07/12/2021

Third party funding costs and COVID-19 adjournments: section 68 challenge to ICC award dismissed

Tenke Fungurume Mining SA v Katanga Contracting Services SAS [2021] EWHC 3301 (Comm)

On 7 December 2021, the Commercial Court handed down judgment in Tenke Fungurume Mining SA v Katanga Contracting Services SAS [2021] EWHC 3301 (Comm). Moulder J rejected a challenge to an ICC award brought by the unsuccessful respondent in the arbitration (TFM) under section 68 of the Arbitration Act 1996 (the “Act”).

Charles Kimmins QC and Mark Tushingham, instructed by Charles Fussell & Co LLP, acted for the claimant (KCS) and successfully resisted TFM’s section 68 challenge.

Moulder J’s judgment addresses two issues which will be of interest to users of arbitration:

• The recoverability of third party funding costs incurred by claimants in London-seated arbitrations and whether an award of such funding costs can amount to an excess of powers under section 68(2)(b) of the Act; and
• The circumstances in which a party can raise a challenge under section 68(2)(a) of the Act to an arbitral tribunal’s discretionary procedural decision to refuse a request for an adjournment of an arbitration, in this case on the grounds of COVID-19.

Background

In two consolidated ICC arbitrations, commenced in January 2020, KCS sought to recover sums due from TFM under contracts for mining services carried out by KCS at TFM’s mine in the Democratic Republic of Congo (DRC).

On 26 August 2021, an ICC Tribunal comprising Mr Charles Kaplan, Mr Jeffrey Gruder QC and Dr Achille Ngwanza issued its Final Award. KCS was awarded all sums claimed and TFM’s counterclaims were dismissed. TFM was also ordered to pay US$ 1.4 million in respect of KCS’s legal and expert costs as well as an additional US$1.7 million in respect of funding costs which KCS had incurred to fund its legal fees in the arbitration (the “Funding Costs”). The tribunal also refused TFM’s requests for an adjournment of the arbitration on the grounds of COVID-19.

TFM sought to challenge the Final Award under section 68 of the Act. TFM argued that the tribunal’s decision to award Funding Costs to KCS amounted to an excess of powers under section 68(2)(b). TFM also argued that, by refusing its requests for an adjournment, the tribunal breached its duty under section 33 of the Act to conduct the arbitration fairly and committed a serious irregularity under section 68(2)(a). TFM’s arguments were rejected by Moulder J.

TFM’s challenge to the award of Funding Costs

KCS sought to recover its Funding Costs from TFM in the arbitration. KCS’s Funding Costs comprised: (i) a fixed fee payable by KCS to the funder of 100% of the amount of the funding (namely US$1.3 million) if KCS was successful in the arbitration; (ii) a variable fee of US$214,317; and (iii) a success fee payable by KCS to its solicitors under a conditional fee agreement.

In its Final Award, the tribunal held that it had the power to award these Funding Costs to KCS as “legal and other costs” within the meaning of section 59(1)(c) of the Act and Article 38(1) of the ICC Rules. The tribunal also held that the “principal issue that the Tribunal needs to decide in relation to the claimed funding costs is whether they are ‘reasonable’ in two respects: as to the principle of [KCS] having recourse to this type of funding and as to the amount.” The tribunal answered both questions in the affirmative and awarded the Funding Costs to KCS.

In reaching its decision, the tribunal relied on Essar Oilfields Services Ltd v Norscot Rig Management Pvt Ltd [2016] EWHC 2361 (Comm), [2017] Bus LR 227 (“Essar”). In Essar, the tribunal held that it had the power to award funding costs incurred by the claimant in the arbitration on the basis that these were “other costs” within the meaning of the Act and the ICC Rules. The respondent in Essar argued that the tribunal had exceeded its powers under section 68(2)(b) by awarding these funding costs. HHJ Waksman QC rejected this challenge in Essar.

HHJ Waksman QC held—relying on Lord Steyn’s speech in Lesotho Highlands Development Authority v Impregilo SpA [2005] UKHL 43, [2006] 1 AC 221—that an allegedly erroneous exercise by a tribunal of an available power to award costs could not amount to an excess of powers under section 68(2)(b). The tribunal undoubtedly had the power to award “legal and other costs” under the Act and the ICC Rules. If the tribunal had erred, it was (at most) an alleged error of law as to the meaning of the term “other costs” which could only be appealed under section 69 but by agreeing to the ICC Rules the parties had excluded the right of appeal on a point of law.

HHJ Waksman QC also held that as a matter of language, context and logic, the term “other costs” in the Act and the ICC Rules was wide enough to include the costs incurred by the claimant of obtaining funding and that such funding costs fell within the arbitrator’s general costs discretion. The requirement of reasonableness (a term used in both the Act and the ICC Rules) served as an important check and balance on the recoverability of such costs.

In support of its section 68 challenge, TFM sought to argue that Essar was wrongly decided and that the tribunal had exceeded its powers under section 68(2)(b) by awarding Funding Costs to KCS. Moulder J declined to depart from Essar; taken at its highest, the tribunal had erroneously exercised an available power to award “other costs” which was not susceptible to challenge under section 68 (see [93]-[94]). Moulder J also held that, having agreed to exclude any right of appeal on a point of law under section 69, “it is not open to a party to circumvent [that agreement] by characterising an alleged error of law as an excess of power” (see [95]).

Moulder J’s judgment is an orthodox application of Lord Steyn’s test in Lesotho Highlands for what can and cannot amount to an excess of powers. The judgment confirms that section 68(2)(b) is a narrow gateway which cannot be used as a vehicle to enable a party to dress up an alleged error of law as an excess of powers.

TFM sought permission to appeal to the Court of Appeal against Moulder J’s decision in relation to the award of Funding Costs. Moulder J declined to grant permission to appeal, holding that the appeal had no real prospect of success and that any appellate consideration of the issue of law as to whether funding costs are recoverable in arbitration “would only fall to be considered in the context of a section 69 appeal”.

In the meantime, therefore, it seems plain that an arbitral tribunal seated in London (whether applying the Act, the ICC Rules or other institutional rules) can in principle award funding costs to a successful claimant in an arbitration if the tribunal considers those costs to be reasonable.

TFM’s challenge to the refusal to grant an adjournment on COVID-19 grounds

As to TFM’s challenge under section 68(2)(a) to the tribunal’s decision to refuse TFM’s requests for an adjournment of the arbitration on COVID-19 grounds, Moulder J held that the court should be “extremely slow to interfere” with the tribunal’s discretionary procedural decisions: “The fact that a different tribunal may have arrived at a different decision is not sufficient to interfere: it has to be a ‘conclusion which no reasonable arbitrator could have arrived at in the case in question having regard to his duties under s33’” (see [62]). Moulder J held that TFM had failed to meet this very high threshold.

TFM’s first adjournment request was sought on the basis that its leading counsel in the arbitration had contracted COVID-19 in January 2021 and was unable to prepare for the merits hearing in March 2021. The tribunal rejected TFM’s adjournment request on the basis that: (i) the parties’ arbitration agreement required the arbitration to be “concluded as expeditiously as possible”; (ii) TFM was already represented in the arbitration by a highly‐qualified legal team; and (iii) TFM could still engage replacement leading counsel if it acted promptly. Moulder J held that the Tribunal was “required to consider all the circumstances and did so” (at [60]) and that “the Tribunal was entitled to take the view that TFM was assisted in the proceedings by a highly‐qualified legal team from a reputed international law firm, including a senior partner with considerable experience as counsel in international arbitration” (at [61]).

TFM’s second adjournment request was sought on the basis that travel restrictions caused by the COVID-19 pandemic had prevented TFM’s mining expert from travelling to the DRC to carry out a site visit at TFM’s mine in connection with TFM’s counterclaim for alleged defective work. The tribunal rejected TFM’s request to adjourn the arbitration to enable a site visit to take place because: (i) both parties’ experts had agreed that a site visit was not necessary for three out of the five alleged defects; (ii) both parties’ experts agreed that a site visit would not allow a visual inspection of the areas of the works concerned by TFM’s remaining two allegations of defective work; (iii) it was not reasonable or fair to adjourn the arbitration for an uncertain period, for the sole purpose of enabling TFM’s expert to conduct face-to-face interviews on site (rather than by videoconference or telephone); and (iv) TFM had failed to discharge its procedural and evidentiary burden of adducing any documentary evidence regarding any remedial works made necessary by the allegedly defective work and the cost of any remedial works.

In assessing whether the tribunal had breached section 33 by declining to adjourn the arbitration, Moulder J held that the tribunal had exercised its discretion “having regard to the evidence of the experts as to the utility of a site visit and weighed this evidence against the effect of an adjournment. There is no basis to conclude that this decision surmounted the high hurdle of a successful challenge under section 68 as being a conclusion which no reasonable arbitrator could have arrived at” (see [48]).

Moulder J’s judgment illustrates the high bar imposed by section 68(2)(a). The judgment reinforces the wide discretion given to London-seated arbitral tribunals in procedural and evidential matters. Any challenge to a tribunal’s discretionary procedural decisions will not succeed unless the applicant can show that the tribunal reached a decision which no reasonable arbitrator could have reached. This test illustrates the commitment of the English courts to the principle of non-intervention in procedural and evidential matters, save in very exceptional cases, of which the present case was not one.

Read the full judgment