BAHR Dispute Resolution Insight - 01/23

Dispute Resolution Insight

Opening remarks

This year started with arbitration in focus. The Norwegian Arbitration Day and the Nordic Arbitration Day held back-to-back over two days in Oslo in January. Together with the Stockholm Chamber of Commerce (SCC), BAHR hosted the pre-seminar discussion on the future of ad hoc and institutional arbitration in Norway. The topic provided for lively discussion. Whilst ad hoc is the most commonly used form of arbitration in Norway today, we see a shift towards more institutional arbitrations.

A large team from BAHR spent most of February in Stockholm representing a buyer in a post-M&A dispute involving a NOK 1,6 billion earn-out claim in an international arbitration under the SCC Rules. Meanwhile, our energy disputes-team acted for a seller under a long-term purchase and supply agreement for natural gas in a price review arbitration. Despite the increased use of hub-indexed price formulas in certain markets, the current volatility in the market sees continued activity in energy and price review arbitrations.

In this Dispute Resolution Insight we discuss two issues of current interest. Firstly, there are possible significant developments in third-party funding. Acting both for and against funded parties, we follow these developments with interest. As we see it, they are a sign that third-party funding is maturing as a concept in the Norwegian market.

In the second article, we summarise the past three years’ discussion on choice of law for arbitration clauses and consider the status under Norwegian law following the decision of the French Court of Cassation in Kabab-Ji SAL v. Kout Food Group, one year on from the decision of the UK Supreme Court in the same case.

We hope this issue provides an interesting read!

Atle J. Skaldebø-Rød Head of Dispute Resolution

Photo credit: Stockholm International Hearing Center (SIHC)

Third Party Dispute Funding on the agenda

Introduction

The cost of litigation and arbitration in complex commercial disputes has increased significantly over the last decade. In response to rising costs, the international market for third-party funding (“TPF”) has developed. TPF reduces constraints on the claimants’ liquidity and provides for a potential upside for investors.

In Norway, TPF has recently received increased attention due to an opt-out class action against two providers of home-alarm systems. The class representative is funded by a third-party funder and has inter alia asserted that the funder’s fee may be recovered as litigation cost and has requested the court to “pre-approve” the cost. The case will be heard by the Supreme Court later this spring and we expect the decision from the Supreme Court to clarify several contested questions related to TPF in Norwegian law.

With the above-mentioned case making its way to the Supreme Court, the spotlight has firmly been put on TPF in Norwegian procedural law. In this article, we discuss four topics that are relevant for the Norwegian TPF market.

Regulatory framework for ThirdParty Funding in Norway

TPF is currently not monitored in Norway on a regulatory level. The Financial Supervisory Authority (“FSA”) has however decided that the only provider of TPF in Norway is subject to licensing from the FSA. The provider has appealed this decision to the Norwegian Ministry of Finance. If subject to licensing from the FSA, thirdparty funders will have to comply with a larger body of regulation. This is in turn likely to affect the Norwegian market for TPF.

Agency problems and ethical challenges

It is a fundamental principle that lawyers must represent and always act in the clients’ best interest. An agreement for TPF may challenge this principle as it, in effect, also introduces another party with a direct interest in the outcome of the dispute, i.e., the funder. And although the client and the funder may share an overall interest in the best possible outcome of the case, the underlying perspectives may differ.

Whilst the funder will generally have a purely monetary interest in the dispute, the client’s interests may be more varied and nuanced. For instance, a client may have an interest in maintaining a professional relationship with the counterparty, in setting a legal precedent through a court decision or demonstrating an ability to “stand firm”. These different perspectives and conflicting interests may lead the client and funder to have different opinions on, for instance, settlement proposals or other crossroads during the proceedings. It is therefore essential to discuss and agree on how such conflicts should be resolved prior to the initiation of the proceedings. Although there are different ways of

handling such conflicts, certain best-practice provisions have been developed by the Association of Litigation Funders through a Code of Conduct. Allthough not targeted directly towards the Norwegian market and Norwegian legislation, the Code of Conduct seeks to ensure that TPF does not interfere with professional and ethical obligations trough generally applicable provisions. Such best-practice provisions may provide a useful and practical framework for handling agency problems and possible TPF related ethical challenges.

Loser pays for Third-Party Funding?

Like most jurisdictions, the Norwegian Dispute Act generally applies a cost-shifting rule based on the “loser pays” principle, with the main rule being that the prevailing party may recover its “necessary cost” from the losing party. In arbitration, costs are generally awarded on a discretionary basis in accordance with the Arbitration Act, but typically along largely similar lines.

In principle, there are two different categories of costs associated with TPF and that we will comment on here: The costs that are directly linked to the funder’s compensation, which normally will constitute the biggest cost element, and increased litigation costs that may be due to the TPF-agreement. There are relevant differences between these categories when assessing the recoverability of the costs.

Litigation costs are expenses that parties to legal proceedings typically incur. This generally includes costs such as fees to the legal counsel and disbursements, such as expert costs, travel expenses and court fees. The question is whether the funder’s compensation could also be regarded as recoverable costs pursuant to the Dispute Act and Arbitration Act? One Norwegian first instance court ruling (Atlant v. Oslo Municipality) concluded that the third-party funding fee was not recoverable pursuant to the rules in the Dispute Act.

The clarification from the Ministry of Finance is therefore awaited.

However, the principle that funding fees are not recoverable as legal costs is challenged and on the agenda in the opt-out class action mentioned above, and we expect further clarifications on the topic to be provided by the Supreme Court. In particular, the decision from the Supreme Court is expected to clarify the admissibility of “pre-approval” of TDF as legal costs.

It should be noted that awards from the ICC (Tenke Fungurame Minin S.A. v. Katanga Contracting Services S.A.S & Essar Oilfield Services Ltd V Norscot Rig Management Pvt Ltd) have opened the possibility for funded parties to recover TPF costs from the losing party if the costs were necessary for access to justice. Whether this also will apply in Norwegian courts or arbitrations, remains to be seen.

Further, the TPF might generate additional legal or other costs due to the possible increased work load that might be associated with TDF. Such additional costs will likely be recoverable pursuant to the Dispute Act as litigation costs if they pass the test of being necessary and reasonable.

Disclosure of Third-Party Funding

How a party wishes to finance his or her claim, is normally irrelevant for deciding the substance of the case. Consequently, there is no general obligation to disclose the existence or identity of a funder under Norwegian law. However, both institutional and best practice arbitration rules encourage disclosure of TPF. Examples are the ICC Rules Article 11 7) and Article 18 to the SCC Rules. It is also recommended by international institutions such as ELI/ UNIDROIT (Model European Rules of Civil Procedure).

The rationale behind imposing a duty to disclose any agreements for TPF is to ensure the judges’ or arbitrators’ impartiality and independence from the parties. At least, the parties to the dispute should be aware of any

connections or ties judges or arbitrations may have to entities that have a direct and intimate interest in the outcome of the dispute, which a third-party funder will have. Early disclosure of agreements for TPF may therefore be vital to ensure trust in the fairness of the proceedings, but also as a tool to prevent subsequent challenges. Such considerations are also relevant in a Norwegian context. It could therefore be argued that disclosure should be considered best-practice also under Norwegian law. Consequently, we expect that disclosure of TPF will be on courts’ and tribunals’ agendas going forward.

Looking ahead

For clients, the possibility of TPF may reduce the liquidity constraints that large commercial disputes can impose. It can even be vital in securing clients their ‘day in court’. On the other hand, TPF will often be considered a high-risk investment, which normally will be reflected in the funder’s compensation.

Having touched on some of the topics that are being placed on the agenda with the increased attention on TPF, only one thing is for certain: Many more questions will arise. There are interesting times ahead with the mentioned Supreme Court decision which is likely to be rendered prior to the summer of 2023. The Ruling is likely to clarify questions that will be instrumental for the further development of TPF in Norway. Similarly, the awaited decision from the Norwegian Ministry of Finance will also be decisive for the further development in this area of litigation and arbitration.

BAHR’s Dispute Resolution Team has experience with TPF acting both for and against funded parties. We also provide second-opinion reviews to financiers and parties alike. As such, we monitor the ongoing legal and market developments with great interest.

Bjørn Eikanger Hanssen Associate

E: bjhan@bahr.no

M: +47 992 34 117

Bjørn Eikanger Hanssen joined BAHR in 2022 and is a part of BAHR’s Energy and Environment group. He primarily advises on contractual matters and dispute resolution in the energy sector. Bjørn wrote his master thesis on third party funding.

E: eiwig@bahr.no

M: +47 917 93 846

Eirik acts as counsel in a wide range of commercial disputes with an emphasis on professional and shareholder liability matters. Recent cases include appearing before the Court of Appeal (Borgarting division) as lead counsel for the successful appellant in a professional liability matter arising out of a commercial real estate transaction.

Skjold Søgaard Partner

E: sss@bahr.no

M: +47 900 21 287

Simen is admitted to the Supreme Court and rejoined BAHR as partner after six years at the Office of the Attorney General (Civil Affairs) in April 2022. Simen represents clients in all forms of commercial disputes, including insurance matters, tax/VAT litigation and matters involving public authorities.

Eirik Wigenstad Senior Associate

Simen

Governing law of arbitration agreements

Many arbitration clauses do not include a separate governing law provision. This is unfortunate because it gives rise to uncertainty when the scope or application of the arbitration agreement is to be considered; which law governs such questions where the arbitration clause itself does not contain a choice of law provision? In the past two years, this question has been considered twice by the UK Supreme Court and once by the French Court of Cassation (Supreme Court).

In this article we summarise status following the UK and French decisions and the likely implications of those decisions under Norwegian law.

When is the governing law of the arbitration agreement relevant?

Arbitration agreements are typically not concluded in separate documents, but rather included as a dispute resolution clause which forms part of a wider agreement substantively regulating a commercial relationship between two or more parties (the ‘main agreement’). These arbitration clauses are still referred to as ‘agreements’ due to the arbitration law ‘doctrine of separability’ whereby the arbitration clause is to be treated as separate agreement from the main agreement and, as such, it survives the termination or invalidity of the main agreement.

Where parties disagree in terms of the validity, scope or effect of the arbitration agreement itself, the courts will have to determine the dispute. This is typically the case where a party oppose the recognition or enforcement of an award under the New York Convention but can also occur where a

court is considering applications for interim injunctions pertaining to the arbitration. In reaching a decision, the courts will necessarily have to determine what law governs the arbitration agreement. If the arbitration agreement itself, i.e. the arbitration clause, includes an express choice of law for the arbitration agreement, determining the governing law is straight forward. However, many arbitration clauses do not. The question then becomes how to determine the governing law without an express governing law provision.

The possible determinative elements

There are primarily two elements which are natural to consider when considering the applicable governing law; (i) the chosen seat of arbitration and (ii) the law chosen for the main agreement (expressly or by implication). The discussion in the courts over the past two years primarily revolved around which of these two elements are determinative (when they are in conflict).

Enka v Chubb – UK Supreme Court (2020)

The issue was first considered by the UK Supreme Court in Enka v Chubb. In that case, neither the arbitration agreement nor the main agreement included an express choice of law provision.

The Supreme Court (unanimously) stated that as a main rule the system of law chosen for the main agreement will usually apply where the parties have not made a specific choice of law in the arbitration agreement itself. The Court split (3-2) in terms of whether the main agreement included an implicit choice of Russian law (the majority finding that it did not). The majority further held that if no choice of law has been stated in the arbitration agreement or in the main contract (expressly or implicitly), the system of law most closely connected to the arbitration agreement will apply.

The majority continued to find that in considering which system of law the arbitration agreement is most closely connected to, the law of the seat of arbitration will, as a default rule, apply. In Enka the chosen seat being in England. Thus, the Supreme Court applied English law.

Kabab-Ji SAL v Kout Food Group –UK Supreme Court (2021)

A year after Enka v Chubb, the UK Supreme Court again considered the issue in Kabab-Ji SAL v Kout Food Group. In Kabab-Ji the main agreement provided for an English

choice of law, but disputes to be referred to arbitration under the ICC Rules, seated in Paris, France.

The arbitral tribunal, sitting in Paris, handed down an award in favour of Kabab-Ji SAL. In the award, the arbitral tribunal also concluded that (i) French law was applicable to the arbitration agreement as the arbitration was seated in France and (ii) under French law Kout Food Group was encompassed by the arbitration agreement.

Following the award, Kabab-Ji SAL sought enforcement in England. Kout Food Group resisted such enforcement, arguing that the arbitral tribunal had erred in applying French law to the arbitration agreement. Rather English law applied, pursuant to which Kout Food Group would not be encompassed by the arbitration agreement.

The UK Supreme Court reaffirmed its finding in Enka that a choice of law for the main agreement will apply as it provides a sufficient indication of the law to which the parties subjected the arbitration agreement. As such, and in that case, the French seat of the arbitration was of no consequence in determining the governing law for the arbitration agreement. Accordingly, the French award could not be enforced against Kout Food Group, cf. the New York Convention Article V(1)(a) whereby enforcement can be refused where “the arbitration agreement is not valid under the law to which the parties have subjected it”

Kabab-Ji SAL v Kout Food Group –French Court of Cassation (2022)

Independent of the enforcement proceedings in England, Kout Food Group applied for the award to be set aside by the French courts arguing inter alia that the law governing the arbitration agreement was English law and had the arbitration agreement been interpreted in accordance with English law, Kout Food Group would not be encompassed by the arbitration agreement.

The Court of Cassation adopted a contrary approach to that of the UK Supreme Court. It found that the position under French law in determining the governing law is well established and dictates that it is the law of the seat of arbitration that is determinative (where the seat is expressly provided for). As such, and under French law, Kout Food Group was encompassed by the arbitration agreement and the award upheld.

The Norwegian law perspective

The decisions in Kabab-Ji SAL v Kout Food Group show a clear divergence in approach between two major arbitration jurisdictions.

There is currently no Norwegian case law that is directly parallel to the above decisions. In Nordic commercial contracts it is not unusual to use a clause titled “Choice of law and arbitration” which contains separate sub-provisions for both choice of law and arbitration. Whilst this is not an optimal provision for regulating the choice of law for the arbitration agreement, there is a Norwegian Court of Appeal case

(LB-2003-20830) suggesting that the choice of law provision may also govern the arbitration agreement where the choice of law and arbitration clause is contained under the same heading. However, in that particular case the Norwegian Court of Appeal also supported its decision in the seat of arbitration matching the choice of law. As such, no clear guidance may be gleaned from that decision, although we would tend towards reading that decision as supporting an approach like that taken by the UK Supreme Court in Enka.

Since the ruling of the Norwegian Supreme Court in I.M. Skaugen (HR-2017-1932) it is well settled Norwegian law that Norwegian courts must look to foreign sources and international best practice when considering matters of international arbitration. Given the clear divergence in foreign sources there is no clear guidance to be drawn from them and it is uncertain how Norwegian courts will conclude.

As such, the only hard and fast rule on the governing law of arbitration agreements remains; an express choice of law provision in the arbitration agreement will be determinative and ensure certainty and predictability. This is why we consistently recommend including an express choice of law provision in arbitration clauses.

Linnea Cecilia Gule Senior Associate

E: ligul@bahr.no

M: +47 412 99 517

Linnea focuses on post-M&A matters, corporate and shareholders’ disputes and general contractual disputes, often within the marine sector. Recent cases include acting in a post-M&A arbitration (purchase price adjustment) for the buyer of a multi-national offshore supply company and representing a shipowner in a complex litigation concerning a long-term LNG (bunkers) supply agreement. Linnea also has considerable experience assisting clients in mediation, in and out of court.

Mads Schjølberg Managing Associate

E: masch@bahr.no

M: +47 958 82 085

Mads has a wide-ranging practice in commercial arbitration and litigation focusing in particular on marine insurance as well as shipping and offshore related matters. Mads has acted as counsel in numerous international arbitral proceedings under the Norwegian Arbitration Act, both ad hoc and under institutional rulesets (i.a. ICC, OCC and NOMA).

Atle Skaldebø-Rød Head of Dispute Resolution

E: atska@bahr.no

M: +47 922 87 727

Atle is admitted to the Supreme Court and has extensive experience across a broad range of complex commercial disputes. His practice includes post-M&A, directors’ liability, shareholder disputes, company law, financial reporting and marine insurance as well as special forms of judicial proceedings, such as enforcement proceedings, preliminary injunctions and securing of evidence.