The recovery of third party funding costs in arbitration has been an area of contention since the case of Essar v Norscot in 2016. The case of Essar Oilfields Services Limited v Norscot Rig Management Pvt Ltd [2016] was a ground breaking decision in arbitration law. It saw a significant shift in how tribunals view the recoverability of third-party funding costs.

The decision paved the way for greater acceptance of third-party funding in arbitration. However, many have attempted to dismiss Essar v Norscot as a case specific to its unique facts. Since then, case law has not significantly progressed. Any insights into how often arbitral tribunals have been willing to grant such awards remain largely anecdotal, given the confidential nature of most proceedings.

The recent case of Tenke Fungurume Mining S.A. v Katanga Contracting Services S.A.S. (2021) revisited the decision is Essar examining the principles around the recoverability of funding costs.

Essar v Norscot (2016)

In the Essar v Norscot case, the issue at hand was whether a party in arbitration proceedings could recover third-party funding costs as part of an award on costs.

In Norscot, the claimant, had secured third-party funding to cover its legal fees in its arbitration against Essar Oilfields Services Limited. This funding arrangement required Norscot to pay a substantial success fee to the funder if it prevailed in the arbitration.

Norscot’s financial situation forced it to seek external funding to cover the direct costs of the arbitration. This was provided on the basis that the funder would receive a success fee from a successful judgment in return for the risk taken. Such funding arrangements are common in arbitration, particularly when the claimant does not have the resources to pursue its claims independently. However, the question arose as to whether this success fee could be included in the overall cost recovery if Norscot succeeded in its arbitration.

The arbitral tribunal in the case ruled in favour of Norscot, allowing the recovery of the success fee.

The tribunal found that Essar’s conduct during the dispute had been oppressive, effectively forcing Norscot into a position where it had no choice but to seek third-party funding. As such, the tribunal concluded that it was justifiable for Norscot to recover these additional costs.

Essar subsequently challenged the tribunal’s decision under section 68 of the Arbitration Act 1996, which permits challenges on the grounds that the tribunal exceeded its powers. Essar argued that the tribunal had no authority to include the costs of third-party funding as part of the costs award.

The Commercial Court dismissed this challenge, confirming that third-party funding costs could be treated as “legal and other costs of the parties” under section 59(1)(c) of the Arbitration Act. This decision effectively validated the tribunal’s ruling and set a precedent for the recoverability of third-party funding costs in arbitration.

The impact of Essar v Norscot on arbitration

The Essar v Norscot case has had far-reaching implications for the arbitration community, especially for claimants considering third-party funding as a way to pursue claims.

The ruling made third-party funding more attractive to claimants. It opened the door for tribunals to consider funding costs as recoverable in arbitration awards. This provided reassurance to both claimants and funders. This ruling also highlighted that claimants facing financial difficulties could seek external funding without being penalised if the case succeeded, potentially making arbitration more accessible.

The decision marked an evolution in the standards applied to cost recoverability in arbitration. Traditionally, recoverable costs in arbitration included legal and expert fees, administrative costs, and tribunal fees. However, the inclusion of third-party funding costs—particularly the success fee—broadened the scope of what could be considered “costs” under section 59 of the Arbitration Act.

Tenke Fungurume Mining S.A. v Katanga Contracting Services S.A.S. (2021)

In 2021, the case of Tenke Fungurume Mining S.A. v Katanga Contracting Services S.A.S. revisited the principles established in Essar v Norscot. However, it added a layer of complexity by involving a loan from an affiliate company rather than a traditional third-party funding arrangement.

In this particular case, the claimant sought to recover costs related to a loan provided by an affiliate company, rather than an external third-party funder. The respondent, Tenke Fungurume Mining (TFM), challenged this recovery, arguing that the loan was an internal financial arrangement designed to enrich shareholders, rather than a necessary expense for pursuing the arbitration.

The tribunal allowed the recovery of the loan-related costs. TFM challenged the award under section 68 of the Arbitration Act, much like Essar had done in the earlier case. However, the Commercial Court ruled that the tribunal had not exceeded its powers. Although the court suggested that there might have been an error in interpreting the law regarding cost recovery, it upheld the tribunal’s decision, citing the principles established in Essar v Norscot.

Despite the decision in Tenke Fungurume Mining, the debate over the recoverability of third-party funding costs, especially in cases involving non-traditional funding arrangements, remains unresolved. The Commercial Court hinted that this could constitute an error of law under section 69 of the Arbitration Act. However, no appeal was allowed in this case due to the exclusion of appeals on points of law under the ICC arbitration rules.

How can Annecto Legal assist with third party litigation funding?

 Annecto Legal help clients realise the value of their commercial litigation claims. Annecto Legal was established to help businesses pursue claims and remove any perceived cost barrier to litigation.

The application process for third party litigation funding can be complex for the unwary. Therefore, we recommend that you contact our team as soon as possible so that we can provide the guidance you require.

We provide our services to a range of clients, including businesses, solicitors, commercial insurance brokers, individuals, insolvency practitioners and liquidators. 

Get in touch with an expert member of our team to find out more about third party litigation funding and which commercial litigation finance cover is the right litigation funding choice for you.