In a decision dated 7 December 2021 in Tenke Fungurume Mining S.A. v Katanga Contracting Services S.A.S. [2021] EWHC 3301 (Comm) (“Tenke v. Katanga”), concerning a challenge under Section 68 of the 1996 Arbitration Act (the “Arbitration Act”) for serious irregularity, the English High Court upheld a 2021 London-seated, ICC arbitration Final Award, in which Tenke was ordered to pay, inter alia, Katanga’s third-party funding costs.
Factual Background
On 13 January 2020, Katanga commenced two ICC arbitrations against Tenke (which were later consolidated), claiming circa USD 13.6 million, under two contracts for works related to a mine operated by Tenke in the Democratic Republic of the Congo.
In the arbitration, Katanga revealed for the first time during the cost submissions stage that it had obtained a shareholder loan to fund the arbitration proceedings (you may also refer to our commentary on disclosing third-party funding agreements here). Despite Tenke’s request, the tribunal did not allow Tenke to cross-examine Katanga on the third-party funding agreement and only permitted document disclosure in relation to the loan.
On 26 August 2021, the ICC arbitral tribunal issued its final award (“Final Award”), awarding Katanga all sums claimed, including USD 1.7 million for its third-party funding costs advanced by way of a shareholder loan, plus compound interest at 9% already accrued to about USD 2 million (Tenke v. Katanga, para. 20). The tribunal also dismissed all of Tenke’s counterclaims.
Thereafter, Tenke challenged the validity of the Final Award before the English courts, under Section 68 of the Arbitration Act for serious irregularity, advancing four grounds, including that the tribunal had allegedly exceeded its power by awarding Katanga its third-party funding costs (Tenke v. Katanga, paras. 22-23 and 63(ii)).
What Did the ICC Arbitral Tribunal Decide in Its Final Award?
In its Final Award, the ICC tribunal held that it had the power to award Katanga its funding costs as “other costs” within the meaning of Section 59(1)(c) of the Arbitration Act and Article 38(1) of the ICC Rules, which define the costs of arbitration.
To explain, a tribunal’s power to award costs is primarily set out in Section 61(1) of the Arbitration Act, which provides, “The tribunal may make an award allocating the costs of the arbitration as between the parties, subject to any agreement of the parties.” Then, Section 59(1) of the Arbitration Act clarifies that references to “costs of the arbitration are to – (a) the arbitrators’ fees and expenses, (b) the fees and expenses of any arbitral institution concerned, and (c) the legal or other costs of the parties.”
The arbitral tribunal was convinced by Katanga’s argument that, as a matter of English Law, the third-party funding costs claimed are “other costs” under Section 59(1)(c) of the Arbitration Act. In support of its position, Katanga cited as authority a similar, previous, English case, i.e., Essar Oilfields Services v. Norscot Rig Management [2016] EWHC 2361 (Comm) (see our commentary on Essar here), in which the High Court had also refused a challenge under Section 68(2)(b) of the Arbitration Act for alleged excess of power, holding that the Essar tribunal’s decision to award third-party funding costs fell within the tribunal’s power and discretion, subject to the requirement of reasonableness (Tenke v. Katanga, para. 74(408)).
Similarly, the Tenke arbitral tribunal held that the “principal issue that the Tribunal needs to decide in relation to the claimed funding costs is whether they are ‘reasonable’ in two respects: as to the principle of [Katanga] having recourse to this type of funding and as to the amount” (Tenke v. Katanga, para. 68(411)). The Tenke tribunal further ruled in this respect that, while Katanga’s funder was a company controlled by a shareholder of Katanga, thereby the funding agreement may not have been “an arms’ length transaction”, the question remained “whether such a choice by [Katanga] was reasonable in the circumstances” (Tenke v. Katanga, para. 68(412)). The Tenke tribunal was convinced that this choice was reasonable, and so were the amounts of Katanga’s funding costs, and thereby decided to award all such costs to Katanga.
What Did the English High Court Decide?
As ruled previously in Essar v. Norscot, the High Court refused to find that the Final Award, whereby Katanga was awarded its third-party funding costs, amounted to an excess of the tribunal’s power and thereby dismissed Tenke’s Section 68 challenge to the Final Award for alleged excess of power. The validity of the ICC Final Award was, thus, upheld by the English court.
Tenke raised various arguments in support of its position that the costs of third-party funding do not fall within the meaning of “other costs” under Section 59(1)(c) of the Arbitration Act, and thereby the tribunal lacked the power to award them to Katanga, including the following (Tenke v. Katanga, para. 76):
- That when the Arbitration Act was passed, no one could have reasonably thought that (a) fees paid to a third-party funder and (b) costs relating to a loan taken to pay for legal costs would have been intended by Parliament to be either “costs of the arbitration” or “legal or other costs of the parties” under Section 59(1) of the Arbitration Act.
- That fees payable to litigation funders are not recoverable in litigation, and thereby there was no reason to think that Parliament intended any different for arbitrations.
- That not only the decision in Essar was wrong, and has been met with surprise and concern in the field of international arbitration, but also that the present case was much worse than Essar since the funding came from a related company owned by one of Katanga’s own shareholders, instead of a regulated third party funder.
- That if the Final Award were permitted to stand, this would encourage claimants to take out shareholder loans, so that shareholders can try to recover further “fees“.
The High Court was not convinced by Tenke’s arguments, however, and stressed that, even if the costs award was wrong as a matter of law (which was not the matter in dispute), it did not amount to an excess of powers for the purposes of Section 68(2)(b) of the Arbitration Act (Tenke v. Katanga, paras. 78 and 94). The English court further clarified, in this respect, that “[i]f there was such an error of law there is a remedy under section 69 [of the Arbitration Act (Appeal on point of law)]. However in the present case that remedy is excluded by agreement. Having reached such an agreement it is not open to a party to circumvent it by characterising an alleged error of law as an excess of power” (Tenke v. Katanga, para. 95).
What Are the Practical Implications of the Tenke v. Katanga Decision?
The practical implications and key takeaways of the High Court’s recent decision in Tenke v. Katanga are the following:
- Upholding Arbitral Tribunals’ Power to Award Third-Party Funding Costs: Tenke v. Katanga reaffirms that a London-seated arbitral tribunal is empowered to award to a party its reasonable third-party funding costs. The decision confirms that English courts would be reluctant to overturn arbitral awards that have allocated the costs of third-party funding to the successful party of an arbitration on the ground that the tribunal had exceeded its powers under Section 68 of the Arbitration Act. On the flip side, this also emphasizes the difficulty that resisting parties will face when seeking to challenge an award of costs of funding on the basis of an excess of power.
- Reaffirming the Decision in Essar v. Norscot: The decision follows and reaffirms the position taken in Essar v. Norscot [2016], where the High Court also refused to allow a Section 68 challenge to an ICC arbitration award which had allocated costs of third-party funding.
- Creating a Significant Advantage of International Arbitration Over English Commercial Litigation, Where Litigation Funding Comes at a Cost: By confirming the recoverability of third-party funding costs in international arbitration, Tenke v. Katanga creates a conspicuous incentive for parties to opt for international arbitration instead of traditional litigation, where litigation funding costs are generally not recoverable from the losing party (see, e.g., Rowe & Ors v Ingenious Media Holdings PLC & Ors [2021] EWCA Civ 29, para. 49, which provides that “costs or losses involved in funding litigation costs, on both sides, are not recoverable from the other party. Section 51 of the Senior Courts Act 1981 provides the jurisdiction for an award of costs. It applies to ‘costs of or incidental to’ the litigation. It has long been established that the costs of funding litigation are not within such a definition.”)
- Enhancing the Appeal of Third-Party Funding in London-Seated Arbitrations: The judgment may provide additional comfort to both funders and parties in need of funding that a London-seated arbitral tribunal has the power to award the significant costs associated with third-party funding to the successful party, and a resulting arbitral award would be unlikely to be overturned on that basis. Thus, such confirmation of a tribunal’s power may also facilitate the appeal of third-party funding to parties in London-seated arbitrations, as third-party funding is costly.
- Signaling the Acceptance of Third-Party Funding by Both Tribunals and English Courts: The High Court’s refusal to see an award for funding costs as an excess of the tribunal’s power, as well as the increasing readiness of tribunals, such as the ones in Tenke and Essar, to award third-party funding costs in the first place, is a sign of the growing acceptance of third-party funding agreements in arbitration, which is a positive development. Third-party funding can assist parties with meritorious claims to seek compensation via arbitration without having to divert capital from other operational and profit-generating functions of a business (please refer to our commentary on how to obtain third-party funding here).
Conclusion
In conclusion, the English High Court’s robust judgment in Tenke v. Katanga [2021] confirms what was previously held by the High Court in Essar v. Norscot [2016], i.e., that a London-seated arbitral tribunal has the power to render an award allocating third-party funding costs to a successful party. Such confirmation should provide comfort to parties in need of funding that they may be able to recover such costs in arbitration, whilst creating a significant advantage of international arbitration over traditional litigation where funding costs are, in principle, not recoverable from the other side.
Case Details
- Parties: Tenke Fungurume Mining S.A. v Katanga Contracting Services S.A.S.
- Court: English High Court (Commercial)
- Judge: Mrs. Justice Moulder DBE
Date of Judgment: 7 December 2021
