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Recovery of arbitration funding costs: Tenke Fungurume Mining SA v Katanga Contracting Services SAS

Posted on 15 December 2021

In a notable recent judgment, Tenke Fungurume Mining SA v Katanga Contracting Services SAS, which will be of particular interest to parties looking to fund the costs of arbitration, the Commercial Court has built upon the controversial decision in Essar Oilfields Services v Norscot Rig Management in rejecting a challenge to an arbitration award on the basis that funding costs were awarded to the successful party. While some questions regarding such awards remain to be determined, the Court's refusal to see an award for funding costs as an erroneous exercise of the tribunal's power, as well as the tribunal's decision to make the award in the first place, is a sign of the growing acceptance of litigation funding structures in the context of arbitration.

Funding in arbitration

The Arbitration Act 1996 (AA) empowers the tribunal to make an award allocating costs between the parties on such basis as it thinks fit, subject to any agreement of the parties. "Costs" are defined as the arbitrators' fees and expenses; the fees and expenses of any arbitral institution concerned; and the legal or other costs of the parties. 

In Essar Oilfields Services v Norscot Rig Management (2016), a sole arbitrator held that a success fee payable by the successful party to a third party funder was an "other cost" for the purposes of this definition, and exercised his discretion to award costs on that basis.  A challenge to the award under section 68 AA on the grounds of serious irregularity failed, and the High Court agreed that as a matter of language, context and logic, "other costs" could include the costs of obtaining litigation funding.  The decision has been the subject of ongoing debate and commentary in the arbitration community, particularly given that success fees are not recoverable as costs in litigation.

Tenke Fungurume Mining v Katanga Contracting Services

Disputes arose between KCS and TFM relating to a mine in the Democratic Republic of the Congo, which were referred to ICC arbitration seated in London. During the costs submissions stage, the successful party, KCS, revealed that it had obtained a shareholder loan described as a "litigation funding agreement".  It sought to recover the costs of that arrangement, including a fixed fee payable in the event of a successful outcome and compound interest based on its alleged actual costs of borrowing.

Following the decision in Essar, the tribunal accepted that as a matter of English law the funding costs claimed were "other costs" of the parties for the purpose of the arbitration, and granted KCS more than $1m in costs in relation to the funding agreement. However, TFM challenged the award under Section 68 AA, contending in part that in making the costs award the tribunal had exceeded its powers, amounting to a serious irregularity that caused it substantial injustice. 

Decision

TFM made various arguments in support of its contention that the costs of funding do not fall within the definition of costs in the AA, including suggesting that when the AA was passed, no one could have though that fees paid to a litigation funder or costs relating to a loan taken to pay for legal costs would have been intended by Parliament to be "costs of the arbitration" or "legal or other costs of the parties". TFM noted that fees payable to litigation funders are not recoverable in litigation, and suggested that there was no reason to think that Parliament intended anything different for arbitration. Finally, it contended not only was the decision in Essar wrong, but that this case was much worse, since the funding came from a related company rather than a regulated third-party funder. 

However, the Commercial Court rejected the challenge on the basis that, even if the costs award was wrong as a matter of law, it did not amount to an excess of powers for the purposes of section 68 AA. The same issue had arisen in Essar, where Mr Justice Waksman held that characterising the arbitrator's decision to award costs of funding as an erroneous exercise of power, rather than as a legal error, would be wholly unrealistic and artificial. In Tenke Fungurume Mrs Justice Moulder agreed with this approach, and the finding that the decision was not susceptible to challenge under section 68. If the tribunal had erred, she observed that there was a remedy under section 69 AA, but in this case, that remedy had been excluded by agreement - it was not open to the parties to circumvent that agreement by characterising the alleged error of law as an excess of power.

Comment

The Commercial Court's robust decision in this case emphasises the difficulty that parties will face when seeking to challenge an award of the costs of funding on the basis of an excess of powers.  However, it is also an indication of the increased willingness of tribunals to make costs awards by reference to the costs of funding. While questions remain as to how a court will treat the arguments raised by TFM on an appeal on a point of law under section 69 AA, where parties have agreed to exclude that power, they should take comfort from this decision that, if a tribunal is willing to award funding costs, the English court is unlikely to intervene. An increasing readiness by tribunals to make orders in relation to funded costs may even lead to the ultimate development of similar principles in the context of litigation.

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