As we have outlined in an earlier post [here], arbitral tribunals – as a starting point – generally apply the rule “costs follow the event” to allocate the costs of the arbitration. That is the result of the ICC Commission Report “Decisions on Costs in International Arbitration”. The ICC Report also came to the conclusion that arbitral tribunals regularly exercise their discretion to adjust the event-based cost allocation on the basis of several factors. One of those factors, the report suggests, is a party’s relative success and failure.[1] But what does relative success and failure mean? Can a tribunal adjust the cost-allocation for an unsuccessful claim or even for an unsuccessful argument? This article provides a guideline for arbitral tribunals on how to exercise their discretion for the allocation of costs.

Adjustment of Cost-Allocation for Unsuccessful Claims, Applications and Arguments

The ICC Report notes that tribunals can take into account (i) whether a party has succeeded with its core or primary argument; (ii) whether a party has (partly) lost some of its claims or some of the “issues”; and (iii) whether a party had inflated its claim.[2]

In particular, a tribunal’s right to take into consideration whether a party was unsuccessful with regard to certain “issues”, or in other words arguments, could help to discipline lawyers and reduce costs in international arbitration.[3]Parties and lawyers have a tendency to draw on every possible argument to bolster their claims.[4] This forces tribunals to analyze all of the arguments put forward and possibly even to take evidence with regard to some issues, possibly including document production, expert reports and witness statements. As a consequence, these additional and possibly unnecessary arguments create additional costs with the ultimate impact on the outcome of a case close to insignificant. A tribunal may thus sanction a (overall successful) party for failed arguments in the decision on costs, because the party did not conduct the arbitration in an expeditious and cost-effective manner.[5]

Such an approach is, however, by no means mandatory. A tribunal may still award the successful party full compensation although some arguments failed to bite, because the ultimate success may prove the merit of the means through which this success was achieved.

Guidelines for Arbitral Tribunals

So how should tribunals exercise their discretion? The following four suggestions[6] may serve as a guideline:

Firstly, in its first procedural order the tribunal should inform the parties that it may award costs to the ultimately unsuccessful party if separable claims, applications or arguments by the overall successful party fail. This will provide an incentive for both parties to conduct the arbitration in an expeditious and cost-effective manner and to refrain from raising claims and applications which are bound-to-fail from the outset. Also the ICC Report encourages arbitrators to discuss cost management at the outset of the proceedings also to manage the expectations of the parties and those of their lawyers.[7] Just to avoid any misunderstanding: cost-allocation for unsuccessful claims should not violate a party’s right to be heard. A party is still free to present every argument it pleases. This party simply has to bear the consequences if the argument is considered by the tribunal and dismissed.

Secondly, the tribunal should acknowledge whether the ultimately unsuccessful claim or application had reasonable chances of success. An adjusted decision on costs should only sanction a party which has not lived up to its obligation to conduct the arbitration in an expeditious and cost-effective manner.

Thirdly, the tribunal should refrain from allocating costs to the overall successful party, if the tribunal itself could have avoided the additional costs (e.g. by examining whether certain lines of argument are at all relevant to the outcome of a case).

Finally, before issuing the award the tribunal could request a schedule from the parties indicating which issue in the arbitration had what cost (e.g. jurisdictional phase, liability phase, document production phase, quantum phase). This will enable the tribunal to reach a precise decision on costs as opposed to one where the tribunal has to assess the degree and scope of success of each party. Tribunals should, however, refrain from requesting such a schedule if it requires substantial effort from the parties to create one or if it would give away the outcome of the tribunal’s decision.