Recoverability of third party funding costs in arbitration: Essar v Norscot revisited

England and Wales

Five years ago the decision in Essar Oilfields Services Limited v Norscot Rig Management Pvt Ltd [2016] EWHC 2361 (Comm) caused a stir in arbitration circles. The Commercial Court declined to allow an Arbitration Act 1996 s.68 challenge against the decision of an ICC arbitration tribunal which had awarded to Norscot recovery of its third party funding cost as part of the costs award. On that occasion, the funding cost in question was the success fee paid to a third party fund, in return for having funded Norscot’s legal costs.

Funders and claimant firms saw this development as increasing the attraction of funding for arbitration, offering an opportunity to diminish the impact on claimants who might otherwise see their recoveries eroded or cancelled out by payments due to their funders. Those on the other side of the equation saw it as a concerning exposure to costs awards which could be several times the amount that they assumed their opponent to be incurring.

The latter is of particular impact in arbitration, where the respondent may be unaware of the extent, or even the existence, of any such funding arrangement until the substantive award is rendered and the issue of costs arises[1]. Some English lawyers have also found it troubling because of the divergence it creates between arbitration, where such funding costs can potentially be recovered under a costs award, and English litigation, where they cannot.

Since then, many have sought to dismiss Essar v Norscot as particular to its facts, in view of the tribunal’s finding that the financial situation of Norscot had been brought about by the conduct of Essar under the contract in question and that had in turn led to Norscot’s need to resort to third party funding. Meanwhile case law has developed no further and there can be no more than anecdotal estimates of the frequency with which arbitral tribunals have been willing to make such awards.

However the debate may now be revived following the decision in November in Tenke Fungurume Mining S.A. v Katanga Contracting Services S.A.S. [2021] EWHC 3301 (Comm) where the arguments in Essar v Norscot were re-run by the s.68 applicant, Tenke Fugurume Mining (“TFM”). The ICC arbitration tribunal had this time been faced with a different scenario, in the form of a third party funding loan provided to the arbitration claimant, Katanga Contracting Services (“KCS”), by an affiliate company. TFM sought to attack that as an attempt to make an unwarranted return for KCS’s shareholder under the guise of costs recovery. The tribunal did not regard the fact that it was an intra-group loan as preventing recovery of the third party funding fees, the important question instead being whether it had been reasonable under the circumstances for KCS to resort to that loan as its means of funding.

The issue of law on the s.68 challenge was whether that decision on the part of the tribunal could properly be characterised as exceeding the tribunal’s powers, thereby providing a ground for challenge under s. 68(2)(b). The argument from TFM ran that “other costs” as used in Arbitration Act 1996 s.59(1)(c) cannot have been intended to include third party funding costs, which did not exist as a concept in England at the time of the Act. In turn, TFM said, by treating the funding costs as such “other costs” the tribunal had exceeded its power to award costs.

The Commercial Court however ruled that even if there was an erroneous exercise of power by an arbitration tribunal (as to which the Court made no comment either way), that could not be characterised as the tribunal exceeding its powers. In doing so, the Court repeated the reasoning in Essar v Norscot, and underlying that, applied the approach of the House of Lords in Lesotho Highlands Development Authority v Impregilo SpA [2005] UKHL 43.

The Court also noted that even if TFM was correct in its submission about the ambit of “other costs” under s.59(1)(c), that could in theory constitute an error of law for the purposes of Arbitration Act s.69[2]. As to the latter, in this case there could be no appeal because of such rights of appeal being excluded under the ICC Rules. Strictly the last question of law therefore remains open for argument on another occasion, though it will not arise either from an ICC arbitration or an LCIA arbitration (the LCIA Rules similarly excluding such rights of appeal).

The new case leaves practitioners then in much the same place as to whether arbitration tribunals have power under the Arbitration Act 1996 or similar legislation to award third party funding costs as costs of the arbitration. It is apparent however from the new case that Essar v Norscot cannot entirely be dismissed as specific to its facts and arbitral tribunals may be willing in wider circumstances to award such costs. Further, the English Court is unlikely to intervene, unless at some point a s.69 appeal arises from an ad hoc arbitration where the appeal right is not excluded.

[1] Increasingly arbitration rules are imposing disclosure requirements which may dampen this effect but provisions such as Article 11(7) in the ICC Arbitration Rules 2021 are directed at disclosure of the identity of a funder, in order to avoid conflicts of interest for arbitrators, rather than disclosure of the terms of the funding. Opposite parties may therefore still learn little in advance of the extent of their exposure to adverse costs.

[2] This point was considered by the Court in Essar v Norscot where the judge concluded that the costs did not fall outside s.59(1)(c).