English high court upholds ICC tribunal’s award of legal funding costs

Tribunals possess authority to allocate costs among the parties under the rules of most international arbitral institutions and under national arbitration legislation in many leading jurisdictions. A recent decision of the English High Court reaffirms that, for arbitrations sited in England and Wales, a tribunal’s decision to award a party the costs of legal funding cannot be set aside on the basis that the award constitutes an excess of power.

This judgment is the second High Court decision rejecting a challenge to a tribunal’s award of funding costs under section 68 of the English Arbitration Act. In Essar Oilfields Services v. Norscot Rig Management, [2016] EWHC 2361 (Comm), HHJ Waksman held that an arbitrator’s award of funding costs could not be characterized as an excess of power. HHJ Waksman went on to conclude that, as a matter of English law, arbitrators can award funding costs as part of their general discretion to allocate costs. As the court explained, “as a matter of language, context, and logic, … ‘other costs’ can include the costs of obtaining litigation funding.”

In a judgment issued on December 7, 2021, in Tenke Fungurume Mining S.A. v. Katanga Contracting Services S.A.S., [2021] EWHC 3301 (Comm), Moulder J maintained the reasoning in Essar that an arbitral tribunal’s award of funding costs is not subject to challenge under section 68 of the Arbitration Act.

Arbitral tribunal awards the claimant’s costs of legal funding

The underlying arbitration concerned claims by Katanga Contracting Services (KCS) against Tenke Fungurume Mining (TFM) for sums due under service contracts in relation to TFM’s mine in the Democratic Republic of the Congo. Each of the relevant contracts was governed by English law and provided for the resolution of disputes through arbitration under the International Chamber of Commerce (ICC) Rules and sited in London.

On August 26, 2021, an ICC tribunal issued a final award ordering TFM to pay all sums claimed by KCS and dismissing TFM’s counterclaims. The tribunal also ordered TFM to pay KCS’s legal and expert costs of US$1.4 million and additional costs of US$1.7 million with respect to funding that KCS had obtained from its shareholder for its legal fees in the arbitration.

In awarding KCS’s costs of funding, the tribunal observed that, under section 59(1) of the English Arbitration Act as well as Article 38(1) of the ICC Rules, arbitration costs are defined to include the parties’ legal and “other costs.” The tribunal relied on Essar to conclude that, as a matter of English law, funding costs constitute “other costs” of the parties under the meaning of the Arbitration Act. The tribunal then determined that KCS’s decision to obtain funding was reasonable in the circumstances of the case.

English court rejects challenge to award

TFM applied to the English courts to set aside the award under section 68 of the Arbitration Act, asserting various grounds of serious irregularity that allegedly affected the arbitral proceedings and award. TFM argued that the tribunal’s decision to award KCS’s funding costs amounted to an excess of power under the meaning of section 68(2)(b) of the Arbitration Act. Under well-settled English law, TFM was required to show that the tribunal exercised a power that it did not have, as opposed to the tribunal’s erroneous exercise of a power that it did have.

Applying this standard, Moulder J dismissed TFM’s argument that the tribunal exceeded its powers by awarding KCS’s funding costs, reiterating a principle articulated by HHJ Waksman in Essar: “[A]t its highest, this was an erroneous exercise of an available power and not susceptible to challenge under section 68.” Moulder J also summarily rejected a challenge to the tribunal’s award of funding costs on public policy grounds, noting the strong public policy in favor of enforcing arbitral awards.

Moulder J did not reach TFM’s argument that the funding costs awarded by the tribunal should not be considered “costs of the arbitration.” Such an alleged error of law could properly be raised only in an appeal under section 69 of the Arbitration Act, which the parties in this case had excluded by agreement.

Implications for the use of legal finance in English-sited arbitrations

The recent decision in Tenke Fungurume Mining and the 2016 decision in Essar are welcome developments for users of legal finance involved in commercial arbitrations sited in England and Wales. Both decisions suggest that tribunals applying the ICC Rules and English law are increasingly allowing parties to recover the costs of legal funding. Further, there are likely many other instances of tribunals awarding funding costs that remain confidential (e.g., because the relevant awards have not entered the public domain through court filings in connection with applications to enforce or challenge the awards).  

The Tenke Fungurume Mining and Essar decisions are also well reasoned in recognizing that, because arbitrators have the authority to award “other costs”, a tribunal’s decision to award funding costs cannot amount to an excess of power under the English Arbitration Act. The decisions thus indicate the emergence of a trend of English courts facilitating litigants’ ability to recover the costs of legal funding where an arbitrator has awarded such costs.

The English courts have a long history of allowing litigants to recover the costs they incur in bringing actions to vindicate their rights. It is uncontroversial that legal fees—even exorbitant ones—are recoverable from the losing party. So too expert fees and all manner of other litigation costs. So why not the cost of capital necessary for the matter to proceed?