Over the last weeks, we have continuously reported on the allocation of costs by arbitral tribunals and the ICC Commission Report “Decisions on Costs in International Arbitration” (“ICC Report”).
As important as the question “Who has to pay?” is the question “What fees and expenses can be recovered?”. Therefore, today’s article focusses on a cost item that has moved into the spotlight in recent years, and that is whether in-house counsel fees are reimbursable as costs of the arbitration.
Fees for In-house Counsel as Part of the Costs of the Arbitration
The question is worth asking because a party’s in-house counsel may spend considerable time and effort on the arbitration, e.g. by instructing its (external) legal representatives, assisting them with regard to factual issues, attending hearings and keeping the management of the company informed. Nevertheless, some tribunals seem to be reluctant to accept costs for in-house counsel as part of the costs of the arbitration. The ICC Report notes that there were “differing views” on whether or not the costs for in-house counsel were reimbursable. Unfortunately, the Report did not provide statistical data from which one could derive a trend towards either position.
The arguments usually brought forward against recoverability are that costs for in-house counsel are part of the normal costs for running a business enterprise and that they would have arisen anyway, since the company had its own internal legal department installed permanently. Another argument given by an ICC tribunal was: “where a party obtains legal assistance from external legal counsel, the internal case management should normally not exceed expenditures of time that would have to be considered as being beyond the ordinary course of business of an in-house legal department.”
On the other hand, there are also valid arguments militating for the recoverability of in-house counsel fees:
Firstly, companies only have to establish their own legal department because of potential arbitrations and litigations. In-house counsel are a crucial link between an external counsel and the company that is a party to the arbitration because they can most efficiently provide external legal representatives with the input required from the client.Without arbitrations, a company would not need to hire and pay for an in-house counsel.
Secondly, the ICC Report notes that time spent by company staff on the arbitration cannot be used for usual business activities and thus qualifies as a cost: “The claimant’s argument that the employees would have been paid (i.e. received their salaries) anyway, irrespective of the existence of the arbitration, failed. The tribunal held that the respondent could have put the employees to work on other projects had they not been required to work on the arbitration.”.
Finally, deeming in-house counsel costs unrecoverable could unjustifiably disadvantage a party which relied on its internal legal department more than on external legal representatives. An in-house counsel will have lower rates per hour than an external legal counsel, i.e. a party which is putting more workload on its own legal staff might actually reduce the costs of the arbitration. If in-house counsel fees were not recoverable, this could create an incentive to use expensive external legal counsel to a larger extent.
Guidelines for Arbitral Tribunals
How should arbitrators and parties deal with the question of the recoverability of in-house legal fees in order to avoid surprises and misunderstandings at the cost stage of the arbitration:
- The ICC Report suggests that tribunals should discuss all potentially recoverable cost items, including in-house counsel fees, with the parties at the beginning of the proceedings. That way, tribunals can avoid two problems: firstly, that the parties omit to record the hours spent by their in-house counsel in an appropriate manner; secondly, that disputes arise over the general recoverability of in-house-counsel fees at the end of the proceedings.
- If the tribunal did not make recoverable cost items part of the terms of reference, it should specify at the latest at the close of the evidentiary phase, what proof a party needs to show in order to substantiate costs for an in-house counsel.
Guidelines for the Parties to the Arbitration
- Parties to an arbitration are advised to keep a record of the in-house counsel’s hours. They are especially advised to do so because in-house counsel usually do not bill their work internally and thus, do not keep a record of the hours specifically spent on an arbitration case. This may prove costly if the tribunal decides that the costs for the in-house counsel where not sufficiently substantiated.
- If the tribunal itself shows no initiative to include recoverable cost items, such as in-house counsel fees, into the terms of reference, the party intending to recover these costs should push for them to be included.