Recovery of funding costs in English seated international arbitration 1252022 10156 PM
25 January 2022
25 January 2022
The English High Court has upheld an arbitral tribunal's costs award that included the costs of third party funding, for a second time. However, unlike the 2016 case where the funding had been provided by a commercial funder, in Tenke the funding was provided by a related entity. The decision highlights the broad discretion tribunals have with regard to ordering recovery of funding costs and that, until the courts are able to consider the matter under s69 of the Arbitration Act (which relates to appeals on points of law), they are unlikely to interfere with the exercise of that discretion.
At its simplest, third party funding is where someone unconnected to a dispute provides funds to a party to that dispute in exchange for an agreed return (i.e. the costs of funding) (for further information on the details of third party funding, see our quick guide third party funding in international arbitration). Third party funding is frequently used in international arbitration.
In international arbitration, the ability of a successful party to recover costs incurred in the arbitration (including the costs of funding) is dependent on the definition of recoverable costs in applicable national legislation and/or procedural rules.
In English litigation the cost of third party funding is not recoverable. However, in English seated arbitration, tribunals have a broader discretion as to what to include in their costs award. The English Arbitration Act 1996 (the Act) provides that, subject to there being no agreement between the parties, a tribunal has the power to award recoverable costs "on such basis as it thinks fit" (s63). The Act does not define recoverable costs but does include in its definition of costs "the legal or other costs of the parties" and states that any reference to costs "includes the costs of or incidental to any proceedings" (s59). The ICC Rules are similar and the definition of costs of the arbitration includes "the reasonable legal and other costs incurred by the parties for the arbitration" (Article 38(1)).
The first known English case where an arbitral tribunal included funding costs in its costs award came to light in 2016 in Essar Oilfields Services Ltd v Norscot Rig Management PVT Ltd (Norscot). The sole arbitrator's decision to order recovery of the funding costs was unsuccessfully challenged under s68 (challenges to awards on the basis of serious irregularity), the Court finding that the high bar of establishing a serious irregularity had not been met; an erroneous construction of the Act (as argued) does not amount to an excess of power – one of the grounds for serious irregularity. In addition, the Court held (obiter) that "other costs" extended in principle to the costs of obtaining third party funding.
TFM operates a mine in the DRC. To operate the mine, TFM agreed a number of contracts with KCS, including construction contracts. Those contracts were governed by English law and provided for English seated ICC arbitration.
KCS commenced arbitration proceeding against TFM in January 2020. The merits hearing occurred in March 2021. As part of its submissions on costs, KCS provided witness evidence that disclosed that KCS had obtained a shareholder loan (which it described as a litigation funding agreement) from Logos Agvet Limited, a company controlled by the shareholders of KCS. It sought recovery of the costs of that funding.
KCS was awarded all sums claimed. The costs award included the costs of the funding ($1.7m – comprising a contingent and fixed fee payable to the funder).
TFM challenged the Final Award for 'serious irregularity' under s68 of the Act (the right to challenge under s69 having been excluded by agreement). This included a challenge to the award on costs.
As to costs, TFM argued that the Tribunal had committed serious irregularity on two bases.
First, TFM submitted that the refusal to allow cross examination of KCS's cost witnesses and only allow limited disclosure relating to the funding agreement was unfair. The Court rejected that argument; TFM had not shown that the Tribunal's procedural directions in relation to costs were so unreasonable that no arbitrator could have reached them in the circumstances.
TFM's second challenge was on the basis that, in making its costs award, the Tribunal had exceeded its powers under the Act. TFM argued that the Act only provides the power to award the costs of the arbitration, not costs that relate to the arbitration (s59 and s61). Third party funding costs were not costs of the arbitration given that:
(a) when the Act was passed, Parliament could not have intended "costs of arbitration" to include the costs of third party funding; and
(b) the costs of third party funding are not a cost of arbitration but are costs payable to a funder.
Further, TFM argued that as the costs of third party funding are not recoverable in litigation, they ought not to be recoverable in arbitration.
Finally, TFM addressed the precedent set in Norscot. That decision was incorrect – "other costs" did not include the costs of funding. In addition, TFM argued that its case was one in which funding should not be recoverable, irrespective of the Norscot decision, as the funding was not provided by a commercial funder, but was provided by a related company. It was in effect a shareholder loan and if the Final Award was to stand it would encourage claimants to take out shareholder loans to fund arbitrations, and enable shareholders to recover further fees.
The Court, as in Norscot, concluded that if the Tribunal had made an error, it was an error of law. As such, the Tribunal had not exceeded its powers under the Act because, following Lesotho Highlands v Impreglio SpA, an "erroneous exercise of an available power cannot by itself amount to an excess of power". Put another way, the Tribunal had not exercised a power which was not available to it; at worst it had wrongly exercised a power which was available to it.
While the Court did not comment on whether there had been an error in law, it did comment that s68 of the Act was not the correct grounds for challenge. If there was an error of law then the remedy lay under s69 of the Act. This remedy had been excluded by agreement between the parties (as the ICC Rules include this exclusion) and a party should not be able to get round that agreed exclusion by characterising an error of law as an excess of power under s68.
This decision, and the restrictive ambit of s68 of the Act, confirms that the issue of whether the costs of funding are recoverable is a matter for the tribunal's broad discretion and that the courts will be reluctant to interfere in any award made. That is likely to remain the case until a challenge is able to be made under s69 of the Act. – and the courts can comment on whether awarding funding costs constitutes an error of law. However, given that most institutional rules automatically exclude the right to challenge on the basis of error of law, and many arbitrations involving funding apply institutional rules, that seems unlikely unless parties start disapplying that provision of the Rules.
The decision may encourage more claimants and tribunals to include funding costs in their costs submissions and awards. However, as was made clear by the extracts of the Award included in the decision, a funded party will need to be able to persuade a tribunal that both the principle of having recourse to the type of funding and the level of funding costs are reasonable in the circumstances.
In deciding that KCS' recourse to a shareholder loan was not inherently unreasonable, the tribunal took into account the fact that the funding agreement was not designed to enrich KCS and also considered the benefits to KCS of having funding provided by a related entity (e.g. bypassing the usual steps necessary to secure third party funding). On the evidence, the tribunal considered it doubtful that a commercial loan or funding would have been available. So, while the decision does raise the prospect of an increase in shareholder or other related party funding, the reasonableness hurdle remains a safeguard against those who may seek to take advantage of it.
Authors: Tom Cummins and Ali Clift
Cases referred to:
For more detail on third party funding in international arbitration, see our quickguide.