Can a Prevailing Party in Arbitration Recover its Litigation Funding Costs?

In addition to providing finance for commercial litigation cases in the U.S. and Canada, Lake Whillans routinely funds claimants in arbitrations. In recent years there has been increasing attention to litigation funding arrangements in arbitrations, and a number of arbitral institutions have inserted rules to address the practice, both to increase transparency and to promote fairness to both sides.  One emerging question in the field, where cost-shifting to the losing party is a typical part of awards, is whether tribunals will award a prevailing claimant the value of its litigation funding costs, in addition to damages and other legal costs. The confidential nature of most commercial arbitral awards makes it difficult to know how often this occurs (or has even been sought), but tribunals have permitted claimants to recover funding costs in some instances. And there is growing precedent to indicate that where tribunals award funding costs, courts will not second-guess the decision — at least for arbitrations sited in England and Wales.

English courts will defer to arbitral tribunals on funding costs

The first case on this issue in English courts was brought in 2016 in Essar Oilfields Services v. Norscot Rig Management, [2016] EWHC 2361 (Comm). Essar challenged an award from an ICC arbitration in the High Court.  The award directed Essar to pay not only Norscot’s damages and attorneys’ fees, but also Norscot’s costs of litigation financing.  Typically, funders are entitled to an amount in excess of the capital provided – recoverable only if the claimant succeeds.   (A full explanation of litigation funding pricing is here).

The arbitrator grounded its decision to award funding costs both on the egregiousness of Essar’s liable conduct and on the tribunal’s finding that Essar engineered a situation in which Norscot was forced to seek litigation financing to pursue its claim.  The arbitrator found that, “Norscot had no alternative, but was forced to enter into litigation funding.” The High Court refused to set aside the award of these costs, reasoning that “[a]s a matter of justice, it would seem very odd and certainly unfortunate if the arbitrator was not entitled under s59(1)(c) to include the costs of obtaining third party funding as part of ‘other costs’ where they were so directly and immediately caused by the losing party.”

The governing legislation in the UK, the Arbitration Act 1996, provides that an arbitrator can award “costs,” defined to include the “legal or other costs of the parties” (Section 59(c)(1)). The High Court agreed with Norscot that the “other costs” language was broad enough to permit the recovery of third party funding costs. The same language appears in the ICC rules, and the Court supported its decision by citing the 2015 ICC Commission Report “Decisions on Costs in International Arbitration,” which advised that a tribunal could discretionarily award the “reasonable” costs of a third-party funder to a prevailing party.

In a December 2021 judgment, the High Court applied the Essar precedent to reach a similar conclusion, holding that an arbitral tribunal’s award of funding costs cannot be challenged under section 68 of the Arbitration Act. Tenke Fungurume Mining S.A. v. Katanga Contracting Services S.A.S., [2021] EWHC 3301 (Comm). In a dispute involving service contracts pertaining to a mine operated by Tenke Fungurume in the Democratic Republic of the Congo, Katanga prevailed in ICC arbitration. Citing Essar, the arbitral tribunal concluded that funding costs constitute “other costs” of the parties under the meaning of the Arbitration Act and found that Katanga’s decision to obtain funding was reasonable. It therefore awarded funding costs to Katanga.

Tenke Fungurume sought to have the award set aside, arguing that the tribunal had exceeded its powers under section 68(2)(b) of the Arbitration Act. The High Court disagreed, noting that the question was not whether the tribunal’s decision was correct, but whether a decision to award costs was a power available to the tribunal. The High Court held: “I decline to depart from the finding . . . in Essar on the ambit of section 68; in my view [the Essar judgment] was correct to conclude that at its highest this was an erroneous exercise of an available power.”

Implications for other jurisdictions

As a funder, Lake Whillans often sees companies with impaired cash flows and a stunted ability to raise traditional capital because of the events surrounding a lawsuit. In that sense, the costs of a funder might be viewed as a type of consequential damages not unlike other types of indirect damages that must be compensated in order for a party to be made entirely whole. These High Court decisions may embolden arbitrators to more frequently award funding costs in the right circumstances.

Admittedly, awarding funding costs may be an easier sell under English law than in other jurisdictions. English courts award legal costs to prevailing parties as a matter of course, so it is perhaps a logical extension to  include funding costs. However, the potential to award such costs is not a unique feature of English law. For example, in a Practice Note issued in March 2017, the Singapore International Arbitration Centre stated: “The Tribunal may take into account the involvement of an External Funder in ordering in its award that all or a part of the legal or other costs of a Disputant Party be paid by another Disputant Party.”

As third party funding becomes an increasingly common feature of arbitrations worldwide, it would not be surprising to see more jurisdictions embrace the view that costs of litigation funding are properly recoverable.

In our next article, we’ll discuss whether this trend could take hold in U.S. litigation in situations where the prevailing party is entitled to its fees and costs pursuant to agreement or other circumstances.