REUTERS | Aude Guerrucci

Can an arbitral award be challenged on the grounds of a third-party litigation funding costs award?

The recent English High Court decision in Tenke Fungurume Mining S.A. v Katanga Contracting Services SAS considered whether an arbitral award that awarded costs for obtaining litigation funding could be challenged on the grounds of serious irregularity under section 68 of the Arbitration Act 1996 (AA 1996).

The dispute concerned a mine in the Democratic Republic of Congo operated by Tenke Fungurume Mining SA (TFM) and in connection with a contract TFM had entered into with Katanga Contracting Services SAS (KCS). KCS commenced ICC arbitration proceedings in London against TFM. The tribunal found in favour of KCS, awarding KCS all the sums claimed and its costs. The costs award included USD1.7 million for litigation funding that was advanced by way of a shareholder loan.

The challenge

TFM challenged the award under section 68 of the AA 1996 on a number of grounds and, specifically, in relation to the costs award for litigation funding, alleging that the tribunal had exceeded its power by making such an award.

TFM contended that litigation funding did not come within the definition of the “costs of the arbitration” in section 61 of the AA 1996. TFM advanced a number of arguments as to why the costs of the arbitration do not include litigation funding. These included the argument that there was no reason to think that Parliament intended that a fee payable to a litigation funder should be recoverable in arbitration (when it is not in litigation), and that costs that relate to an arbitration are not within the tribunal’s power to award costs.

TFM argued that not only was the High Court’s decision in Essar Oilfields Services v Norscot Rig Management wrong and met with “surprise and concern in the field of international arbitration”, but this case was “much worse” since the funding came from a related company owned by a KCS shareholder. TFM concluded that if the award was permitted to stand, it would encourage claimants to take out shareholder loans, enabling shareholders to potentially recover further “fees”, safe in the knowledge that they are beyond the reach of the arbitral tribunal and the courts if they fund arbitrations which fail, unlike third-party funders in litigation.

Court’s view

Mrs Justice Moulder declined to depart from the court’s decision in Essar, that, at its highest, this was an erroneous exercise of an available power, rather than an excess of power, and therefore it was not susceptible to challenge under section 68 of the AA 1996.  She further noted that TFM’s argument that the tribunal’s decision to purportedly award costs, which are not “costs of the arbitration”, was in fact a challenge on the ground that there was an error of law under section 69 of the AA 1996. However, since the parties had excluded the right to challenge an award on the grounds of an error of law, it was not now open to TFM to circumvent this agreement by characterising an alleged error of law as an excess of power.

Comment

On the question as to whether the tribunal has the power to include in its costs award the costs of obtaining third-party litigation costs, in Essar, HHJ Waksman unhesitatingly concluded that the arbitrator’s interpretation of “other costs” in that case was correct and extended, in principle, to the costs of obtaining third-party litigation funding.

Mrs Justice Moulder did not expressly state whether she considered the tribunal’s interpretation of “other costs” as including the costs of third-party litigation funding to be correct. While she was unequivocal that such an award was not susceptible to challenge under section 68, she did seemingly leave open the door for a section 69 challenge to such an award. Given, however, that most institutional arbitration rules exclude the power to challenge an award on the grounds of an error of law, it might be some time before such a case comes before the courts.

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