Funding costs in arbitration: are they recoverable?

Summary

The English High Court has, once again, upheld the decision of a London-seated ICC arbitral tribunal to award a successful claimant its third party funding costs (Tenke Fungurume Mining SA v Katanga Contracting Services), in the context of a challenge to the Tribunal’s decision by the unsuccessful respondent under section 68 of the Arbitration Act 1996 (the Act) (for a “serious irregularity”).

Following the perhaps controversial decision in Essar Oilfields Services v Norscot Rig Management – which was at odds with the general position in the English courts that a successful claimant cannot recover its funding costs – the Court rejected the challenge, finding that the Tribunal’s award of funding costs in this case did not constitute an excess of power under s. 68(2)(b). Moreover, the Court said that, if the Tribunal had erred, that error was an error of law which could only be challenged under section 69 of the Act. However, as is common in international arbitrations, by agreeing to the ICC Rules the parties had excluded any right of appeal on a point of law.

The decision highlights that tribunals – even in London-seated arbitrations – may be willing to award funding costs and that the English courts will not interfere lightly with such an award. Whilst this is bad news for defendants facing a funded claim, the judgment will be welcome news to funders and law firms operating on a success fee basis.

Background and the tribunal’s award

KCS commenced two ICC arbitration claims, that were later consolidated, seeking to recover sums due from TFM under contracts for mining services carried out by KCS in the Democratic Republic of Congo. In August 2021, the Tribunal issued its final award, under which KCS was awarded all sums claimed and TFM’s counterclaims were dismissed.

Under the award, TFM was ordered to pay KCS’s legal and expert costs ($1.4m), as well as the costs it had incurred to fund its legal fees ($1.7m). Those funding costs comprised:

1. a fixed fee payable by KCS to the funder, representing the total funding sum ($1.3m), if KCS was successful in the arbitration;

2. a variable fee ($214,317); and

3. a success fee payable by KCS to its solicitors under a CFA.

As a matter of English law, the Tribunal held that it had the power to award KCS its Funding Costs as “legal and other costs” under s. 59(1) of the Act and Article 38(1) of the ICC Rules. The Tribunal referred to the Essar case in which that Tribunal found that “other costs” included the costs of funding. In reaching this decision, the Tribunal stated that the “principal issue that the Tribunal needs to decide in relation to the claimed funding costs is whether they are “reasonable” in two respects: as to the principle of the Claimant having recourse to this type of funding and as to the amount”. The Tribunal was satisfied as to both these questions in this case.

TFM’s s. 68 challenge

Like the respondent in Essar, TFM sought to challenge the Award on the basis that the Tribunal’s decision to award KCS its funding costs amounted to an excess of powers, amounting to a “serious irregularity”, under s. 68(2)(b) of the Act. TFM also brought various other challenges, but this summary focuses on the recoverability of the funding costs.

Decision

TFM’s challenge was rejected by the Court. In particular, the Court held that the Tribunal’s decision to award the funding costs did not exceed its available powers, agreeing with the Court’s decision in Essar that “at its highest this was an erroneous exercise of an available power and not susceptible to challenge under section 68”. In other words, given that the Act allows London-seated tribunals to award “other costs” as part of its costs award (which is wide enough to include the Funding Costs), the Tribunal could not be said to have acted in excess of its powers. The requirement of reasonableness served as an important check and balance on the recoverability of such costs.

Going further, the Court held that, as a result of this, if there was any error by the Tribunal, it was an error of law, ie as to the construction of the term “other costs” in the Act. However, an error of law could only be challenged under s. 69 and, by agreeing to the ICC Rules, the parties had excluded any right of appeal on a point of law. The Court noted in this regard that “it is not open to a party to circumvent [that agreement] by characterising an alleged error of law as an excess of power”.

Although TFM sought permission to appeal, the Court declined to grant TFM permission on the basis that it had no real prospect of success and any appellate consideration “would only fall to be considered in the context of a section 69 appeal”.

Takeaway points

The decision makes clear that a London-seated arbitral tribunal can in principle award funding costs to a successful claimant, provided those costs are considered reasonable. In Essar the court noted that the funded party’s impecuniosity was caused by the behaviour of its opponent. It is of note that here the Court held that there was no need for KCS’s financial difficulties to be exclusively caused by TCM. The fact that it needed funding to pursue the claims was enough to make incurring the funding costs reasonable.

Where a tribunal is persuaded to award funding costs, this case confirms that this will not constitute an excess of powers amounting to a serious irregularity under s. 68 of the Act. Moreover, s. 68 cannot be used as a vehicle to dress up an alleged error of law as an excess of power. This is likely to mean that parties will only be able to challenge such an award by a tribunal under s. 69 (error of law), but this right is typically excluded in the parties’ arbitration agreement.