Controlling the rising costs of arbitration
October 2014 | SPECIAL REPORT: INTERNATIONAL DISPUTE RESOLUTION
Financier Worldwide Magazine
The lower assumed cost of arbitration compared to litigation is often touted as one of arbitration’s top advantages over traditional court litigation. Still, with the rise in popularity of this dispute resolution alternative, especially among sophisticated parties in complex international matters, many of those having gone through an arbitration procedure can attest that this is more of a myth than a reality and that arbitration may not be so inexpensive after all. In fact, the arbitration community is increasingly concerned with reducing the costs of arbitration, so it can continue to serve as a financially viable and attractive alternative to litigation. The best way to truly control the cost of an arbitration is to identify the areas where cost quickly accrues and then design ways to monitor and rein in such cost.
What are the costs involved in arbitration?
In general, the costs to arbitrate a dispute can be divided into five categories: (i) arbitrators’ fees and expenses; (ii) administrative costs; (iii) expert fees; (iv) legal costs; and (v) witnesses, management and other logistical costs. Although not covered in this article, parties should also consider the internal cost to the parties involved in lending support to any dispute resolution process, such as in-house counsel, company witnesses and other professional or technical support.
Depending on the type of arbitration selected (institutional vs. ad hoc), arbitrators’ fees are set by the institution administering the arbitration or by the arbitrators themselves. The International Chamber of Commerce (ICC) calculates arbitrators’ fees based on the amount in dispute, taking into account factors such as the time spent by the arbitrators and the complexity of the dispute. Parties can actually go on the ICC web page and determine their expected cost in a virtual calculator, by inputting the amount in dispute and the number of arbitrators. Other institutions, such as the London Court of International Arbitration (LCIA), set hourly fees for arbitrators, generally capping them at a certain amount. In other instances, such as in arbitrations conducted under the auspices of the American Arbitration Association (AAA), the AAA’s international arm known as the International Centre for Dispute Resolution (ICDR), or JAMS (formerly known as Judicial Arbitration and Mediation Services), arbitrators are also compensated based on hourly fees, but the hourly rates are set by the arbitrators themselves. Additionally, parties are required to reimburse reasonable expenses incurred by the arbitrators, such as travel and accommodation for any necessary arbitration hearings.
Most arbitration institutions charge a fee, in addition to the arbitrators’ compensation, which covers the institution’s costs in managing the dispute, such as serving as a repository of fillings and other administrative documents, collecting arbitrators’ fees, conducting review of the arbitral award or making administrative decisions about the case, among others.
In ICC arbitrations, administrative costs consist of a non-refundable US$3000 fee paid by the claimant when filing the request for arbitration. Once the proceedings have started, the ICC Court will fix additional administrative fees, based on the amount in dispute. Similarly, LCIA arbitrations require claimants to pay a registration fee of £1750 (approximately US$2900) along with the request for arbitration. Additional administrative charges, based on hourly rates, are later established by the LCIA Court. The AAA charges an initial filing fee based on the amount of the case, ranging from US$775 (for disputes up to US$10,000) to US$12,800 (for disputes over US$10m). Respondents filing counterclaims must also pay an administrative fee using the same fee schedule. Additionally, a final fee must be paid, ranging from US$200 to US$6000, which may be refunded if no hearings take place. For JAMS arbitrations, a non-refundable filing fee of US$1000 per party must be paid by the claimant when filing the request for arbitration. JAMS charges an additional administrative fee equivalent to 10 percent of the time spent by the arbitrators, which entitles parties to use JAMS Resolution Centres for hearings and on-site support, including internet and copying services.
Given the complexity of most commercial arbitration cases, the assistance of experts is almost always recommended, if not required. Parties are responsible for these expert fees, which can range from a few thousand dollars to millions of dollars, depending on the complexity of the case and the type of expert. Parties are also responsible for reimbursing reasonable expenses incurred by the experts, such as any necessary travel and accommodation costs required for the preparation of the expert reports or testifying at the arbitration hearings.
Parties are responsible for the legal fees of the counsel they engage for the arbitration. While parties to an arbitration may, under certain circumstances or applicable law, recover these sums, this is a matter for the Arbitral Tribunal to decide when it renders its final award.
Witnesses, management and other logistical costs
Finally, parties need to bear the costs entailed in preparing fact witnesses for written and oral testimony, including travel and accommodation costs. Additionally, parties are also responsible for other logistical costs, such as necessary translation services, interpreter services, court reporter services, videographer services, rental fees for hearing rooms, food and beverage consumed during the hearings, photocopying and courier services, among others.
Addressing the rising costs of arbitration
Some of the costs mentioned above may seem invariable, and therefore hard to reduce, but as detailed below, parties can implement cost-saving strategies, commensurate with the nature of the dispute, to reduce such costs.
Given that arbitrators’ fees are set by the individual arbitral institution, or by arbitrators themselves, parties usually cannot control how such fees are set. Parties can, however, select a one or three-member arbitral tribunal, depending on which choice is better suited for the nature and amount of the arbitration. Oftentimes, for example, parties will choose a three-member arbitral tribunal in the arbitration agreement, binding them to this option even in cases where the amount and complexity of the matter do not warrant three arbitrators. Accordingly, the lesson is to try to foresee the type of dispute most likely to occur, and the estimated amount in controversy when formulating the arbitration agreement, and then tailor the arbitration clause to the appropriate number of arbitrators. If that assessment did not happen during the contract phase, parties can still try to agree during the initiation of the dispute to modify the arbitration clause to streamline the procedure, or name a sole arbitrator, but that will usually require the unanimous agreement of the parties.
As discussed above, each arbitral institution has its own way of setting administrative costs. When choosing an institution or ad hoc arbitration, parties should consider the benefits of each institution, and how administrative costs may change during the life of the arbitration. For example, parties may want to consider an institution that sets a fixed fee when the amount in dispute is high, or when they foresee filing additional claims later on. If parties choose an arbitration institution that sets administrative costs based on the amount in dispute, it would be wise to not overstate the claims, so as to keep administrative costs as low as possible. Finally, parties should consider if they want to proceed under an ad hoc arbitration that will not carry certain administrative costs, but then leaves them responsible for administering the case, either by later agreement, or by having to seek local court intervention in the juridical seat of the arbitration.
Finding ways to minimise the number of experts or extent of work performed by the experts can often lead to significant cost savings and should be employed whenever possible. A common trend in arbitration is to overuse experts for unnecessary issues, in particular if parties are already paying for a sophisticated arbitral tribunal that may have significant experience with the industry and the kind of claims at issue. Accordingly, to lower costs, parties engaged in arbitration should ascertain the areas that truly require expert testimony and either agree with the opposing party on limiting expert testimony or get the arbitrators to limit expert testimony. Also, new approaches to expert presentations such as ‘hot tubbing’, where experts testify and address questions from the arbitral tribunal simultaneously, may reduce the issues in controversy and possibly lead to joint expert reports, which can help reduce costs.
Legal fees make up a significant amount of the costs associated with arbitration. While these fees cannot be curtailed in their entirety, cost-conscious parties can reduce or control the cost in many ways. First, parties should always hire a lawyer that is very experienced in international arbitration as opposed to a general litigator. This is a specialised practice with a unique set of rules, procedures, customs and practice. The more experienced arbitration lawyer will know how to anticipate and prevent costs from spiralling out of control. Second, beyond engaging an experienced arbitration lawyer, parties should ensure their lawyer has experience with the industry and particular technical issues that will be arbitrated. Finally, even after hiring a ‘top gun’ arbitration lawyer, parties should plan to work closely with the team analysing ways to facilitate information gathering internally; document review by contract lawyers or automated systems; and other cost reducing tactics. Experience shows that the most satisfied clients are those that stay involved in the matter and are proactive in working with counsel to manage both the strategy and the cost of the case.
Witnesses, management and other logistical costs
The balance of the arbitration costs, such as witness travel, witness preparation, document production and the location of the hearings themselves are, collectively, also significant cost factors in arbitration. The largest logistical cost usually is the venue of the hearings (or juridical seat). This designation carries with it legal ramification as to where a subsequent arbitral award can be reviewed by a local court, as well as the practical implications about where parties will gather for pre-hearings and the final hearings in the matter. Often the seat of the arbitration is chosen based on being a neutral location that does not relate to any of the parties so as not to give any one party a tactical advantage legally or factually. Too often, however, this strategy leads to a location that is extremely expensive for all parties because of its remoteness from all the witnesses and parties and the expense of conducting a hearing in such venue. The first way to lessen this cost is to consider the venue that makes the most sense when drafting the arbitration agreement. Parties can also state in the agreement that the ‘juridical seat’, which carries a legal implication is one location, but that for convenience of the parties, the actual hearings or meetings among the parties will occur elsewhere. If such a provision was not incorporated into the agreement, parties can still try to negotiate among themselves and with the arbitral tribunal such alternative location for hearings or meetings of the parties. Once again, this will usually require unanimous agreement. Even if parties cannot agree on changing the hearing location to a more accommodating venue, many of the costs can still be mitigated through the strategic and effective use of technology. For example, the use of videoconferencing for client meetings and preliminary hearings as well as the use of electronic document production versus paper production may save costs and time. Parties are even experimenting with examining witnesses by videoconference in certain cases to lessen cost, although still infrequently seen on major matters.
For complex international transactions, arbitration is oftentimes the only viable means to obtain an impartial decision in an arbitral award that can be enforced worldwide due to the recognition given to such foreign arbitral awards by most countries which are signatories to various conventions, including the New York Convention. In turn, we can expect that arbitrations in the future will become even more multi-jurisdictional, more contentious, more culturally challenging and ultimately more costly. Just like the old commercial adage about car maintenance where the mechanic says “you can pay me now or you can pay me a lot more later”, cost control and maintenance in an international arbitration requires upfront planning and conscious maintenance of the process throughout.
Daniel E. González is the director of the international arbitration practice, Maria Catalina Carmona is a foreign associate and Roland Potts is an associate at Hogan Lovells, US LLP. Mr González can be contacted on +1 (305) 459 6649 or by email: email@example.com.
© Financier Worldwide
Daniel E. González, Maria Catalina Carmona and Roland Potts
Hogan Lovells, US LLP