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In Progas Energy Limited et al v the Islamic Republic of Pakistan [2018] EWHC 209 (Comm) the English High Court considered the conditions to be imposed on the Claimants who sought to challenge an award.
The Court ordered security for costs against the Claimants notwithstanding the fact that they had the support of a commercial third party funder. However, third party funding did not impact on the Court’s refusal to order, as a condition of the challenge, the security of sums due under the award being challenged.
The Claimants, Mauritius incorporated companies, built and operated an import terminal for liquefied petroleum gas in Pakistan. The Claimants alleged that the government of Pakistan expropriated that investment. The Claimants brought an investment treaty arbitration against Pakistan pursuant to the Mauritius-Pakistan Bilateral Investment Treaty. By an award dated 30 August 2016 (the “Award”), the Claimants’ claims were dismissed and costs were awarded to the Defendants.
The Claimants brought a challenge to the Award under section 68 of the Arbitration Act 1996 (the “AA”) (which applied because the arbitration was seated in London), alleging that the Tribunal failed to deal with all the issues that were put to it. The Defendant applied for the following conditions to be imposed for that challenge to proceed:
1. Security for the costs of the challenge under Section 70(6) AA; and
2. The costs awarded to it under the Award to be paid into Court or otherwise secured under section 70(7) AA.
The Claimants’ claims and their challenge to the Award were funded by a professional litigation funder, Burford Capital. However, Burford Capital was not contractually obliged to cover any adverse costs orders against the Claimants.
Section 70(6) AA provides the English courts with the power to order security for the costs of challenging an English arbitration award under the AA. One of the key questions to be determined in an application for security for costs is whether the party challenging the award “has sufficient assets and whether those assets are available to meet any order for costs”. Traditionally in English proceedings, the loser pays the winner’s costs, meaning that if the challenge to the award fails, the unsuccessful claimant should be ordered to pay the bulk (but not necessarily all) of the defendant’s costs incurred in defending the application. To mitigate against the risk of costs orders against an impecunious claimant, the claimant may be ordered to provide security for costs before its application can proceed.
Among other arguments, the Claimants submitted that security for costs should not be ordered because Burford Capital provided two letters stating, “Burford Capital Ltd will ensure that [a subsidiary of Burford Capital] will pay these costs to the Defendant (should the Claimants not do so) up to a maximum amount of £482,019.19” (that amount being the projected costs of the Defendant in the application).
The Claimants argued that these letters confirmed that they had the requisite “available assets” to satisfy a future adverse costs order and that security for costs was therefore unnecessary. The Claimants also argued that the Court has the power to make adverse costs orders against third parties (such as Burford Capital) under section 51 of the Senior Courts Act 1981 (“SCA”), and that therefore it did not matter that Burford Capital’s letters did not constitute binding obligations, as it would be open to the Defendant in due course to seek a costs order against Burford Capital under that section.
The Court rejected the Claimants’ position. The reasons for doing so included:
1. the letters from Burford Capital did not constitute a contractual commitment to anybody and were not legally enforceable, which meant that the Defendant’s ability to obtain a costs order under section 51 SCA was not a foregone conclusion;
2. given the absence of a legally enforceable obligation on Burford Capital, “there is nothing “available” to the Claimants, and still less can it be said that the Claimants have assets in any relevant sense” [36];
3. the ability to obtain a costs order against non-parties under section 51 SCA (which anticipates a future exercise of the Court’s discretion) is not a suitable alternative to obtaining a security for costs order (which needed immediate determination); and
4. as Burford Capital was willing to meet an adverse costs order, there is no reason why it should not be able to put the Claimants in funds in order to provide security for costs.
The Defendant was awarded £400,000 by way of security for costs, reduced from the £482,029.19 sought on the basis that the Defendant was likely to be entitled to recover the bulk of its costs (rather than all of its costs) if it successfully defends the application.
Section 70(7) AA gives the English court the power to order that any money payable under an English arbitration award being challenged before it under the AA is to be paid into Court or otherwise secured.
The Court upheld the established proposition that in order to trigger section 70(7) AA, it must be shown that the challenge under section 68 AA “in some way prejudices the ability of the defendant to enforce the award or diminishes the claimant’s ability to honour the award”. The Court noted that:
1. the “prejudice” which may be suffered would generally be based on a risk of dissipation of assets. There may be other ways in which enforcement may be prejudiced but delay caused by the challenge is not sufficient to constitute “prejudice”; and
2. Section 70(7) AA should not be used as a means of assisting a party to enforce an award and is not designed to put the award creditor in a better position than would be the case had the challenge not been brought.
On the facts, the Court did not find that the Claimants had engaged in asset dissipation. It agreed with the Claimants’ characterisation of the application as one which would put the Defendant in a better position than if the challenge to the Award had not been made.
The Defendant had submitted that the Court was in “unchartered waters” and that this case did not fall to be determined in accordance with existing case law because this appeared to be the first occasion where a section 70(7) AA application was made against a claimant funded by a professional funder. On the Defendant’s case, the Claimants were able to “take advantage” of the lack of a legally binding commitment from Burford Capital to satisfy adverse costs orders in the arbitration (as the Tribunal did not have jurisdiction over Burford Capital), however, the Court has the power to grant such costs orders against Burford Capital itself. The Defendant further submitted that there was a “policy approach” [74] that those who fund proceedings ought to be liable for costs incurred by the opposing party.
The Court disagreed, holding that the approach established by existing authorities should be applied whether or not the case involves commercial funding or not. Furthermore, section 51 SCA is expressly concerned with non-party costs orders whereas section 70(7) AA is not, and therefore the Court’s willingness to grant costs orders against litigation funders pursuant to section 51 SCA should not be imputed to section 70(7) AA.
This judgment suggests that entities (in particular, SPVs with no or few assets) seeking third party funding should secure binding obligations from the funder to comply with any adverse costs orders. This may reduce the likelihood that a security for costs application will be granted against them in like circumstances to this case, given that non-binding comfort letters from litigation funders are unlikely to dissuade the Court from granting security for costs.
The judgment also indicates that third party funding is in itself unlikely to have adverse consequences for a party seeking to challenge an award if that application is met with a counter-application for the security of funds due under the award under section 70(7) AA.
28 February 2018
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