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Recovering Funding Costs in Litigation: A Modest Proposal
Money often costs too much …
Ralph Waldo Emerson, Wealth (1841)
A party who has had to rely on third party funding to pursue a claim will agree with the Sage of Concord. Commercial funders of litigation typically require a multiple of their outlay in return for their funding. It is very expensive money.
To make matters worse, in the kind of case where it is most often required, defendants with very deep pockets can drag out proceedings and so put great pressure on claimants who know that not only will each further step in the proceedings cost them money – like any other litigation – but that the cost of each such step will be deducted from their eventual damages at least twice over.
Prior to the Jackson reforms of 1 April 2013, parties to litigation in England and Wales could recover some costs associated with funding their claims. They could recover success fees payable to their lawyers and the premiums payable to their after-the-event (“ATE”) insurers for covering their exposure to adverse costs.
They were unable to recover the costs of third party funding because English law had long considered that the cost of funding litigation was not money paid to solicitors for the ultimate benefit of the client and was therefore not a cost the client could recover from another party. The Court of Appeal confirmed that was still the case in Motto v. Trafigura Limited [2011] EWCA Civ 1150.
As matters stand now, however, they can recover none of these things. By contrast, parties to arbitration can recover funding costs. This firm has recovered solicitors’ success fees and funding costs in an ICC arbitration award, which was upheld by the Commercial Court in Tenke Fungurume Mining SA. v. Katanga Contracting Services SAS [2021] EWHC 3301 (Comm).
The Supreme Court’s decision in R. (PACCAR) v. Competition Appeal Tribunal [2023] UKSC 28, which caused dismay amongst litigation funders, appears to have triggered calls for reform of this area of the law. One of the results of that decision was that the Lord Chancellor asked the Civil Justice Council (“CJC”) to consider the whole area of litigation funding.
On 2 June 2025, the CJC published its Review of Litigation Funding (the “Review”). Of greatest interest to those involved with litigation funding will be recommendation 41, which is:-
“Recoverability of litigation funding costs should be permitted in exceptional circumstances. The CPR and CAT Rules [i.e. the procedural rules of the Courts and the Competition Appeal Tribunal] should be amended to provide such a discretion.”
The authors of the Review note that “the majority of respondents [to the CJC’s consultation exercise] were in favour of extending the definition of costs to enable funding costs to be recovered in exceptional circumstances to meet the justice of the case.” Their argument was that it was “necessary to secure effective access to justice” and that “litigation funding enables claimants who lack the means to pursue meritorious claims to access justice.”
There was less consensus, however, about how that aim would be achieved. “It was submitted, for instance, that Bates v. The Post Office was a paradigmatic example of the type of case where recoverability should be allowed.” The reasons given were that the claimants lacked funds because of the defendant’s own prior conduct and that the way in which the defendant conducted the following litigation was unreasonable and increased the claimants’ costs and funding costs unnecessarily.
The authors of the Review did not consider going back on the Jackson reforms and permitting recovery of lawyers’ success fees or ATE premiums.
In Appendix A to the Review, the authors of the Review suggest some legislation in the form of a putative Litigation Funding, Courts and Redress Act 2025 and some new Court rules. Those proposed rules are:-
“CPR X.3
Recovery of Funding Costs as costs (s.8 of the Act)
(1) In this Part, “funding costs” has the meaning given in s.8(7) of the Litigation Funding, Courts and Redress Act 2025. [This is defined in a footnote to the draft legislation as “the funder’s return” and explicitly excluding success fees or ATE premiums]
(2) In any proceedings to which this Part applies, the court may order a party to recover all or part of any funding costs by way of costs but only where the court is satisfied that there are exceptional circumstances which justify such an order being made.
(3) In deciding whether the circumstances are sufficiently exceptional to make the order within the meaning of rule X(2) the court will have regard to the following factors:
(a) the conduct of the parties, and in particular the conduct of the paying party, whether before or during or after the proceedings, and
(b) the conduct of the funder, whether before or during the proceedings, and
(c) the extent to which the funding costs were incurred by reason of the conduct of the paying party, and
(d) the amount of the funding costs and whether the funding costs were reasonably incurred, and
(e) whether the proceedings could have been pursued by the receiving party without incurring the funding costs, and
(f) the financial consequences of making the order from the perspective of both the receiving party and the paying party, and
(g) notwithstanding the exceptional nature of the order, it is in the interests of justice to make the order.
(4) Any order made under rule X(2) for the payment of any funding costs, shall be subject to detailed assessment.
…”
The use of the phrase “exceptional circumstances” is often a recipe for arguments. Any lawyer will say his or her client’s case is unusual and deserves special treatment. However, the proposed drafting gives an implicit definition to what that phrase means here.
First, there are references to the conduct of both the paying party and the funder (in proposed sub-sections (a) and (b)), so we can expect the importation of arguments about indemnity costs and whether a paying party has behaved in a way that is “out of the norm” such that they should pay costs on a different basis than most parties.
Second, there appears in proposed considerations (c) and (e) to be an element of causation to the test. If a party could have brought a claim without the need for funding but the paying party’s conduct forced them to seek funding, that appears to be in favour of making an order. This is likely to place a burden on claimants with regard to financial evidence and what attempts (if any) they made to finance the case without recourse to funding. They may need to consider disclosing privileged exchanges with lawyers.
Third, there is the usual test in costs cases at proposed consideration (d) of whether it was reasonable to incur the cost or not. This may lead to arguments about industry norms – and may even help to promote them over time – but we can expect significant disputes over what such industry norms are if this becomes law.
Finally (in proposed considerations (f) and (g)), there are considerations of fairness as between the parties, in particular the financial consequences for both sides of making the order.
None of this is actual legislation yet – but it is a very good indication of the likely direction of travel in the near future. For example, on 4 July 2025, the Court of Appeal handed down judgment in Sony Interactive Entertainment Europe Limited v. Alex Neill Class Representative Limited (and a number of conjoined appeals) [2025] EWCA Civ 841. All those cases concerned the enforceability of litigation funding agreements which had been amended in response to the Supreme Court’s decision in R. (PACCAR) v. Competition Appeal Tribunal. The Court of Appeal upheld them all.
It remains to be seen what legislation or changes to the relevant rules will in fact be made. The CJC has put forward its views and the Lord Chancellor will consider them.
In this firm’s view, the CJC could have gone further in looking to maintain a balance between claimants and defendants. In a case where it is apparent to the Court that a defendant has deliberately sought to exhaust a claimant’s resources with a view to defeating the claim or coercing the claimant into accepting a poor settlement, the Court should have the power to go further and make an award which includes any relevant success fees and ATE premiums. By making that power “exceptional”, the balance of power between claimants and defendants in this kind of case will be struck fairly.
Simon Winter
Ghaffari Fussell LLP
An Endemic Problem in Arbitration, or (with apologies to Freud) The Psychopathology of Every Day Commercial Life
Simon Winter | Ghaffari Fussell.
1. Fifty-one years (the author’s entire lifetime) have passed since 1974, when Frédéric Eisemann first diagnosed what he called “pathological clauses” in commercial agreements¹. Such clauses referred – or, perhaps more accurately, attempted to refer – disputes under those agreements to arbitration.
2. While it is not clear Eisemann was being entirely serious in his choice of words (his essay goes on to give examples of such clauses, which he describes as “pearls” he has extracted from his “dark museum”), the phrase has gained common currency. That is no doubt because, despite the passage of those fifty-one years, the pathology which Eisemann diagnosed appears incurable: such clauses continue to appear regularly in practice. This firm has encountered two such clauses in 2025 alone.²
Eisemann’s Four Criteria
3. In a less anecdotal and more analytical vein, Eisemann also set out four criteria³ which any arbitration clause must meet:-
(1) It should produce mandatory consequences for the parties to the agreement. In other words, it must oblige the parties to arbitrate rather than simply give them the option. Some clauses mistakenly use the word “may” when the word “shall” should have been used: if a party “may” do something, it may equally not do it.
(2) It should exclude the intervention of state courts from the resolution of the dispute – at least before any award is made, in which case enforcement by national courts might be required. Surprisingly often, parties simply add an arbitration clause (or even a throwaway reference to arbitration) to a pre-existing form of contract which contains a standard jurisdiction clause referring to a national legal system. This raises significant doubt as to any arbitral panel’s jurisdiction over the dispute.
(3) It should give powers to the arbitral panel to resolve the disputes likely to arise between the parties. Parties sometimes appear to provide that some kinds of dispute will be heard by arbitrators and others by judges. Quite apart from the practical difficulties of drafting such a clause, it is beyond anybody’s ability to anticipate every kind of dispute which might arise. The safest approach is “all or nothing”: all disputes go before an arbitral panel or they all go before a judge.
(4) It should permit a procedure which results in an enforceable award. In other words, a party to the agreement should be able to start the process of arbitration and see it through to a conclusion without difficulty. Difficulties arise in practice when an agreement provides no procedure at all, even perhaps failing to specify how to appoint an arbitral panel, or provides only for inadequate procedures.⁴ The safest course is to appoint a well-known arbitration body which will provide an appointment mechanism and rules of procedure.
4. All these criteria still hold good today. Any clause which does not comply with these requirements invites serious dispute and the inevitable intervention of national courts, which in turn means delay and additional expense in a process of dispute resolution which is intended to avoid both.
The Inconsistent Approaches of National Courts
5. Thus far, this article has given advice on pitfalls to avoid in drafting. But what should a party do when the pathological clause has already been agreed?
6. In-house counsel often (and understandably) struggle with these clauses and may be given differing and inconsistent advice by external advisers. Recalcitrant defendants can – and often do – exploit them to their advantage.
7. The difficulty rarely lies in legislation. Most nation state arbitration laws are based on the UNCITRAL Model law (with a variety of local reservations or amendments). The difficulty which arises in practice is whether the national Courts concerned with supervising arbitration in their own jurisdictions will uphold the parties’ apparent – if not perfectly expressed – desire to refer disputes to arbitration and the approaches taken by those Courts vary widely.
8. Some jurisdictions will simply find a pathological clause is unenforceable for one (or more) of the reasons suggested by Eisemann’s four criteria. But others are renowned for their pro-arbitration stance.
Pro-Arbitration Jurisdictions
9. England and Wales is one such jurisdiction. For example, so long ago as 1991, Steyn J held in Paul Smith Limited v. H&S International Holding Inc that an agreement containing both an arbitration provision and a standard form jurisdiction clause – a pathology of the kind identified at paragraph 3(2) above – should be interpreted as providing clearly for arbitration.⁵
10. Other jurisdictions also take a commercial and pro-arbitration approach, including the Courts of Singapore and Hong Kong. Case law from both jurisdictions suggests a judiciary keen to cure such pathological clauses and uphold the parties’ apparent agreement to refer disputes to arbitration:-
(1) In HKL Group Co Limited v. Rizq International Holdings Pte Limited, for example, the High Court of Singapore upheld an arbitration clause which purported to refer disputes to the non-existent “Arbitration Committee at Singapore”.⁶
(2) In the case of Lucky-Goldstar International (H.K.) Limited v. Ng Moo Kee Engineering Limited, the Supreme Court of Hong Kong upheld an arbitration clause which provided for arbitration in an unspecified (and impossible to determine) “3rd COUNTRY” under the rules of the non-existent “International Commercial Arbitration Association”.⁷
11. It will be noted that both these clauses were pathological in the sense noted at paragraph 3(4) above. It was impossible to appoint a panel because the body named did not exist.
12. States which are keen to encourage inward investment have taken more innovative approaches. For example, Bahrain has entered into a bilateral treaty with Singapore, which has established not only a new Bahrain International Commercial Court in Bahrain but also a designated body in Singapore to hear appeals from that Court.⁸ It is very likely – and it appears to be the clear intention – that this appeal body will build up a body of jurisprudence favourable to arbitration.
Conclusions
13. What conclusions can we draw from these issues?
(1) First, draft your arbitration agreements with care.
(2) Second, choose your supervising jurisdiction with an equal amount of care.
(3) Third, in the event of any dispute, choose a firm which has experience of these issues and can diagnose and cure the pathology quickly.
Simon Winter is a partner at Ghaffari Fussell LLP (Simon@ghaffarifussell.com)
¹The usual English translation: Eisemann wrote in French and so referred to “les clause pathologiques” in La clause d'arbitrage pathologique, Commercial Arbitration Essays in Memoriam Eugenio Minoli (Torino: Unione Tipografico-editrice Torinese, 1974).
²As late as 2020, Global Arbitration News could publish an article entitled “The Dream of a World Free of Pathological Clauses”. The critical word in that title is “Dream”.
³The following translation of Eisemann’s four criteria derives from Benjamin G Davis’s translations in Pathological Clauses: Frédéric Eisemann’s Still Vital Criteria (1991) 7 Arb Int 365.
⁴The case law even provides examples of parties purporting to appoint bodies who will not accept such appointments and will not nominate arbitrators, such as the UN’s World Health Organization.
⁵[1991] 2 Lloyd's Rep 127. The Court’s reasoning was that both clauses were valid, the first being a self-contained agreement which provided for the resolution of disputes by arbitration and the second specifying the law which would apply to the particular arbitration. This involves limiting the scope of the jurisdiction clause in favour of the arbitration clause.
⁶[2013] SGHCR 5. The Court pointed out that “When faced with a pathological arbitration clause, the court generally seeks to give effect to that clause, preferring an interpretation which does so over one which does not.”
⁷HCA000094/1993. At para 17, the Court found: “I believe that the correct approach in this case is to satisfy myself that the parties have clearly expressed the intention to arbitrate any dispute which may arise under this contract. … As to the reference to the non-existent arbitration institution and rules, I believe that the correct approach is simply to ignore it.”
⁸See https://www.mlaw.gov.sg/news/press-releases/singapore-bahrain-sign-treaty-on-appeals-from-bicc/. Part of this article notes the involvement of the Singapore International Commercial Court (“SICC”) and refers expressly to “arbitration in litigation”: “the SICC combines the best practices of international arbitration with the substantive principles of international commercial law, to offer procedures compatible with, and responsive to, the fast-changing needs and realities of international commerce.”
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