The costs of international arbitration can be substantial. At the same time, an arbitral tribunal has a broad discretion regarding the question: Which party has to bear the costs of the arbitration? Against this background, the ICC Commission’s Task Force of Decisions as to Costs has reviewed hundreds of arbitral awards and has analysed in what manner arbitral tribunals exercise their discretion. The results were compiled in the ICC Commission Report “Decisions on Costs in International Arbitration” (“ICC Report”). According to the ICC Report, the majority of arbitral tribunals adopted as a starting point a rebuttable presumption that the successful party can recover its reasonable costs, in other words the principle of “costs follow the event”.1
The ICC Report was based on a study of roughly 500 arbitral awards, examined by a purpose-built task force.2 The analysed awards were not only issued under the ICC Rules of Arbitration, but also under the rules of other arbitral institutions, such as the CIETAC, the HKIAC, the DIS, the ICDR, the LCIA, the PCA, the SCC and the SIAC. The overriding goal of this comprehensive study was to consider how the allocation of costs between the parties can be used effectively to control time and costs in international arbitration. In ICC arbitrations, 83% of these overall costs usually amount for the parties’ legal costs (lawyers’ fees and expenses, expenses related to witness and expert evidence and other costs), whereas 15% amount for the arbitrators’ fees and 2% for administrative expenses.3
According to the ICC Report, tribunals allocated costs according to the principle “costs follow the event” in the majority of awards. Under this principle, the successful party in the arbitration can recover all of its costs from the unsuccessful party. The ICC Report notes that this approach was adopted despite the fact that the ICC and at least half of the other major institutional rules do not contain a presumption in favour of the recovery of costs by the successful party.4
However, the ICC Report also points out that tribunals do adjust the event-driven allocation of costs. First and foremost, tribunals acknowledge an agreement of the parties towards the allocation of costs. Tribunals also assess the reasonableness of the costs claimed by the successful party, the procedural behaviour of the parties and whether they conducted the arbitration in an expeditious and cost-effective manner and whether they rejected a settlement offer. The ICC Report also touches on other cost-related issues, e.g. whether internal legal and other costs are usually recoverable and whether a party usually discloses its funding by a third party.
Unfortunately, the ICC Cost Report does not contain detailed statistics on the final cost decisions. The ICC Report’s finding that the principle “costs follow the event” is the starting point and that tribunals – in a second step – adjust the event-driven allocation of costs prompts the question: in how many cases could the successful party recover its costs? Earlier statistics regarding ICC cost decisions seem to suggest that arbitral tribunals in most cases start with the rule “costs follow the event” but in the end decide that each party has to bear its own costs. 25 years ago, the ICC analysed approx. 100 arbitral awards. In 48 cases, the claimant prevailed – or at least prevailed to a large extent. In 50% of these cases, the tribunals refrained from ordering the unsuccessful defendant to pay the claimant’s legal costs. In 36 cases, the defendant prevailed. Only in 33% of these cases, the tribunal ordered the claimant to pay the defendant’s legal costs.5
A more recent analysis was conducted by Webster in 2009.6 Webster analysed 100 ICC awards rendered in the years 2006 to 2008. In 63% of the cases, the successful party was able to recover its legal costs. On the one hand, the percentage of decisions which in the end enforced the rules “costs follow the event” had risen. On the other hand, one wonders why in almost 40% of the cases the successful party had to pay its own legal costs.
Finally, an analysis of 16 ICSID awards from 2015 and 2014 (click here7) showed that only two tribunals accepted a pure “costs follow the event” approach. Interestingly, the tribunals were very reluctant to order the investor to pay the legal costs of the respondent state. In 10 decisions applying a “costs lie where they fall” approach to legal costs, the respondent state was denied recovery of legal costs on 7 occasions, while claimant was denied recovery on the remaining 3 cases.
As stated, the ICC Report does not contain detailed statistics on ICC awards. Interestingly, the ICC Report provides statistics on cost decisions in ICDR arbitrations (see page 31). Only in 18 out of 68 cases (i.e. 26%), the successful party was able to recover its legal costs.
Even without the detailed statistics, the ICC Report gives great insights on how arbitral tribunals award costs in international arbitration. On Global Arbitration News, we will comprehensively discuss several of these adjustment mechanisms to the allocation of costs and other cost-related issues in additional blog posts over the upcoming weeks.