By Nick Rowles-Davies

Third-party litigation funding (TPF) has become increasingly prevalent in international arbitration. As arbitration remains the preferred mechanism for resolving high-value commercial disputes, particularly those with cross-border elements, funding enables claimants lacking financial resources, or those seeking to mitigate risk exposure, to pursue meritorious claims. However, as third-party funders have become integral participants in the arbitration landscape, a critical question has emerged: can the costs of third-party funding be recovered as part of an arbitration award?

This article examines the current position on the recoverability of third-party funding costs in English seated arbitrations, with particular focus on two significant cases, Essar v Norscot [2016] EWHC 2361 and Tenke Fungurume v Katanga [2021] EWHC 3301, both respectively having shaped the legal discourse. It explores the competing arguments surrounding such recovery, reviews arbitral tribunal powers, considers applicable rules and national laws, and assesses whether the potential for funding cost recovery may influence the strategic choice between arbitration and litigation.

The Rise of Third-Party Funding in Arbitration

Over the past two decades, third-party funding has become established in international commercial and investment arbitration. The ICCA–Queen Mary Task Force Report on Third-Party Funding in International Arbitration (2021), & Third-Party Funding in International Arbitration, 2nd ed. (Kluwer 2017), collectively suggest several factors, in particular, that explain this development:

• High costs associated with pursuing arbitration, including tribunal fees, legal costs, and expert witness fees
• Protracted duration of proceedings
• Non-recourse nature of funding, enabling claimants to transfer legal cost risk

TPF is particularly prevalent in investor-state disputes, construction arbitration, and large-scale commercial disputes. The global arbitration community has increasingly accepted the role of funders, and institutional rules (including those of the ICC, LCIA, and ICSID, discussed herein) have introduced disclosure obligations to manage potential conflicts of interest.

However, whether the cost of obtaining funding, often representing a substantial portion of damages recovered, is recoverable from the losing party remains a contentious issue.

General Principles on Costs in Arbitration

Most arbitral tribunals possess a discretion to award costs, which generally encompass:

• Tribunal fees and expenses
• Legal representation costs
• Expert fees
• Administrative costs of institutions

The relevant institutional rules typically confer wide discretion on tribunals. For example:

• ICC Arbitration Rules (Article 38) – tribunals may fix costs of arbitration and decide which party shall bear them.

Article 38(1) provides:

The costs of the arbitration shall include … the reasonable legal and other costs incurred by the parties for the arbitration.

Article 38(4) provides:

The final award shall fix the costs of the arbitration and decide which of the parties shall bear them or in what proportion they shall be borne by the parties.

• UNCITRAL Rules (Articles 40-42) – costs include reasonable legal and other costs incurred by parties.

Article 40(1) states:

The arbitral tribunal shall fix the costs of arbitration in the final award and, if it deems appropriate, in another decision.

Article 40(2)(e) states:

The legal and other costs incurred by the parties in relation to the arbitration to the extent that the arbitral tribunal determines that the amount of such costs is reasonable.”

Article 42(1) states:

The costs of the arbitration shall in principle be borne by the unsuccessful party or parties. However, the arbitral tribunal may apportion each of such costs between the parties if it determines that apportionment is reasonable…

• ICSID Convention (Article 61) – tribunals may decide how and by whom expenses shall be paid.

Article 61(2) of the ICSID Convention states:

“Unless the parties otherwise agree, the tribunal shall fix the costs of the proceedings and may decide how and by whom they shall be paid.”

Notably, none of these rules explicitly address third-party funding costs, leading to divergent tribunal approaches and the need for interpretative clarity.

The Landmark Case: Essar Oilfields Services Ltd v Norscot Rig Management Pvt Ltd (2016)

The dispute involved an ICC arbitration seated in London. Norscot, the successful claimant, sought to recover not only legal fees but also £1.94 million paid to a third-party funder that had provided funding at a substantial success fee (300% return).

The arbitral tribunal, chaired by Sir Philip Otton, allowed recovery of the funding costs as other costs under Article 31(1) of the ICC Rules and Section 59(1)(c) of the Arbitration Act 1996 (UK), which encompasses other costs incurred in the arbitration.

Essar challenged the award in the English High Court under Section 68 of the Arbitration Act 1996, alleging serious irregularity.

The High Court (HHJ Waksman QC) dismissed the challenge, making the following key findings:

• The tribunal possessed discretion to treat funding costs as recoverable other costs
• These were costs incurred in bringing the arbitration, not inherently different from other disbursements
• The losing party’s conduct was egregious, having forced the claimant into funding through oppressive behaviour

This decision was groundbreaking, confirming that in appropriate circumstances, a tribunal could award funding costs under English-seated arbitration.

The Confirmatory Decision: Tenke Fungurume Mining SA v Katanga Contracting Services SAS (2021)

This ICC arbitration was seated in London. Katanga, the claimant, had entered into a funding arrangement (structured as a shareholder loan) with a litigation funder. Following success in the arbitration, in addition to legal and expert costs, the tribunal awarded Katanga approximately US$1.7 million in funding costs, plus compound interest at 9% (which had already accrued to approximately US$2 million).

Tenke, the unsuccessful respondent, challenged the award before the English High Court under Section 68 of the Arbitration Act 1996, contending that the tribunal had exceeded its powers by awarding funding costs and that this constituted a serious irregularity.

The English High Court (Mrs Justice Moulder DBE) dismissed Tenke’s challenge in its entirety. The court confirmed that the tribunal had not exceeded its powers in awarding third-party funding costs and that the decision did not constitute a serious irregularity under Section 68. The judgment emphasises that the challenge was under Section 68 (serious irregularity), not under Section 69 (error of law) because the parties had excluded a Section 69 challenge. This means the court didn’t definitively rule that awarding funding costs must always be allowed.

However, this case reinforced the position established in Essar, demonstrating that English-seated tribunals possess the discretion to award funding costs as part of recoverable costs. However, it also illustrated that such awards depend on multiple factors:

• The terms of the applicable rules
• The tribunal’s interpretation of costs
• The factual background, including parties’ conduct
• The nature and reasonableness of the funding arrangement

Comparative Jurisdictional Approaches

• England: As demonstrated in Essar and Tenke, English-seated tribunals may include TPF costs as other costs under Section 59 of the Arbitration Act 1996
• Singapore: Recently liberalised TPF regime. The Singapore International Arbitration Centre (SIAC) 2017 Draft Investment Arbitration Rules reference TPF, though recoverability remains discretionary
• Hong Kong: TPF has been permitted in arbitration since 2017. Hong Kong International Arbitration Centre (HKIAC) Rules allow tribunals to consider TPF arrangements but remain silent on cost recovery

Arguments For and Against Recovery of TPF Costs

Arguments Supporting Recovery

• Access to justice: Claimants may be compelled to obtain funding due to respondent conduct (as in Essar)
• Reasonableness: Where funding costs are commercially reasonable and necessary, they constitute costs incurred in bringing the claim
• Equitable treatment: If legal fees and expert costs are recoverable, funding costs integral to claim pursuit should be similarly recoverable
• Deterrence of misconduct: Awarding costs where the losing party’s oppressive conduct necessitated funding discourages such tactics

Arguments Against Recovery

• Speculative nature: Funders often charge multiples or high returns resembling finance charges rather than legal costs
• Remoteness and foreseeability: The losing party has no control over or knowledge of private funding agreements
• Lack of transparency: TPF arrangements are often confidential, raising due process concerns
• Voluntary private financing choice: Funding arrangements represent voluntary commercial decisions about how to finance litigation, similar to taking out a bank loan. The losing party should not bear the cost of the claimant’s private financing choices, particularly when alternative, less expensive funding options may have been available.

Implications for Commercial Arbitration

The debate over funding cost recovery may significantly impact arbitration’s attractiveness relative to litigation:

(i) Arbitration versus Litigation

• Litigation in many jurisdictions (including England) does not permit recovery of TPF costs
• Arbitration, particularly in London, offers greater cost recovery flexibility, potentially influencing forum selection where funding is central to case strategy
• Arbitration may become the preferred venue for funded claimants seeking to maximise recoveries

(ii) Strategic Considerations for Parties and Funders

• Claimants must carefully structure funding agreements, ensuring transparency and proportionality
• Funders may seek provisions for cost recovery within arbitration clauses or procedural agreements
• Parties must carefully evaluate funding cost recovery potential during settlement negotiations. The possibility of recovering funding costs increases the effective value of a claim, potentially widening the settlement gap between parties and affecting negotiation dynamics. Conversely, uncertainty about recovery may incentivize earlier settlements to avoid litigation risk on this issue.

(iii) Tribunal Discretion and Consistency

• Arbitrators may exercise discretion differently depending on their background, the seat of arbitration, and applicable rules
• Where funding is demonstrably essential and properly documented, arbitral receptiveness toward recovery may increase

Future Developments: Reform or Clarification?

There is growing recognition that the issue requires greater clarity:

• Model Rules: Institutions could explicitly address TPF cost recovery in future rule revisions
• Guidelines: Soft law instruments (such as IBA Guidelines, CIArb Guidelines and ICCA-Queen Mary Task Force Reports) can help standardise practice
• Court decisions: English courts have begun establishing precedent through challenges to arbitral awards (Essar, Tenke), but broader guidance requires more jurisdictions to address the issue. The underlying arbitral awards remain confidential, limiting parties’ ability to predict tribunal approaches before reaching the court challenge stage

Ultimately, a uniform global position is unlikely to emerge. The question will continue to be answered case-by-case, grounded in party conduct, funding terms, and tribunal discretion.

Conclusion

The recoverability of third-party funding costs in arbitration has evolved from a theoretical debate to established practice in English-seated arbitrations. The Essar and Tenke decisions confirm that tribunals possess discretion to award funding costs as part of recoverable expenses, though this outcome depends heavily on the specific facts, the reasonableness of the funding arrangement, and critically, the conduct of the parties.

However, overall, significant uncertainty remains. The English position is not universally adopted, and tribunals in different jurisdictions may reach divergent conclusions based on applicable institutional rules, seat-specific legislation, and varying interpretations of “costs”. This unpredictability creates both strategic opportunities and risks that parties must carefully navigate.

For claimants and funders, the potential to recover funding costs enhances the attractiveness (of English seated arbitrations) relative to litigation, particularly in high-value disputes where funding arrangements are substantial. Yet this advantage is far from guaranteed. Parties must ensure funding arrangements are transparent, commercially reasonable, and properly documented to maximise prospects of recovery.

As third-party funding becomes increasingly integral to international dispute resolution, pressure will mount for clearer guidance from arbitral institutions, courts, and international bodies. Whether through revised institutional rules, soft law guidelines, or expanding court jurisprudence, the boundaries of recoverability will continue to evolve. Until comprehensive clarity emerges, parties must approach funding cost recovery not as an entitlement, but as a contingent, strategic element requiring careful planning and documentation.