Essar Oilfields Services Ltd v Norscot Rig Management Pvt Ltd

An arbitral tribunal’s power to award the costs of an arbitration under the Arbitration Act 1996 may include the reasonable costs of third-party litigation funding. The expression “other costs” in section 59(1)(c) is construed functionally. The costs must relate to, and be incurred for the purposes of, the arbitration. Their recoverability remains subject to the tribunal’s discretion, including reasonableness and proportionality.

A mistaken construction or erroneous exercise of an available costs power is not, without more, an excess of powers under section 68(2)(b). Section 73 waiver applies strictly where a party fails to raise an alleged irregularity in the required terms during the arbitration.

Essar applied under section 68 of the Arbitration Act 1996 to set aside the fifth partial award of the arbitrator, Sir Philip Otton, concerning interest and costs. The arbitrator had ordered Essar to pay Norscot’s litigation-funding costs, which arose under a funding agreement used to pursue the arbitration.

Essar argued that “other costs” under section 59(1)(c) did not include third-party funding costs, that the arbitrator had exceeded his powers, and that the award caused substantial injustice. Norscot relied on limitation, waiver and the correctness of the arbitrator’s construction. The central issues were whether the arbitrator had exceeded his powers, whether funding costs fell within “other costs”, and whether the challenge was barred or otherwise defective.

1. Application dismissed. The arbitrator had not committed a serious irregularity within section 68(2)(b). The relevant power was the general power to award arbitration costs. If the arbitrator had erred, the error would have concerned the scope of an available power, not the exercise of a power which he did not possess. The distinction identified in Lesotho v Impregilo [2006] 1 AC 221, Abuja International v Meridien [2012] 1 Lloyd’s Rep 461 and New Age v Range Energy [2014] EWHC 4358 was applied.
2. The court held that “other costs” in section 59(1)(c), read with sections 61 and 63 and Article 31(1) of the ICC Rules, may include the costs of obtaining third-party litigation funding. “Costs of the arbitration” is defined by the items listed in section 59(1); it is not a prior limiting phrase. The functional question is whether the costs relate to, and were incurred for the purposes of, bringing or defending the arbitration. The Arbitration Act 1996 is a complete code in this respect, and CPR costs practice does not control its construction.
3. The inclusion of funding costs in “other costs” does not require the tribunal to award them in every case. The tribunal retains a broad discretion, subject to considerations including reasonableness, proportionality and the prevention of windfalls. On the facts, the arbitrator had found that Essar’s conduct had forced Norscot to obtain funding and that the funding terms reflected market rates.
4. In the alternative, the court held that the alleged irregularity would have caused substantial injustice because, if the funding costs were legally irrecoverable, Essar would have been ordered to pay a sum which the arbitrator had no power to award. The court rejected a general balancing exercise based on fairness.
5. In any event, Essar had waived its objection under section 73. It had challenged the recoverability of the funding costs but had not objected that the matter involved an irregularity, improper conduct or an excess of powers. Its continued participation in settling the order and assessing the costs reinforced the waiver.
6. The court further held, alternatively, that the clarification of the award was material to Essar’s ability to know whether it had grounds for challenge. Applying K v S [2015] 2 Lloyd’s Rep 363, time therefore ran from the clarified award. The application was in time. The remaining limitation and extension-of-time observations were academic.