Key takeaways
Supreme Court clarifies nature of costs orders
Costs are procedural, not compensatory damages for loss
Implications for contractual indemnity clauses
Parties must review wording to avoid unintended exposure
Litigants should reassess risk in cost recovery
Strategic planning essential to manage financial outcomes
Supreme Court confirms costs order not a damages award intended to compensate loss
Process & Industrial Developments Limited -v- The Federal Republic of Nigeria [2025] UKSC 36
In a complex and much-publicised dispute arising out of successful challenges to arbitration awards by the Republic of Nigeria (Nigeria), the English courts were required to decide what was the appropriate currency for the costs order against the unsuccessful party. The latter had resisted a costs order in sterling because it alleged that Nigeria had converted Nigerian naira into sterling in order to fund the litigation and, therefore, costs should be awarded in naira.
Both the Commercial Court and the Court of Appeal concluded that costs should be awarded in sterling because Nigeria had been billed by its English lawyers, and settled the invoices, in sterling. That was the general rule and the Court was not required to launch an inquiry into how a litigant funded an action.
The Supreme Court has upheld these decisions. It confirmed that a costs order is not an indemnity. It is a discretionary remedy to determine by whom and to what extent the costs incurred in litigating in the courts of England and Wales are to be paid. An award of costs is not intended to address loss in the same way as an award of damages. The fact that Nigeria had expended large sums in funding the successful challenges to the awards did not change the nature of a costs award, which remained entirely discretionary.
The background facts
In 2010, Process & Industrial Developments Ltd (P&ID) entered into a 20-year gas supply and processing agreement with Nigeria. In 2013, a dispute arose, and P&ID commenced London arbitration proceedings against Nigeria.
In 2016 and 2017, P&ID obtained two awards in its favour, awarding it a total of about US$6.6 billion plus interest at 7% for damages for repudiatory breach of a contract for the construction of a gas processing facility in Nigeria (Arbitration Awards).
In 2018, P&ID applied to the Commercial Court to enforce the Arbitration Awards in England. Nigeria resisted the application and successfully challenged the Arbitration Awards under section 68 of the Arbitration Act 1996 on the grounds that they were obtained by fraud, and that the Arbitration Awards were and the way in which they were procured were contrary to public policy.
The trial took eight weeks in the Commercial Court and Nigeria incurred total unassessed costs of £44.127 million (excluding interest). Subsequently, P&ID was ordered to pay Nigeria’s legal costs. The Commercial Court heard arguments on the currency in which the costs order should be made.
Nigeria argued that the appropriate currency was sterling because it had been billed in and paid its legal expenses in sterling. P&ID submitted that it should be naira because Nigeria had funded its legal expenses by converting naira into sterling from its consolidated fund. Naira was, therefore, said to be the currency that most accurately reflected the loss suffered by Nigeria in funding the litigation.
The Commercial Court concluded that costs should be ordered in sterling. P&ID appealed. The Court of Appeal dismissed the appeal and upheld the Commercial Court decision. It decided that the Commercial Court was correct to conclude that as Nigeria had incurred its liability to its English solicitors in sterling, and had paid those bills in sterling, the Commercial Court had been right to make a costs order in sterling.
P&ID appealed to the Supreme Court. It maintained that a costs order in sterling would give Nigeria a substantial windfall because the value of the naira had fallen significantly against other currencies, including sterling, over the last several years. As a result, the sterling amount Nigeria paid its solicitors was approximately 25 billion naira at the time but would now be the equivalent of 95 billion naira. At this stage, Nigeria contended that it had available to it funds in sterling when it had paid its lawyers’ bills.
The Supreme Court decision
The Supreme Court unanimously dismissed the appeal. It made the following key points.
An order for costs is not intended to provide compensation for loss in the same way as awards of damages in tort or for breach of contract. Unlike an award of damages, which is giving effect to a party’s legal right to reparation once a head of loss is established and calculated, an order for costs is a discretionary remedy. In simple terms, no one has an entitlement to an award of costs.
While, at a high level of generality, a costs order may be seen as a statutory indemnity because a party cannot recover more in costs than it has paid in fees and disbursements on the litigation, such an order is not intended to restore a party to the position it would have been in if it had not had to litigate to assert its rights. The indemnity principle simply prevents a party from recovering in a costs order sums for which it has not incurred a liability to its own lawyers.
In making a costs order, the Court must take into account all the relevant circumstances, including the conduct of the parties and the extent to which the party being awarded costs has been successful in the action. The Court should identify the reasonable amount which the party ordered to pay costs should pay, which is not the same as the sums which the receiving party has paid its lawyers and excludes the costs of funding the litigation, such as the cost of borrowing or the sums paid to commercial litigation funders.
In making an order for costs, therefore, the Court is not addressing loss. The fact that very large sums had been spent by Nigeria in challenging the Arbitration Awards did not alter the nature of a costs order.
The Supreme Court highlighted that, in awarding costs, a court will usually have no idea of the arrangements by which the litigant has obtained the funds to meet its liability to its solicitors and does not investigate those arrangements in order to ascertain that party’s loss.
The Court was not expected to inquire into how a party had funded the litigation because this might lead to collateral disputes of fact that could necessitate a separate trial. The Court should discourage disproportionate and satellite litigation. For example, in this case, Nigeria was now alleging that it had not converted naira into sterling in order to fund the action. There was, therefore, potentially a dispute of fact in this respect.
While there might be circumstances in which it was appropriate for the Court to make an order for costs otherwise than in sterling, legal certainty required that there be a general rule that an order for costs should be made in sterling or in the currency in which the solicitor had billed the client and in which the client had paid or there was a liability to pay. That reflected the liability that the party had incurred by litigating in the English Court.
As a postscript, the Supreme Court added that, contrary to P&ID’s submission, Nigeria does not enjoy a large windfall from this decision. The depreciation of its currency internationally had resulted in a substantial diminution of the domestic purchasing power of the naira in Nigeria since 2019 and especially since 2023.
Comment
This is an important decision generally with regard to costs orders. However, it is also a very significant one for parties to international arbitral awards who subsequently seek to challenge such awards in the English Court and who face considerable legal expense in doing so.
Currency fluctuations and currency exchange rates should be kept in mind where these may be relevant, even when the sums involved are not of such magnitude as in this case.
