Court finds £1.5m arbitration bill is not 'ordinary' business expenditure

Turkish mining company Koza Limited had provided a court undertaking to "not dispose of, deal with or diminish the value of any funds belonging to it or held to its order other than in the ordinary and proper course of business". It applied to the High Court for a declaration that various types of expenditure, including funding an International Centre for Settlement of Investment Disputes (ICSID) arbitration, fell within the terms of the undertaking.

Ruling last month the court held that Koza could spend money on public relations advisers and directors' remuneration, but could not fund a proposed arbitration. The anticipated costs of the arbitration amounted to £1.5 million, with the case brought by Koza's parent company.

Koza's lawyers argued that the company's undertaking was the same as that of a freezing injunction, to prevent dissipation of its assets. Although this was not a freezing injunction case, the court considered authorities concerning the ambit and terms of freezing orders in making its decision.

The judge set out a series of guidelines to help parties in similar cases decide what would be ordinary expenditure, including whether an objective and knowledgeable observer would view such expenditure as being made in the ordinary and proper course of a company's business. The court said that the fact that the proposed expenditure was unprecedented or exceptional would not of itself mean it was not made in the ordinary and proper course of the company's business.

However proposed expenditure that would give rise to a breach of fiduciary duty by the company's directors could support a conclusion that the expenditure would not be in the ordinary and proper course of the company's business.

Litigation expert Wee Jian Ang of Pinsent Masons MPillay, the Singapore joint law venture between MPillay and Pinsent Masons, the law firm behind Out-Law.com, said the guidelines would apply most relevantly to companies which did not fund disputes as their primary business model.

However Ang said that third party litigation funders could feasibly argue that arbitration funding costs would fulfil the guidelines set out by the court in this case.

The court in this case also considered the merits of a jurisdictional challenge. Ang said it could be argued that the jurisdiction challenge should properly be heard before the relevant arbitration tribunal.

“This is because arbitration funding may fall within the 'ordinary and proper course of business', whether the company wins or loses the dispute at the jurisdictional stage,” Ang said. “In fact, by extension of the Court’s reasoning, there is nothing to stop it from considering the merits of the arbitration, when deciding whether arbitration funding falls within the phrase. That does not appear appropriate."

Ang said the ultimate success of the arbitration on jurisdiction or merits should not be a factor when considering if arbitration funding constituted the ordinary course of business.

“This would be particularly relevant for a third party funder, who would have on its own initiative analysed the prospects of success, and accounted for such risks in its business model,” Ang said.

“That said, one can see why the court considered the jurisdictional issue. Arguably, if it was plain and obvious that the claim was destined to fail at the jurisdictional stage, it would be inconceivable that funding such a dispute would constitute the 'ordinary and proper course of business'. If so, perhaps the court should have explained that it had considered the jurisdictional issue on a prima facie basis, or adopted a similar threshold to that of striking out,” Ang said.