Evaluating the Court’s Approach in Tenke Fungurume Mining SA v. Katanga Contracting Services SAS [2021] EWHC 3301 (Comm).

THE AUTHORS:
Joseph Siyaidon, Team Lead at Stren & Blan Partners
Stanley Umezuruike, Associate at Stren & Blan Partners
Ebube Okorji, Associate at Stren & Blan Partners

Introduction

Third-Party Funding (“TPF”) has gained significant traction in international arbitration, providing a financial mechanism that allows parties to transform their claims that would have been a huge financial burden to pursue into a financial asset. In principle, TPF is an arrangement where an independent, commercial funder (Individual or Legal Person), without prior connection to a dispute between the parties, provides a party with full or partial funding (i.e. of legal fees and expenses) for arbitration proceedings in exchange for a portion or the full amount recovered by that party after the determination of the arbitration dispute. TPF is increasingly common in high-stakes and complex disputes where costs can be substantial. The costs for third-party funding are often included in an arbitration award. In Nigeria, third-party funding is recognized under section 67 of the Arbitration and Mediation Act, 2023 (“the AMA”). This legislative acknowledgment represents a significant step in aligning Nigeria with other leading jurisdictions that have embraced third-party funding as a vital tool in promoting access to justice in international arbitration. The right of a party to get reimbursement of the cost incurred to obtain TPF in arbitration was emphasized in the case of KCS v. TFM, Final Award, 26 August 2021. This case highlights the importance of TPF agreements in arbitration and the legal issues that may arise about the prevailing party’s right to reimbursement of costs incurred to obtain TPF in the arbitration. In this case, KCS secured a shareholder loan, described as a “litigation funder agreement,” to finance its arbitration against TFM. TFM challenged various aspects of the tribunal’s final award, including the recovery of funding costs and procedural decisions. This article evaluates the Court’s approach to awarding TPF costs and highlights the import of the decision to Arbitration.

Facts of the Case

TFM v. KCS involved a dispute between two Companies over two contracts related to a mine in the Democratic Republic of the Congo (DRC). TFM had engaged KCS for services under a Tailing Services Agreement and a Scats Agreement. Both contracts contained arbitration clauses governed by English law, with the arbitration seated in London under ICC Rules. In January 2020, KCS initiated arbitration against TFM, seeking approximately USD 13.666 million. The proceedings were later consolidated. The COVID-19 pandemic significantly affected the arbitration, with TFM requesting adjournments due to travel restrictions and the illness of their leading counsel. However, the arbitral tribunal, composed of Mr. Charles Kaplan, Mr. Jeffrey Gruder QC, and Dr. Achille Ngwanza, denied these requests and proceeded with the hearing in March 2021. During the proceedings, KCS revealed it had secured a shareholder loan, described as a “litigation funder agreement,” to finance the arbitration from the funder – Logos Agvet Limited (“Logos” or “the Funder”). TFM sought to cross-examine witnesses on this, but the Tribunal denied the request and instead ordered disclosure of certain documents. In August 2021, the Tribunal ruled in favour of KCS, awarding them all claimed amounts, dismissing TFM’s counterclaims, and ordering TFM to pay KCS’s legal and expert costs of USD 1.4 million, along with USD 1.7 million for litigation funding fees, plus compound interest. TFM later challenged the award in Court as well as the awarded litigation fund.

Action at the English High Court Challenging the Final Award

Pursuant to section 68 of the Arbitration Act 1996, TFM challenged the final award of the Tribunal at the High Court of Justice of England and Wales on several grounds. One of the grounds of TFM’s challenge was that the Arbitral Tribunal was wrong to have awarded KCS the sum of USD 1.7 million as reimbursement of the costs KCS incurred to obtain litigation funding to pursue its claims in the arbitration. The arguments canvassed by the parties in respect of the ground and the KCS v. TFM, Judgment of the High Court of Justice of England and Wales [2021] EWHC 3301, 07 December 2021 on this ground is examined below.

Arguments on the issue of Litigation Funding

TFM challenged the award of costs of litigation funding on two basis, which are: the refusal of the Tribunal to cross-examine KCS’ witness on the loan funding agreement and that the Tribunal acted more than its powers to award costs under section 68(2)(b) of the Arbitration Act, 1996 (“the AA’”). The ground on the TPF litigation funding arguments basis will be examined summarily below:

On the first basis, TFM argued that the Tribunal’s refusal to allow cross-examination on the loan funding agreement was a serious irregularity and breached its duty under section 33 of the AA. They contended that cross-examination was necessary to understand the legitimacy of the funding agreement considering that the fund was given by a shareholder of KCS and the interest rate involved is high. They relied on the case of D. v. P., Judgment of the High Court of Justice of England and Wales [2019] EWHC 1277, 16 May 2019 in support of their argument. In response, KCS argued that TFM could make submissions as to the market rate and did not need to cross-examine the Witness of KCS for this purpose and that the financial position of KCS and whether it was “brought to its knees” by the transaction was irrelevant.
On the second basis of the cost award, TFM argued that the Tribunal exceeded its powers by awarding KCS funding costs obtained from its shareholder-owned company, Logos Agvet Limited. TFM also submitted that section 59 of the AA defines the “costs of the arbitration” as including the “legal or other costs of the parties”. TFM noted that the Tribunal relied on the case of Norscot v. Essar, Judgment of the High Court of Justice of England and Wales [2016] EWHC 2361, 15 September 2016,and held that litigation funding costs can constitute “other costs” recoverable under the AA provided they are reasonable and incurred in arbitration. TFM submitted that the proper interpretation of “other costs” did not extend to the cost of obtaining litigation funding and that the Tribunal had no power to award such costs. They argued that the decision in Norscot v. Essar case was wrong and criticized it as being contrary to the principles of recovering funding costs in arbitration. They also contended that the fees payable to litigation finders are not recoverable in litigation and that when the AA was passed in 1996, the Parliament did not intend for such costs to be recoverable particularly when the funding was from a related party. On the part of KCS, they argued that TFM is incorrectly dressing up an alleged error of law as an excess of powers, noting that an error of law does not equate to excesses of power. They contended that the Tribunal had the authority under Section 59(1)(c) of the AA to award legal costs, and any potential error in interpretation would fall under Section 69 of the AA. KCS cited the authority in the case of Willers v. Joyce (No 2)(See [2016] UKSC 44 and [2018] AC 843 at [9]) that Courts should generally follow decisions of a Court of co-ordinate jurisdiction unless a strong reason exists, which in this case TFM failed to provide, particularly about the Norscot v. Essar case, which remains undisputed. Additionally, KCS submitted that TFM waived its right to object and did not argue in the arbitration that Essar was wrongly decided neither did TFM object at the time that the Tribunal lacked power to award funding costs.

Decision of the Court

On the first basis challenging the Tribunal for not allowing cross-examination of KCS’ witness, the Court rejected TFM’s argument and upheld the Tribunal’s decision. It also stated that D. v. P. case was not applicable in the circumstance. The Court held that the Tribunal acted within its discretion by refusing the cross-examination considering that disclosures had been made by KCS and that the funding agreement provided by KCS’ shareholder was reasonable. The Court decided that TFM failed to show under section 68 of the Arbitration Act that the Tribunal’s decision was one that no reasonable arbitrator could have reached.

On the second basis challenging the Tribunal for exceeding its power to award KCS funding costs. The Court declined TFM’s argument and aligned with the decision in Norscot v. Essar that the Tribunal did not exceed its power in awarding funding costs. The Court also accepted KCS’ position that the Tribunal had the power under s. 61(1) of the Act to award a successful party its funding costs including the costs incurred to obtain TPF.

Lessons from TFM v. KCS

The Court’s Decision in TFM v. KCS underscores several important principles relating to arbitration and third-party funding and provides valuable lessons, such as the following:

Award of the cost of Third-Party Funding: The decision of the Court and its reliance on Norscot v. Essar case suggests a growing acceptance of third-party funding in arbitration. It points out that Tribunals have the discretion to award costs including that of TPF to a successful claimant if the Tribunal finds it reasonable, fair, and necessary for the funded party to have access to justice. Therefore, this decision could influence how Arbitrators exercise discretion in handling cost awards in TPF as the tribunal’s decision on such matters is unlikely to be overturned unless they are unreasonable. In the instant case, the Court found it necessary to allow the awarded the costs of third-party funding against TFM because the funding was necessary for KCS to proceed with the arbitration and the Tribunal was within its discretion to consider the costs as part of the overall cost of arbitration.
Tribunal’s Discretion: The ruling highlights the significant discretion given to arbitral tribunals in determining costs. The Court supported the tribunal’s decision to award KCS’s TPF costs and to refuse cross-examination, emphasizing that such decisions fall within the tribunal’s powers unless shown to be unreasonable.
The Court’s Attitude to Arbitral Awards on Cost: Thecase illustrates the Court’s attitude towards overturning arbitral awards relating to cost especially TPF unless there is a compelling reason. The Court emphasized that Courts should generally follow established decisions, such as those in theNorscot v. Essar case, unless there is a strong reason to deviate, which TFM failed to provide.

Conclusion

The decision in TFM v. KCS reinforces the growing acceptance of TPF in arbitration, affirming that Arbitral Tribunals possess broad discretion to award TPF costs when deemed reasonable and necessary. This case also, demonstrates that Courts are generally reluctant to overturn arbitral decisions on cost awards, particularly in the context of TPF, unless there is a clear indication of unreasonableness or excess of power. Notably, this case is a significant precedent in arbitration and reaffirms the growing acceptance of TPF in arbitration.

ABOUT THE AUTHORS

Joseph Siyaidon is a Team Lead in Stren & Blan Partners’ Arbitration, Maritime, Real Estate & Construction Disputes Practice Groups. He is a graduate of Law from the Niger Delta University and the Nigerian Law School. Joseph has extensive experience in arbitration and commercial litigation. He has acted as counsel in several international arbitrations and arbitral award enforcement proceedings under major arbitration rules, including ICC, DIAC, UNCITRAL, MAAN, and RCICAL. His focus is on providing cutting-edge strategies to resolve disputes in the areas of maritime, oil and gas, commercial contracts, construction, corporate, debt recovery, bankruptcy/insolvency, and civil fraud/white-collar crimes. He is also experienced in advising clients in relation to concession contracts, joint venture agreements, maritime asset acquisition, due diligence, and distressed situation deals. Joseph also has significant in-house experience, having led the legal and compliance team of Promax & Complant Holdings Limited, a Dubai International Financial Centre registered multinational investment consortium. Before his role at Promax & Complant Holdings Limited, Joseph had a visiting Counsel experience in the Arbitration Practice Group at Al Tamimi & Co in Dubai, UAE.

Stanley Umezuruike is an Associate at Stren & Blan Partners. He provides legal support in the Dispute Resolution Department of the Firm, with a specialty in arbitration, maritime and real estate-related matters. Stanley is a highly innovative and goal-driven lawyer, who applies a professional approach towards delivering top-notch legal solutions and support to clients. He was a former participant and team lead of the International Mediation Singapore Competition organized by the Singapore International Mediation Institute (SIMI), where he played the role of a mediator and a mediator advocate at different levels of the competition for his team.

Ebube Okorji is an Associate in the Arbitration, Real Estate and Maritime practice group of Stren & Blan Partners. She also works in and contributes to the transportation sector of the firm. Ebube graduated with a Second-Class Upper Degree from both Nnamdi Azikiwe University and the Nigerian Law School, which demonstrates her commitment to academic and professional excellence. She is a member of the Nigerian Bar Association and an associate of the Institute of Chartered Mediators and Conciliators.

*The views and opinions expressed by authors are theirs and do not necessarily reflect those of their organizations, employers, or Daily Jus, Jus Mundi, or Jus Connect.