meaning, those costs which would be irrecoverable in litigation due to the general prohibition noted above: but which share the common quality of being “costs of the arbitration”. Otherwise, logically, on the arbitrator’s approach, “other costs” means all types of economic loss or cost, provided they can be quantified in pounds and pence that might be sustained in litigation. The statutory focus is narrower than that.
The statute does not say in subsection (1)(c) that recoverable under section 59 are legal costs, and the costs of financing those legal costs: instead “other costs” is a sweeping up, residual category. On a natural and ordinary interpretation, bearing in mind the statutory purpose is to provide for awards of costs in various different arbitral contexts such that it will encompass such elements as litigant in person costs, the costs of managerial time, the costs of employees acting as experts or other analogous categories of costs.
What it should not encompass, both as a matter of natural and ordinary interpretation and when considering the purposive construction to be provided to the statute, is categories of economic loss, such as the cost of funding litigation which have never been recoverable at common law.
Instead, it could be argued the solution adopted by Parliament, to compensate a successful party who has made expenditure on legal costs during the course of litigation is an award of interest, a structure mirrored by section 49 of the Arbitration Act 1996 (interest) and section 59 (costs).
In such a context, when enacting the scheme of the Arbitration Act 1996 it can be noted that Parliament extended the ambit of recoverable costs of the arbitration, to include costs under sections 59 and 63 which would otherwise be caught by the general prohibition “other costs” and also provided for an award of interest under section 49 which can be simple or compound interest, and the rate of which is discretionary.
In those circumstances Parliament has provided a broad definition of recoverable costs and also allowed for an award of interest, to compensate at least in part for the cost of financing arbitration costs. There is no requirement therefore for section 59(1)(c) to practically overlap with section 49 in dealing with the financing of costs. Indeed, the construction adopted by the arbitrator, conflicts with the statutory scheme, a point which will be developed below.
The ejusdem generis rule provides that ostensibly wide phrases, which in fact form a residuary category, are to be construed narrowly based on the same categorisation as applies to the limited words preceding it. Legal costs, represent a solicitors profit costs and disbursements, chargeable to the client. They represent an expenditure on work done which is progressive and falls within the scope of advice, preparation for and appearance at the arbitration. They do not include the cost of financing any part of the arbitration costs.
Similarly “other costs” should be read as limited to a fee or expense charged for work done which constitutes, advice preparation or appearance at the arbitration: something spent which can properly be said to be part of the “costs of the arbitration.” To construe “other costs” more widely, is to say that the costs of financing the costs properly falls within a residuary category, far wider than the limited words preceding it. Such a construction is impermissible on the ejusdem generis principle.
Perhaps the simplest point is this: the statutory scheme contemplates an award of costs and an award of interest meant to compensate the receiving, for, amongst other things the costs of financing its costs. The construction adopted by the arbitrator merges the two concepts reflected in two different statutory sections, in a way that it is submitted runs counter to the intention of Parliament, as to how the two issues are to be separately addressed.
These arguments were rejected by the court. The result is that by endorsing the decision of the arbitrator, the law has been changed, so that in arbitration proceedings, the award of charges for litigation funding is now lawful as an item of “other costs”. This is an immediate consequence. There are three further consequences.
The first, is that although funding was obtained in this case from a bespoke litigation funder, as a point of principle the receiving party was in no different position than any party who funds litigation through a loan, be it credit card, overdraft, family member or high street bank and has to pay interest or a fee for the financial accommodation they are granted. Presumably such charges are now also recoverable as “other costs”.
The second, is that arbitration is now a much more attractive option than litigation in the Commercial Court, given the limitations of recovery of litigation costs. Given the pronouncements in the last year or so of the Lord Chief Justice, bemoaning the lack of appeals from arbitration proceedings to the High Court, the irony is acute.
The third consequence, is that no further appeal was possible from this decision to the Court of Appeal, due to the bar in section 68(4) of the Arbitration Act 1996, once the High Court had refused permission. Accordingly, it will be years, before this issue is reconsidered, if it ever is, by the Court of Appeal in some other case.