Court rejects challenge over third party arbitration funding costs

The High Court in London ruled that Tenke Fungurume Mining (Tenke) had failed to show that an ICC tribunal had made a procedural error or acted with excess power when it ordered it to pay $1.7 million in costs relating to the litigation funding agreement that Katanga Contracting Services (KCS) had put in place.

KCS was experiencing financial difficulty at the time of the dispute and turned to a related entity with which it shared a common shareholder to help it fund the cost of the arbitral proceedings. Those arrangements only came to Tenke’s attention when KCS made a costs submission on the final day of the hearing. At that stage Tenke said the arrangement raised questions about KCS’ financial position and it claimed, among other things, that the funding agreement represented an attempt by KCS to “confer a windfall benefit on a related party”.

While the arbitral tribunal made a disclosure order to enable Tenke to examine KCS’s financial position in more detail, the alternative funding options KCS had available, and the terms and negotiation of the funding agreement itself, it rejected Tenke’s request to allow it cross-examine witnesses that had provided statements to the tribunal in relation to the funding arrangements. Tenke argued this was a procedural error the tribunal had made and that it amounted to a “serious irregularity” that had caused it, or would cause it, substantial injustice. However, the High Court rejected that grounds of appeal.

Mrs Justice Moulder DBE said: “The issue for the tribunal was whether the recourse to this kind of funding was reasonable in the circumstances, not whether KCS could have obtained funding from other sources. The tribunal was entitled to reach the conclusion that cross examination was not necessary having regard to the stage of the proceedings and the disclosure. [Tenke] has not shown that the refusal to allow cross examination was a decision which no arbitrator could reasonably have reached in the circumstances of the case.”

Tenke raised a second ground of appeal in relation to the tribunal’s third-party funding costs award before the High Court. It claimed the tribunal had gone beyond the powers it has under the Arbitration Act to award costs of arbitration when it ordered it to pay the costs of KCS’ third-party funding arrangements. The court, though, dismissed that argument, finding that Tenke had failed to show that the decision amounted to “an excess of powers” under the Act.

Third party funding is becoming increasingly popular with businesses, and an increasing number of funders are entering the market. A funder will fund the cost of the claimant’s claim, such as solicitor fees and those of legal counsel, on the understanding that if the claimant wins their case the funder will have the costs it has advanced returned as well as a fee – the precise rate of which will commonly depend on which funder is used and how long the money is advanced for before being paid back, for example. In most situations, third party funding arrangements will involve a funder that has no connection with the claimant, though this was not the case with KCS.

At the heart of the court’s reasoning on the excess powers point was its consideration of case law in England and Wales which confirms parties’ right to claim the fee associated with third party funding arrangements in the context of arbitration. There is no equivalent right in respect of claiming the fee attached to third party funding arrangements in litigation.

Michael Fenn, a specialist in commercial litigation at Pinsent Masons, said: “The issue of whether the fees paid by a claimant to a third party funder could be recovered as part of the ‘legal or other costs of the parties’ in an arbitration was first considered in 2016, where in the case of Essar Oilfields v Norscot it was held that these fees were recoverable. It is interesting to consider the difference in approach of an arbitration, to the approach taken before the courts in litigation where these costs are not recoverable, which demonstrates a potential advantage of arbitration over litigation when the claimant is funded by a third party.”

Dispute resolution expert Chris Dryland, also of Pinsent Masons, said: “One of the issues the court was asked to consider was whether the funding agreement entered into was to confer a ‘windfall benefit’ on a party related to the claimant, which led to the issue of whether the third party funding was reasonable. The decision gives useful guidance on how the court will approach this question, in that all it needs to consider is whether recourse to third party funding was reasonable in the circumstances, and not whether other sources of funding were available.”