Increasingly popular techniques for managing the costs of arbitration
November 2017 | LEGAL & REGULATORY | LITIGATION & DISPUTE RESOLUTION
Financier Worldwide Magazine
November 2017 Issue
The cost of resorting to international arbitration for the resolution of international disputes can be substantial. For many potential arbitrating parties, this can be daunting. The challenge, however, can be reduced by the efficient management of the arbitral process by experienced (and known-to-be-efficient) arbitration lawyers.
The cost of arbitration has increased in recent years because the success of international dispute resolution by way of arbitration has proven to be so successful that it is being used more and more as an effective means of resolving disputes in increasingly technical, legally complex and time-consuming cases.
For example, a study of investor-state arbitrations carried out under the Arbitration Rules of the International Centre for Settlement of Investment Disputes (ICSID) and concluded between FY2011 and FY2015 revealed that, on average, claimants and respondents incurred costs of approximately $5.6m and $4.9m, respectively. Similarly, in 2013, the United Nations Conference on Trade and Development (UNCTAD) reported that legal fees and tribunal expenses, on average, exceeded $8m per party per case. Against this backdrop, it is not surprising to learn that substantial costs awards have become increasingly common in international arbitration, with cost recovery forming part of the total compensation that parties seek. In recent years, with ever-increasing frequency, the arbitration community has engaged in discussions and carried out work designed to tackle the growing concerns over the rising costs of arbitration proceedings and to propose solutions. Those frank exchanges of ideas – variously, among arbitral institutions, arbitrators and interested parties and their counsel – have led to the development of a variety of techniques intended to promote cost economy and efficiency. These techniques include the availability of expedited (or emergency) procedures, cost orders to dissuade disruptive (and other guerrilla) tactics and incentivising arbitrators to render their awards expeditiously by lowering or increasing their fees, depending on how quickly they can complete their work.
Roughly speaking, costs can be split into two broad categories: arbitration costs (generally comprising the arbitrators’ fees and expenses, the administrative fees of the arbitral institution and the charges for any other assistance required by the tribunal); and party costs (encompassing all of the legal fees and expenses incurred during the pendency of the arbitration, including those of outside counsel, party appointed experts, witnesses, court reporters and translators, etc.). This article will briefly touch upon and analyse several practical techniques for managing those costs in international arbitration from two perspectives, that of the parties, identifying some best practices for ensuring efficiency within firms and among those participating in the arbitration, and that of the tribunal, tracing the different tools at a tribunal’s disposal for managing costs.
Maintaining cost efficiency by and for the parties to an arbitration
Ultimately, the parties to an arbitration are responsible for the costs of the proceedings. As a result, special and constant emphasis needs to be placed on steps aimed at lowering the costs connected with the parties’ presentation of their case. Often, excessive costs can be attributed to, and stem from, unnecessarily long and complicated proceedings, riddled with unfocused requests and overburdened by ineffective procedural correspondence. In that scenario, one of the most fruitful ways to seek to minimise costs is for the parties, as often as is appropriate, to seek agreement on certain essential matters at the outset of the proceedings. A well planned ‘case management conference’ in the nascent stages of an arbitration, preceded by the exchange of a detailed draft of a first procedural order, can go a long way toward curbing future costs.
In other words, if parties can effectively settle in advance (or reach an agreement), essential matters like the number of written submission rounds, the filing schedule for those written submissions, the modalities and timing of document production, the preferred venue, dates and duration for the hearings and the confidentiality (or otherwise) of the proceedings, they will both save significant resources throughout the life of the arbitration and ensure greater certainty of process for themselves.
In terms of other cost-saving steps, parties should explore the possibility of doing as much as possible – whether inter partes or with the tribunal also in attendance – by telephone or video conference. While this is more often than not already the norm in investment treaty arbitrations where parties and their counsel hail from, and often are based in, different countries, it is no less relevant a consideration in more geographically localised commercial arbitrations. Equally, parties should not assume a priori that a hearing is necessary. Hearings are costly, and parties should consider carefully whether the nature of a particular arbitration axiomatically dictates that there be an oral hearing. Self-evidently, if it is possible for an arbitral tribunal to decide a case on documents alone, there will be significant attendant reductions in the duration and cost of the arbitration.
Of course, if (taking into account the totality of the circumstances of a particular arbitration) a hearing is deemed necessary, parties nevertheless should seek early agreement on hearing logistics like time allocation, ground rules for fact and expert witness examinations, the need for court reporters and interpreters and other practical arrangements. In particular, parties should consider streamlining the different phases of an oral hearing, including by agreeing time limits for opening statements so as to ensure that they are not simply a needlessly time-consuming and costly reiteration of all that has been pleaded in writing over many months. An ancillary, natural benefit of doing so will be more effective and focused advocacy, not to mention a more engaged decision maker.
Regulating cost efficiency at the tribunal level
At the tribunal level, a key way of managing costs (by influencing party behaviour) is through the staged allocation of costs or the issuance of interim costs orders at different points in the arbitral process. Such powerful and useful tools at a tribunal’s disposal, designed to encourage efficient behaviour and discourage and deter future unreasonable conduct by the parties, are enshrined expressly in many institutional arbitration rules and other international instruments, for example, Article 38 of the 2012 ICC Arbitration Rules (as amended in 2017) and Article 61(2) of the ICSID Convention. These types of provisions afford a tribunal the discretion to take into consideration the extent to which a party has conducted itself in the arbitration, whether as a whole, or with respect to a particular phase of the arbitration, in an expeditious and cost-effective manner and to apportion and allocate costs accordingly. And, historically, arbitrators have been relatively willing to make adverse costs orders on the basis of the unreasonable or perceived-to-be abusive prosecution or defence of an arbitration.
While there is no universally accepted definition of what is reasonable arbitral conduct, unreasonable and, by extension, uneconomical behaviour may include exaggerated (and unsubstantiated) claims, unjustified applications for interim relief, serial, excessive and overly broad document requests and other dilatory tactics. Of course, any assessment of reasonableness in allocating costs or in issuing costs orders adverse to one of the parties to an arbitration is a highly fact-specific exercise, and what amounts to unreasonable, inefficient behaviour in one case may not in another.
Critically, there are other ways in which arbitral tribunals can and should manage the costs of an arbitration proactively so as to ensure that the parties are not running up legal costs needlessly. In a landscape where high-stakes, such as so-called ‘bet the company’ and ‘bet the country’ arbitrations are increasingly commonplace, it is of paramount importance that tribunals snuff out any attempts by the parties to run up costs by engaging in less-than-good-faith practices in the hope of gaining any kind of advantage. Tribunals can and must do so, first by being careful to issue clear and well reasoned directions and orders throughout the life of an arbitration and, then, by enforcing those decisions at every turn.
Thus, even though, by its nature, international arbitration can be expensive, it does not mean that its costs cannot (and should not) be managed. Parties and tribunals have a multitude of techniques and tools at their disposal to manage those costs. And maintaining cost efficiency, while plainly pivotal from an economic point of view, is also critical from an advocacy perspective. When proceedings are more efficiently run and streamlined, and therefore less costly, a tribunal will be able to adjudicate the case more expeditiously. Consistently looking for ways to manage costs should lead to a swifter resolution of claims, thereby helping to ensure that arbitration remains appealing and competitive, and continues to play a vital role in the settlement of disputes.
As a final note, it is worth remembering that parties also are more frequently looking to manage costs by deferring their costs – that is, by having an entity extraneous to the dispute cover the legal fees and disbursements incurred by a party, usually in exchange for a fee or for a percentage of any damages ultimately awarded. The presence and continued development of third-party funding constitutes an important option for parties to an arbitration, and not just those impecunious (or asset-poor or less-than-liquid) entities unable to fund the costs of bringing a claim. In fact, it has the potential of being just as popular with asset-rich companies (for example, lacking the requisite liquidity to fund the ongoing and often significant costs of an arbitration) or companies that simply prefer to manage risk creatively and to free up their cash flow.
Giorgio Mandelli and Robert G. Volterra are partners at Volterra Fietta. Mr Mandelli can be contacted on +44 (0)207 380 4388 or by email: email@example.com. Mr Volterra can be contacted on +44 (0)207 380 3898 or by email: firstname.lastname@example.org.
© Financier Worldwide
Giorgio Mandelli and Robert G. Volterra