ICSID tribunal upholds the recoverability of success fees for counsel in BSG Resources v Guinea

On 18 May 2022, an arbitral tribunal rendered its award in BSG Resources Limited (in Administration), BSG Resources (Guinea) Limited, BSG Resources (Guinea) Sàrl v Republic of Guinea (ICSID Case No. ARB/14/22) in favour of the Republic of Guinea ("Guinea"). Notably, in awarding costs, the tribunal treated as recoverable Guinea's success fees under a private fee arrangement with counsel.

The decision on the recoverability of success fees is a significant development in the arbitration community and in particular for arbitrations under the auspices of the International Centre for Settlement of Investment Disputes ("ICSID"). The tribunal offered its interpretation of 'costs reasonably incurred' under Rule 52(2) of the amended ICSID Arbitration Rules, viewing success fees as a category of recoverable costs to the extent that such fees are part of a total costs figure that resembles the unsuccessful party's expenditure. The decision prompts several unresolved questions, leaving it open to future tribunals (ICSID or otherwise) to follow suit, qualify the decision, or disregard it altogether.

Background

BSG Resources Limited (in Administration) and later BSG Resources (Guinea) Limited and BSG Resources (Guinea) Sàrl (together "BSG") collectively commenced two ICSID arbitration proceedings against Guinea relating to two iron ore mining areas in the south-eastern part of Guinea, Zogota and Simandou. The two arbitrations were subsequently consolidated. The dispute arose under the 1995 Investment Code of Guinea, 1995 Mining Code of Guinea, the 1998 BOT Act and the 2009 Base Convention ("Invoked Instruments").

BSG claimed that (i) Guinea unlawfully expropriated its investment by revoking its mining rights over the two iron ore mining areas in 2014 and (ii) BSG suffered discriminatory treatment from a 2012 governmental review of mining rights which specifically targeted BSG and favoured those who had funded the President's 2010 presidential election. BSG claimed these acts were in breach of its rights under the Invoked Instruments and international law and sought around USD 5 billion in compensation.

In turn, Guinea requested that the tribunal find that (i) the tribunal lacked jurisdiction to hear BSG's claims under the 1995 Mining Code and the BOT Act and (ii) BSG's claims were inadmissible because the mining rights were obtained through bribery of public officials and corruption. Guinea also made counterclaims seeking reparations for the economic and moral damages incurred from the corruption and the moral damages sustained from BSG's public media campaign.

As to costs, Guinea sought to recover its legal fees and expenses in full, which notably included a 25% success fee pursuant to an arrangement with its counsel. Success fee agreements generally involve a party's counsel agreeing to a fee cap in return for a percentage fee uplift payable if the party wins the case. In this case, counsel for Guinea had agreed to a 25% lower rate of legal fees in return for that 25% difference being paid as a lump sum in the event of a successful outcome. Guinea argued that success fees offsetting a contingency fee arrangement are recoverable and that a 25% success fee was not unreasonable. On the other hand, BSG argued that success fees were not reasonable costs under Rule 28 of the ICSID Arbitration Rules (now Rule 52(2) of the amended ICSID Arbitration Rules) such that this risk could not be borne by the unsuccessful party. Additionally, BSG argued that Guinea should have disclosed the content of the private fee arrangement.

Decision

The tribunal found that BSG's claims were inadmissible on the basis that the claims related to mining rights were secured through corrupt practices. Similarly, the tribunal found that Guinea's counterclaims were inadmissible on the basis that the President engaged in bribery and corruption in relation to these mining rights. It was noted that conduct irreconcilable with international public policy must lead to a finding of inadmissibility.

Costs

Addressing the parties' costs submissions, the tribunal ordered BSG to pay 80% of ICSID's costs and 80% of Guinea's costs on a 'costs follow the event' basis, noting that Guinea was unsuccessful in its jurisdictional objections and counterclaims, but was successful in arguing that BSG's claims were inadmissible and successful in defending BSG's challenge to the authenticity of documents, which incurred additional costs in instructing forensic experts for an assessment.

In particular, in respect of Guinea's success fees due to counsel, the tribunal was of the view that Guinea was entitled to its recovery on the basis that "the success fee does not qualify as a "reward" and does not appear unreasonable, since the total amount of legal fees of both Parties are nearly identical if the Respondent's success fees are taken into account." The tribunal did not address BSG's argument that Guinea should have disclosed the contents of the private fee arrangement for the purposes of recovery.

Comment

Under the English regulatory regime, success fees are no longer recoverable following the Jackson reforms (with few transition-related exceptions). Uplifts to discounted rates are also limited to 100% of a lawyer's benchmark fee (so in the circumstances of this case, this uplift may have been recoverable under the English regulatory regime depending on the rates and how the uplift was presented). However, in the context of arbitration, arbitral institutions generally grant tribunals discretion and authority to determine and apportion costs (Article 28.3 LCIA Arbitration Rules; Article 40(2)(e) UNCITRAL Arbitration Rules; Articles 37(4) and (5) ICC Arbitration Rules; Article 61(2) ICSID Convention and Rule 52 ICSID Arbitration Rules). Accordingly, success fees may be recoverable in arbitration.

Rule 52(2) of the ICSID Arbitration Rules imposes a 'reasonableness' qualifier on recoverable costs. However, it is silent as to the categories of costs which are recoverable and the extent to which qualifying costs are recoverable. It therefore remains to be seen whether success fees in other circumstances – for instance, where they involve a high percentage uplift or where the total fees (including the success fee) are not proportionate to the counterparty's costs – will be treated as recoverable.

It also remains to be seen how future tribunals will approach the issue of the disclosure of success fee arrangements with counsel. There is currently no explicit obligation for parties to disclose success fee arrangements under the ICSID Arbitration Rules, although in the event of success, disclosure is inevitable at the cost submission stage. However, following ICSID's comprehensive reform, there is now a mandatory requirement for disclosure of any third-party funder that has provided funds to defend a claim (Rule 14(1) ICSID Arbitration Rules). The award in question was rendered on 18 May 2022, before the reform on 1 July 2022. It may be that tribunals in practice are more inclined to insist on the early disclosure of such arrangements by analogy with the third-party funding rule.

The treatment of costs in arbitration, including third party funding and contingency arrangements, remains a closely watched issue, including before the English courts. As we previously covered on our blog, in December 2021 the English Commercial Court in Tenke Fungurume Mining S.A. v Katanga Contracting Services S.A.S, [2021] EWHC 3301 (Comm) refused a challenge to an arbitral award brought on the basis of the tribunal’s award of the costs of third-party funding to the successful party, finding that it did not constitute a serious irregularity under s 68 of the 1996 Arbitration Act (see our post on the decision here). That decision built on an earlier 2016 High Court decision in Essar Oilfields Services Limited v Norscot Rig Management PVT Limited, [2016] EWHC 2361 (Comm) (for a full discussion, see our blog post on the decision here).

Annulment proceedings were filed on 23 August 2022 by BSG, although the grounds for annulment (and whether they separately address the costs issue) have not yet been published.

For further information, please contact Craig Tevendale, Partner, Louise Barber, Senior Associate, or your usual Herbert Smith Freehills contact.