Costs decisions in international arbitration
February 2016 | LEGAL & REGULATORY | LITIGATION & DISPUTE RESOLUTION
Financier Worldwide Magazine
There is no overriding principle in international arbitration governing how costs decisions should be made. While various trends are emerging in relation to cost allocation practices and expectations, little has been written about them, making it difficult for parties to accurately predict their total potential cost liability at the outset of an arbitration.
To address this problem, the ICC Commission on Arbitration and ADR has published a Report on Decisions on Costs in International Arbitration (the Report). The Report sheds light on the considerations that arbitrators take into account in making costs decisions, though it is neither prescriptive nor endorses any particular practice or approach.
While acknowledging that there is no single, universal approach to the allocation of costs, the Report’s analysis of a selection of ICC awards from 2008 to 2014, as well as feedback received from eight other major arbitral institutions worldwide, reveals some prevailing approaches taken by tribunals in making costs decisions.
First, the parties’ agreement on costs is usually the principal factor to take into account in any decision on costs. Tribunals should consider all aspects of the parties’ agreement, including the written arbitration agreement, the applicable arbitration rules, the terms of reference of the arbitration (if any), any applicable law, any other rules or guidelines which the parties had agreed to apply and the parties’ expectations.
Secondly, the majority of arbitral tribunals adopt a presumption that the successful party will be entitled to recover its reasonable costs, thereafter adjusting the allocation of costs as considered appropriate. This is the case whether the applicable arbitration rules: (i) include an express, rebuttable presumption that the successful party will be entitled to recover its reasonable costs (e.g., in the CIETAC, DIS, LCIA, PCA and UNCITRAL Rules); or (ii) simply authorise the tribunal to make an award apportioning costs without including any presumption on their allocation (HKIAC, ICDR, SCC and SIAC). Only a minority of arbitral tribunals proceed from the starting point that each party will pay its own costs (in which case costs will be from the other party only in rare circumstances).
Where there is no straightforward way to identify the successful party in a case, particularly in complex disputes involving multiple claims, counterclaims, contracts and parties, arbitrators may take into account the relative success of the prevailing party by: (i) assuming that if a claimant or respondent succeeded in its core or primary claim or outcome, then it is entitled to all of its reasonable costs; (ii) apportioning costs on a claim-by-claim or issue-by-issue basis according to relative success and failure; or (iii) apportioning success against the amount of damages originally claimed or the value of the property in dispute.
Thirdly, irrespective of the starting point, tribunals also assess the reasonableness of the costs claimed and may accordingly adjust the amount of costs awarded. Although there is no standard definition of reasonableness in institutional arbitration rules or national arbitration statutes, tribunals may take a common-sense approach of assessing whether the costs are reasonable in amount and proportionate to the amount in dispute or value of any property in dispute, as well as whether the costs themselves have been proportionately and reasonably incurred. Tribunals may also consider allowing the recovery of internal costs (e.g., costs associated with executives’ time and disbursements and/or internal administrative costs) insofar as they are necessary, do not unreasonably overlap with outside counsel fees, are substantiated in sufficient detail to be distinguished from ordinary staffing expenses and are reasonable in amount. Tribunals would also seek satisfactory evidence that the costs claimed have been incurred and paid or are payable by the party claiming them, although they may prefer to avoid lengthy submissions and arguments in which parties give a detailed breakdown of costs or provide invoices.
Finally, arbitrators may adjust the allocation of costs in light of the conduct of the parties and that of their representatives. This is expressly permitted under the rules of a number of institutions (e.g., the ICC and LCIA Rules), guidelines issued by other bodies (e.g., the IBA Rules on the Taking of Evidence in International Arbitration) and some national arbitration statutes (e.g., the Brazilian Arbitration Act). Conduct taken into account when allocating costs between the parties may include, but is not limited to: (i) improper conduct in the procedural steps of an arbitration, e.g., repeated, unsuccessful challenges, known to be unfounded, against the appointment of an arbitrator or the jurisdiction or authority of the tribunal: (ii) improper conduct or bad faith in the production of documents, e.g., deliberate and improper failure to comply with directions concerning requests for document production; (iii) presentation of false testimonial evidence to the tribunal; (iv) any false submissions made to mislead the tribunal or undermine the integrity of the proceedings; and (v) aggressive conduct by a party or its representatives, lack of professional courtesy or unsubstantiated fraud allegations.
Costs as a case management tool
In addition to identifying the various approaches applied by arbitral tribunals in the allocation of costs, the Report also identifies three broad ways in which tribunals may use the allocation of costs as a tool for managing efficiency and controlling time and costs at every stage of the arbitral process.
At the outset or early in the proceedings, e.g., at the case management conference or in the terms of reference, tribunals are encouraged to discuss cost allocation principles with the parties and indicate that it intends to take into account the manner in which each party has conducted the proceedings and to sanction any unreasonable behaviour by a party when deciding on costs.
Throughout the proceedings, tribunals may also consider making interim awards on costs or orders on costs relating to interim applications, steps or decisions, while bearing in mind the potential effect of such an interim award of order on costs on the dynamic of the ongoing proceedings.
Finally, tribunals may sanction improper, inefficient or unreasonable conduct or behaviour at the end of proceedings, through appropriate adjustments to the allocation of costs in the final award, as described above.
Concerns regarding costs and the effective management of proceedings are some of most significant concerns for users of international arbitration. This was most recently evidenced by the results of Queen Mary University of London’s 2015 International Arbitration Survey, Improvements and Innovations in International Arbitration, which revealed that respondents viewed cost as the worst characteristic of international arbitration, followed by “lack of effective sanctions during the arbitral process”.
Significant work has been undertaken by arbitral institutions, professional bodies, arbitrators and practitioners alike to identify various techniques to improve the efficiency and cost-effectiveness of arbitration. The Report builds on this body of work by acting as a resource to tribunals seeking to improve the management of time and costs in international arbitration.
Sylvia Tee is a director at ICC Dispute Resolution Services. She can be contacted on +65 6225 9082 or by email: firstname.lastname@example.org.
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