Recovering the cost of litigation funding in international arbitrations

International arbitrations are substantial cases which involve substantial claims. A team of leading counsel, junior counsel and suitable experts does not come cheap and even if solicitors can be found to act on a contingency basis, disbursements are likely to have to be funded by the client.

It is at this point that litigation funding comes into its own, but the price to be paid for the financial assistance of a litigation funder is likely to be heavy. To what extent can this be recovered from the other side, if it lends itself to victory in the arbitration ?

The centuries old prohibition against maintenance and champerty is now fast fading, most obviously since the passage of the Criminal Law Act 1967 but also due to the respectability given to the practice by numerous appellate decisions in England and Wales, developments on the international scene and most latterly the Jackson Report.

Although there are many uncertainties about costs awards in international arbitrations, in some respects the power of an arbitrator when it comes to questions of costs, is far wider than that of a High Court judge sitting in the Commercial Court.

In particular, it remains of interest to consider what might fall within the scope of “other costs” in section 59 the Arbitration Act 1996? It cannot mean all types of economic loss that might be sustained in litigation. The statutory focus is narrower than that, but it might be stretched widely enough to include the cost of litigation funding, or for example the recovery of ATE premiums

In ordinary litigation, the cost of litigation funding is a paradigm example of a cost of funding that has never been recoverable. Other examples are the cost of 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.

Instead, the solution adopted by Parliament initially, to compensate a successful party who has made expenditure on legal costs during the course of litigation is an award of interest.

An award of interest compensates the successful party for the loss of use of their money, whilst funding legal costs. This is not and has never been an indemnity for the successful party, for their economic loss or opportunity costs of funding the litigation. Instead the principles of such an award are governed by established legal principles.

Through the passage of the Judgment Act 1838 initially and then formulated through caselaw over the years, a mature and established body of principles has been developed through caselaw to award interest on costs initially from the date of an award, then latterly through further statutory intervention by a power to award pre-judgment interest on costs.

But the incidence of interest and the rate and the court’s discretion in these areas, is circumscribed by legal principles as described below. It is important to note that although an award of interest on debt or damages is primarily compensatory in nature, the award of interest proceeds on wholly different lines to an award of damages. The court is exercising a discretion, but as a judicial discretion, it must be exercised judicially in accordance with principle.

Other factors than purely the purely compensatory have informed these principles as is set out in the caselaw. It should be noted that after judgment any award of interest on costs is set by the Judgment Act 1838 at a statutory rate of 8% simple interest.

In the decision of Hunt.v.RM (Douglas) Roofing Limited Lord Ackner noted the following when explaining why interest on costs should be awarded from the date of the order for costs, and not the date of a certificate of taxation quantifying the sum. It also explained the purpose of such a rule: to provide justice to the client who has funded the litigation and to avoid barristers, solicitos and expert witnesses involuntarily funding the costs of litigation. Had it been possible to claim as an item of costs the cost of funding, an award of interest would be otiose and serve no purpose:

The Court of Appeal in K. v. K. (Divorce Costs: Interest) [1977] Fam. 39 misapprehended the nature of the amendment made to the new form by the Rules of the Supreme Court (Revision) 1965, for the reasons already stated. The decision in Pyman’s case [1884] W.N. 100 as to the effect of the Rules of 1883, as approved by the Court of Appeal in Boswell’s case, 57 L.J.Ch. 101 was correct. Accordingly the incipitur rule prevails. I respectfully agree with the observations of the Court of Appeal that a satisfactory result cannot be achieved in every case, but in my judgment the balance of justice favours the incipitur rule for the following reasons. 1. It is the unsuccessful party to the litigation who, ex hypothesi, has caused the costs unnecessarily to be incurred. Hence the order made against him. Since interest is not awarded on costs incurred and paid by the successful party before judgment, why should he suffer the added loss of interest on costs incurred and paid after judgment but before the taxing master gives his certificate? 2. Since, as the Court of Appeal rightly said in the Erven Warnink case [1982] 3 All E.R. 312 payments of costs are likely nowadays to be made to lawyers prior to taxation, then the application of the allocatur rule would generally speaking do greater injustice than the operation of the incipitur rule. Moreover, the incipitur rule provides a further necessary stimulus for payments to be made on account of costs and disbursements prior to taxation, for costs to be more readily agreed, and for taxation, when necessary, to be expedited, all of which are desirable developments. Barristers, solicitors and expert witnesses should not be expected to finance their clients’ litigation until it is completed and the taxing *416 master’s certificate obtained. If interest is not payable on costs between judgment and the completion of taxation, then there is an incentive to delay payment, delay disbursements and taxation. 3. It is common ground between the parties that the unsatisfactory situation illustrated in K. v. K. can be simply dealt with by an express agreement between the solicitor and his client that any interest recovered on costs and disbursements after judgment is pronounced but before the taxing master’s certificate is obtained, which costs and disbursements have not in fact been paid prior to taxation shall as to the interest on the costs belong to the solicitor, and as to the interest on disbursements be held by him for and on behalf of the person or persons to whom the disbursements are ultimately paid.

For the sake of completeness I should add that Mr. Goldblatt strongly argued that an order for payment of costs to be taxed cannot be a judgment debt within section 17 of the Act of 1838 because until taxation has been completed, there is no sum for which execution can be levied. This point appears to have been raised in the Erven Warnink case and disposed of at the end of the judgment on the basis that the courts have accepted since its enactment, that section 17 does apply to such a judgment and accordingly the law has gone too far for that argument. I agree. This acceptance is because a judgment for costs to be taxed is to be treated in the same way as a judgment for damages to be assessed, where the amount ultimately ascertained is treated as if it was mentioned in the judgment – no further order being required. A judgment debt can therefore in my judgment be construed for the purpose of section 17, as covering an order for the payment of costs to be taxed.

The Court of Appeal in Motto.v.Trafigura Ltd made the following observations on the prohibition on the recovery of the costs of funding and why the cost of borrowing was not an item of “costs” that could be recovered under an order for costs.

Instead the Court of Appeal held that the position under the CPR was the same as under the RSCL the cost of borrowing to pay solicitors bills was not recoverable as costs and although the CPR has introduced an express power to award interest on costs prior to the order for costs:

104 The issue here is whether the costs of and in connection with the work undertaken by Leigh Day, counsel, costs draftsmen and insurers in establishing and setting up the conditional fee arrangements and/or the ATE insurance policy are recoverable, and whether the costs of subsequent dealings with the ATE insurers are recoverable. The Judge held that they were recoverable, and the defendants appeal against this conclusion.

 105 The defendants rely, as they did before the Judge, on the well established general rule, perhaps most clearly considered in Hunt v Douglas Roofing (1987) 132 Sol Jo 935 , that the cost of funding litigation, in the sense of interest paid on the money borrowed to pay solicitors bills submitted in connection with the litigation, was not recoverable under the old rules relating to costs – RSC Order 62 . The Judge (rightly in my opinion) accepted that this principle applied equally in relation to the CPR (although there is now an express right under the CPR to interest on costs incurred). However, he held that the costs of drafting and preparing the CFAs for this case, and explaining them to potential claimants, and advising them in that connection, were recoverable as were the costs of negotiating and arranging the ATE insurance.

 106 I agree with the Judge that the costs which are sought to be claimed under this head are distinguishable from the interest in a case such as Hunt 132 Sol Jo 935 . Interest on sums borrowed to pay litigation costs is not money payable to solicitors for work done for the ultimate benefit of the client, whereas it is easier so to characterise sums incurred by solicitors in preparing and advising on a CFA and arranging ATE insurance, or on subsequently dealing with the insurers. I also see the force of the point that a solicitor acting for a (CFA and ATE insurance)-funded claimant should be able, as a matter of policy, to recover the costs sought under this head from the defendant if the claim is ultimately successful.

 107 Nonetheless, both (i) interest paid on money borrowed to pay litigation costs and (ii) costs incurred in connection with a CFA and ATE insurance are ultimately attributable to the need of a litigant to fund the litigation as opposed to the actual funding of the litigation itself.

If litigation funding falls outside the scope of “other costs” as defined by section 59, it remains an intriguing issue as to how far, the cost of this form of financial assistance can be claimed back by way of an enhanced award of interest from the arbitrator under section 49 of the Arbitration Act 1996.

Keen readers of the Act will note that under the provisions of those sections compound interest can be sought, and interest rates are at large.


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