Micha Bühler, Walder Wyss Ltd
This is an extract from the third edition of GAR’s The Guide to Damages in International Arbitration. The whole publication is available here.
The arbitrator’s duty and power to decide on costs
The costs of the arbitration can be divided into two main categories: (1) the ‘arbitration costs’ (or ‘procedural costs’), which include the arbitrators’ fees and expenses and the administrative charges of any arbitral institution, as well as charges for any other assistance required by the arbitral tribunal; and (2) the ‘party costs’, which include legal costs and other expenses incurred by a party for the arbitration, including the fees and expenses of outside counsel, party-appointed experts, witnesses, translators, etc.
The main ‘cost driver’ is usually the legal fees: a study conducted by the ICC analysing the proportion between the two cost categories in recent ICC final awards showed that the party costs accounted for more than 80 per cent of the total costs of the arbitration. Given this and considering the fact that determination of the arbitration costs is, at least in institutional arbitration, fairly straightforward and rarely poses problems in practice, this chapter will focus on the party costs only.
The arbitral tribunal’s power to decide on costs is regularly derived from both the lex arbitri and the parties’ agreement, be it the applicable arbitration agreement or the chosen arbitral rules:
Most legal systems frequently hosting international arbitrations have arbitration statutes that either expressly confer on the arbitral tribunal the power to decide on costs or simply consider such authority as inherent in the arbitrator’s mission as conferred by the parties to resolve a dispute. Indeed such mission cannot be completed without a decision as to which party shall bear, and in what proportion, the procedural costs and, where claimed, the party costs. The situation is somewhat different in the United States where, reflecting the so-called ‘American Rule’, an arbitral tribunal is only considered to be empowered to shift party costs if so provided by the arbitration agreement, the applicable arbitration rules or the (foreign) lex arbitri.
Similarly, most national arbitration laws do not limit the parties’ autonomy to regulate cost issues by agreement, be this directly in their written arbitration agreement, by incorporating arbitration rules by reference in the arbitration agreement or by common arrangements in the course of the arbitration. However, certain national laws do include mandatory provisions as to the allocation of costs or provide specific guidelines, which may not be effectively derogated by a reference to less specific institutional rules. Hence, prudent parties and arbitrators will want to make sure that any particular arrangements and resulting decisions on costs do not contravene any mandatory provision of the lex arbitri or potentially the law of the likely place of enforcement.
Prevalently, arbitration agreements do not, however, include any specific agreements as to costs; and none of the standard arbitration clauses of any of the major arbitral institutions suggests addressing cost issues. If sometimes parties do, it is usually to state in their arbitration clause either that each party shall bear its own costs, or that the successful party shall be awarded its costs.
By contrast, virtually all of the commonly chosen arbitral rules expressly empower the arbitrators to award the costs as between the parties. They also broadly describe which costs, and in particular which costs incurred by the parties are recoverable and invariably limit recovery to ‘reasonable’ party costs. Certain institutional rules provide for a rebuttable presumption that the successful party will be entitled to recover its reasonable costs, while other rules simply authorise the arbitral tribunal to apportion party costs and vest it with unfettered discretion concerning how to allocate such costs, or expressly allow it to consider the parties’ conduct in the arbitration for its cost decision.
Notwithstanding these differences as to the starting point for the cost allocation decision, all prevalent institutional rules confer broad discretion upon the arbitrators to not only consider the outcome but also all other relevant circumstances of the case for the determination of the final allocation of costs. Similarly, the principles of ‘reasonableness’ and ‘proportionality’ as the criteria usually applied for determining which costs are recoverable, both provide the arbitral tribunal with wide discretion and make sure that the arbitrators retain the necessary flexibility to decide costs as appropriate in the specific case.
Finally, there is wide consent that arbitrators are not bound to follow national cost rules applicable to judicial proceedings at the place of arbitration, where the lex arbitri and the applicable institutional rules fail to provide any guidance. Rather, modern arbitration laws and institutional rules give the arbitrators the subsidiary power to determine the procedure, which includes the applicable standards for cost determinations. Indeed, ‘one of the benefits of the discretion that arbitrators enjoy in relation to awarding costs is precisely that they are freed from [applying laws or rules which] may be complex and/or ill-suited to the determination of cost claims in international arbitration.’
Despite the emergence of prevailing trends as to which costs are considered recoverable and how the costs of arbitration shall be allocated in international commercial arbitration, the practices adopted by arbitral tribunals remain far from uniform. Considering the important autonomy of the parties and the wide discretion afforded to the arbitrators when deciding on costs combined with different cultural expectations reflecting the approach found in one’s own national legal system, it is no surprise that in practice arbitral awards reveal a broad diversity of approaches and variety of different outcomes.
In order to remove uncertainty and improve predictability for the parties, arbitral tribunals should consider to briefly address cost issues together with the parties at the outset of the proceedings, e.g., at the occasion of the initial organisational conference; particularly so, when the case involves parties and arbitrators of several nationalities and different legal and cultural traditions. The ICC Commission Report on ‘Decisions on Costs in International Arbitration’ identifies a number of aspects of cost management that the arbitral tribunal might consider discussing with the parties, including:
- informing the parties 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’;
- ‘what cost items the tribunal considers may potentially be recoverable’;
- ‘what records will be required to substantiate cost assessment claims’;
- ‘sensitive matters, such as whether there is third-party funding and any implications it may have for the allocation of costs’; and
- the timing and sequence of submissions on costs.
A proactive approach is also recommended by the ‘Guideline on Drafting Arbitral Awards Part II – Costs’ of the Chartered Institute of Arbitrators, which moreover suggests that the tribunal should issue its directions to cost issues following a discussion with the parties at the initial organisational conference. If it does so, it is suggested here that the tribunal should be mindful to include adequate wording indicating that its discretion to consider all relevant circumstances of the arbitration when deciding on costs remains unaffected.
As a rule, the arbitral tribunal is to decide in its (partial or final) award which party shall bear which costs and in which proportion. For that purpose, a two-tiered assessment is required with respect to both cost categories – i.e., the tribunal must determine, on the one hand, the allocation of liability for costs and, on the other hand, what types of costs are recoverable and to what extent. The next part of this chapter will summarise the prevailing standards and approaches adopted by arbitral tribunals when exercising their discretion for deciding the allocation of costs. I will then take a closer look at the recoverability of various party cost items and how arbitrators tend to apply the test of reasonableness in practice.
Cost allocation considerations
Basic cost allocation principles
While there is a great variety of different approaches or practices for allocating cost, two primary yet opposing approaches stand out: the rule of ‘costs follow the event’ and the ‘American Rule’. The costs follow the event rule requests the losing party to compensate the winner for its costs, while the American Rule means that each party is to bear its own legal costs (and its own share of the arbitration costs).
The costs follow the event rule is reported to be almost universally recognised in both common and civil law jurisdictions. The rationale behind allocating costs to a successful party is that a party ‘should not be out of pocket as a result of having to seek adjudication to enforce or vindicate its legal rights’. It also has a strong foundation in economic theory: by penalising the losing party for bringing an unsuccessful suit it serves as a deterrent for frivolous claims. There is recent empirical data to support the position that the ‘costs follow the event rule’ has become the prevailing approach in international commercial arbitration in recent years, in the sense that ‘where a party is entirely successful in its claims or in defending against a claim, the arbitral tribunal is likely to allow it to recover some or all of its reasonable costs from the losing party’.
The American Rule providing that each party should bear its own legal fees is not only applied in US litigation but also in China and Japan. Moreover, it correlates with the traditional practice in interstate disputes, and is applied in interstate arbitrations, where it is customary that, as a matter of international comity, each party bears its own legal costs and half of the procedural costs. Awards applying the American Rule are less common in international commercial arbitration, but remain frequent in investor-state arbitrations. As justification for the American Rule, it is often advanced that legal costs are properly considered as a normal cost of doing business and that it lowers barriers to access to justice.
As an intermediate position, as contemplated by Article 40 of the 1976 UNCITRAL Rules, arbitral tribunals may allocate the procedural and the party costs differently; namely by awarding a claim for reimbursement of the procedural costs to the winning party, while not shifting legal or other party costs. However, this approach has become less frequent in recent years, reflecting the growing awareness that engaging external counsel is often appropriate, or even necessary, for conducting an arbitration.
Degree of success as prevalent criterion and starting point for cost allocation
The starting point for any decision on costs is the applicable arbitration rules and, if containing relevant rules, the arbitration agreement and the applicable lex arbitri.
Many international arbitration rules now expressly provide that the costs of arbitration shall in principle be borne by the unsuccessful party, and hence expressly provide for fee shifting: see Article 52(2) of the 2015 CIETAC Rules; Article 35.2 of the 1998 DIS Rules; Article 28.4 of the 2014 LCIA Rules; Article 42(1) of the 2012 PCA Rules and Article 42(1) of the 2010 UNCITRAL Rules. Other rules, including the ICC Rules in particular, simply authorise the tribunal to make an award apportioning costs but do not stipulate any presumption in favour of the ‘costs follow the event’ rule as the guiding principle for allocation and simply command the tribunal to take into account the circumstances of the case; see Article 33.2 of the 2013 HKIAC Rules; Article 37(5) of the 2012 ICC Rules; Article 34 of the 2014 ICDR Rules; Article 44 of the 2010 SCC Rules, Rule 37 of the 2016 SIAC Rules and Article 74 of the 2014 WIPO Rules. Article 40(1) of the 2012 Swiss Rules provides that the cost of arbitration shall in principle be borne by the unsuccessful party, while Article 40(2) gives the arbitral tribunal discretion to apportion the party costs as it deems fit.
However, the express or implied will of the parties is also to be followed where the applicable rules do not include a costs follow the event presumption. If, for example, both parties request the tribunal to order the other party to compensate it for its legal costs in their prayers for relief, the arbitral tribunal may reasonably conclude that the parties agree on an allocation of the costs linked to the outcome on the merits; and particularly so where both parties invoke in their submissions their success on the merits as reason for a cost award in their favour.
One of the main findings of the ICC Commission’s analysis of cost allocation decisions made in arbitrations administrated by major arbitral institutions worldwide was that a majority of tribunals adopt the costs follow the event rule as a prevalent criterion and starting point for cost allocation. This result is of no surprise where the applicable arbitration rules include an express presumption that the successful party will be entitled to recover its reasonable cost. However, the outcome was the same under those arbitration rules that simply authorise the tribunal to make an award apportioning costs, and notably also in ICC arbitrations. Hence, the recent study seems to corroborate that the costs follow the event rule has indeed become the prevalent approach for cost decisions in international commercial arbitrations.
Yet, it should be noted that the costs follow the event rule is prevalently applied in a ‘bespoke way’ by arbitral tribunals, namely taking into account the parties’ relative success and failure in the award, or the relative degree of success of their claims and defences respectively. It is submitted here that a strict ‘net winner’ or ‘winner takes it all’ approach as traditionally applied in High Court litigation in England is, in contrast, rarely recommended for international arbitrations. Not only is this latter approach intrinsically linked to the English practice of ‘sealed offers’, but in extreme cases it may even be regarded as irreconcilable with the tribunal’s duty of equal treatment of the parties. Conversely, allocation based on the parties’ relative success should not be seen to reduce the cost decision to a purely arithmetical exercise, and in particular does not speak against awarding full costs where a party, while not fully, still very predominantly succeeded with its claim or defence, or against equal apportionment where neither side came out as a winner.
Determining the relative success is not necessarily straightforward, in particularly in complex cases with multiple causes of action and claims. In purely monetary awards, and absent particular circumstances, it will in many cases be appropriate for assessing the relative success of each party to determine the success ratio by simply comparing the amounts claimed by the parties in their prayers for relief and the amounts ultimately awarded to each party. In other cases, the pro rata rule will only be a starting point and the arbitral tribunal will look beyond a mere computation of the amounts claimed and awarded. The arbitral tribunal enjoys discretion when evaluating the parties’ relative successes and failures in the arbitration. For instance, the tribunal may take into consideration that a party, although unsuccessful in the end, succeeded on certain preliminary issues on which a large amount of time and effort had to be spent by the parties or the tribunal. To the same effect, a tribunal may take into account case-specific difficulties in assessing and valuating damages and, in particular, where such assessment was made difficult by the uncooperative attitude of the counterparty, may decide to award full costs to a claimant, although the monetary award obtained was lower than the claimed amount (or to not reduce the cost award proportionally to the ratio between the amounts claimed and awarded). Moreover, a tribunal may decide to assess the costs separately for certain procedural applications, and may allocate the costs based on the outcome of such issue rather than based on the overall outcome. For instance, it may consider it appropriate in a given case to allocate the estimated costs generated by an unsuccessful plea of jurisdiction or request for security of costs against the applicant even though that party prevailed on the merits.
In summary, when awarding costs based on the outcome of the dispute, arbitral tribunals measure success in various ways, effectively adjusting the costs follow the event rule to the specific case.
While the majority of arbitral tribunals take the outcome of the arbitration as a guiding principle and starting point for cost allocation, they regularly use their discretionary powers to adjust the allocation of costs by taking account of other factors relevant in the particular case. Indeed, none of the arbitration rules mentioned earlier that include a presumption that costs follow the event, makes cost-shifting to the successful party an absolute rule. Rather, they all allow the tribunal to depart from the principle where appropriate or reasonable. Additional factors that arbitrators consider for cost allocation include, for example, the following.
Arbitral tribunals routinely take into account improper conduct and bad faith procedural behaviour by a party when deciding costs, and may penalise with their cost award unreasonable, obstructive, abusive or otherwise improper behaviour aimed at derailing or delaying the arbitration. In fact, both Article 37(5) of the 2012 ICC Rules and Article 28.4 of the 2014 LCIA Rules now expressly encourage the tribunal to take party conduct into consideration in the decision on costs. Where a party undermines an expeditious and cost-efficient conduct of the arbitration, the tribunal should consider ordering that party to reimburse the other party for additional costs incurred because of its uncooperative behaviour, or reducing any costs award to such party because of its inefficiency. Events that the tribunal may wish to take into account include filing of grossly exaggerated or spurious claims; unreasonable procedural applications; unnecessarily lengthy submissions or applications; abusive document production requests or failure to comply with production orders; repeated filing of belated or unsolicited submissions; repeated unsuccessful challenges against the appointment of an arbitrator; or other ‘guerrilla tactics’ aimed at derailing the arbitral process.
Issue-based allocation of preliminary issues
Arbitral tribunals regularly consider, as a factor mitigating cost-shifting, that an ultimately unsuccessful party prevailed on preliminary issues, particularly if a procedural defence or a set-off claim was dismissed, or if the claimant succeeded on liability, but lost on quantum. As shown above, this approach can be considered a refinement of the loser-pays principle rather than an exception.
Cause of the dispute; failure to avoid the dispute
Arbitral tribunals also look into the parties’ conduct that gave rise to the arbitration, and in particular whether the arbitration could have been avoided if one party had acted differently in earlier settlement discussions or dealings or whether the winning party shares responsibility for the escalation of the conflict or the root cause of the dispute. For instance, one tribunal held against the winning party that ‘only the strength of the contract has caused [its] success’, whereas another panel did not grant costs to the prevailing respondent because the claim brought was ‘far from being reckless’ and partly arose out of a confusion created by the respondent’s conduct. In another case, the tribunal considered in its cost decision that the dispute arose out of the unclear terms of the parties’ contract and that therefore each party should ‘bear a share of the responsibility for this uncertainty and the resulting costs’. In contrast, where the tribunals found that the prevailing claimant acted reasonably in pursuing its claim in arbitration and was left with no choice other than to enter into arbitration, given the unreasonable position adopted by the other side, such circumstances were considered in support of allocating legal fees.
Claims raised bona fide
Arbitral decisions show a wide range of further mitigating factors considered by arbitrators when deciding on costs, including understandable difficulties of a party in providing sufficient evidence, the sheer complexity of a case and the novelty of issues to be decided.
Finally, cost awards sometimes reflect an approach of leniency towards an economically weaker party that lost the arbitration or, which seems more delicate, a compromise made within the arbitral tribunal to reach an unanimous decision on the merits of the case.
The determination of recoverable party costs
Legal and other costs reasonably incurred by the parties
In international arbitration, all costs incurred in relation to the arbitral proceedings are in principle regarded as recoverable provided they have been proportionally and reasonably incurred, recovery has been claimed by the parties and unless otherwise agreed by the parties. In particular, it is generally accepted that a party’s recoverable costs for legal representation and assistance are not limited to the costs of outside legal counsel but also include costs for other (external) professional services and expert advice as necessary for accurately presenting the case, notwithstanding that the wording found in some arbitration rules seems to suggest a narrower understanding.
Hence, the costs as effectively incurred by a party are, in principle, both the starting point and the upper limit for cost recovery. Yet, it is also an essential requirement of fairness that the costs one party may request its opponent to reimburse are limited in some way. Such limits are provided by (1) the requirement that recoverable costs must have been specifically incurred for the arbitration and be directly linked to it, and (2) the standard of reasonableness.
Only costs incurred for developing and presenting the case before the arbitral tribunal can be recovered. Costs incurred prior to the commencement of the arbitration are only recoverable if incurred in contemplation and for the purpose of the arbitration, but are usually not, for example, costs related to negotiations or mediation initiated prior to filing for arbitration. Conversely, costs incurred following the final award, such as costs for its enforcement or resisting annulment proceedings cannot be considered costs of the arbitration.
Likewise, costs incurred for ancillary judicial proceedings are generally considered to lack a sufficiently close nexus to the arbitration and, hence, not form part of the costs of the arbitration. Exceptionally, costs incurred in ancillary proceedings might be regarded as recoverable if they have not been brought in breach of the arbitration agreement (but rather before the ‘juge d’appui’) and no cost decision was made in such ancillary proceedings.
Arbitral tribunals have usually not taken into consideration third-party funding arrangements when determining the amount recoverable by a successful claimant, but consider the legal fees paid by the funder to the funded party’s lawyers as ‘incurred’ by the funded party, as long as the latter has incurred the liability to pay legal fees to its counsel. Indeed, a successful claimant who was funded by a third-party funder will usually at the least have to repay the costs of the arbitration advanced by the funder from the sum awarded. As a result, the successful party will then be ‘itself ultimately out of pocket . . . and may therefore be entitled to recover its reasonable costs’.
Arbitration rules invariably include a proviso that costs must be ‘reasonable’ to be recoverable. However, there is no definition of reasonableness in any of the prevalent arbitration rules or national arbitration statutes. The ICC Report on Decisions on Costs in International Arbitration suggest that ‘a common-sense approach is to assess whether the costs are reasonable and proportionate to the amount in dispute or value of any property in dispute and/or the costs have been proportionately and reasonably incurred’.
While the standard of reasonableness confers considerable discretionary power to the arbitrators, they should be slow to impose their own views as to how much a party should have spent on making its case. Not only are the parties free to select legal counsel of their choice but the fact that a party paid legal fees without knowing whether or not it would ultimately prevail and recover such costs is ‘a strong indication that the amount billed was considered reasonable by a reasonable man spending his own money, or the money of the corporation he serves’. Where they are satisfied that the amounts claimed were effectively spent, arbitrators tend to intervene only if the legal and other professional fees claimed by one party are manifestly disproportionate to the importance of the case and the amount in dispute and, moreover, if there are no objective circumstances justifying the increased costs. Tribunals will usually compare the amounts of costs claimed by each side and if comparable sums are claimed or if the winning party’s costs are lower, consider this as an indication that the costs claimed are reasonable. Inversely, even an important imbalance between the amounts claimed by each party may not automatically signify that the party claiming higher costs acted unreasonably or inflated its cost claim. However, arbitrators may take this as a cause for requesting further explanations for the disparity and reviewing any cost documentation submitted more closely.
Specific categories of party costs
Outside counsel cost
It is widely accepted that parties will usually need to retain specialist outside legal counsel for conducting an international arbitration and, accordingly, that the reasonable lawyers’ fees payable to outside counsel are recoverable. When assessing their reasonableness, the arbitral tribunal ‘should compare the amounts claimed by each party, taking into account the time spent, hourly rates and level of skill engaged in the light of the complexity and duration of the case as well as the amount in dispute’. The level of scrutiny varies and will usually depend on the specific circumstances: if the legal fees claimed by each party are comparable, the hourly rates charged in line with market practice and the billing is transparent, an arbitral tribunal usually accepts the reasonableness of the legal costs claimed without further ado, as long as the legal fees and their reasonableness remain unchallenged by the other party.
Success-fee arrangements and third-party funded costs
Contingency fees or similar arrangements between the prevailing party and its counsel or funder that provide for an uplift in case of success can be problematic in several aspects with regard to the allocation of costs. First, it may be doubtful whether the fee arrangement was validly entered into between the party and its counsel (or funder) in light of the applicable ethical rules and whether the lex arbitri in turn allows the arbitrators to give effect to such agreement. Second, the success element or premium is unlikely to be considered ‘reasonable’ by the arbitral tribunal when assessing the recoverable fee amount, unless both parties entered into such arrangements and requested recovery of such additional cost portion. It is argued that the losing party’s liability should not be increased as a result of the winning party’s choice to rely on risk sharing with a third party and that ‘in a system where the costs are, in principle, to be borne by the unsuccessful party such arrangements would allow the parties to shift, with respect to the success premium, their fee exposure entirely to their counterparty’. As a result, international arbitral tribunals have usually refused to shift the cost of the success premium to the losing party, but there are exceptions. In contrast, arbitral tribunals tend to allow the funded party to claim legal fees on the normal hourly rates that the party would have incurred if no third-party agreement had existed (and to the extent such fee amount does not exceed the sum payable to the funder). Yet, a higher level of substantiation of the time spent on the case may be required to enable the arbitral tribunal to determine whether the ‘normal fees’ claimed by the funded party are reasonable. Accordingly, the parties to success-fee arrangements should be mindful when drafting the fee agreement that such documents may have to be disclosed for the purpose of substantiation of the cost claim and should state the normal hourly rates of the lawyers engaged as well as the requirements as to the recording of the time spent on the case. The same applies mutatis mutandis to agreements with a litigation funder.
In-house counsel costs
Arbitral tribunals are increasingly recognising that the cost of in-house legal advice is, in principle, recoverable provided the use of in-house lawyers leads to a reduction of work otherwise done by external legal resources, and goes beyond mere management involvement. In support of the recoverability of in-house counsel costs, it is argued that arbitral tribunals should not interfere with the party’s right to choose between external counsel and in-house counsel and that ‘no privilege should be attached to the choice of external counsel’. Moreover, it has become increasingly common that both parties request, in their prayers for relief, compensation for in-house counsel costs from the outset. Such concordant approach by the parties can be seen as tantamount to an implied agreement on the recoverability of in-house costs. Yet, while external counsel fees are expenditures that can be clearly identified and evidenced, substantiating in-house costs is often problematic. A clear determination of both the exact time spent by the internal lawyer specifically on the case, and the exact cost incurred by the company for such time, is usually difficult. As a result, proper time sheets recording the activity and time spent by the in-house lawyers, or some other in-house documentation, will regularly be essential for successfully substantiating and evidencing the costs claimed for in-house counsel involvement.
Management and employees’ costs
While the conduct of an arbitration may necessitate substantial involvement of the staff of a party, arbitrators are generally reluctant to allow claims for the costs of a party’s own employees. In particular, most arbitrators regard the time spent by members of the management for managing conflicts as part of the normal cost for running a business enterprise, which is not recoverable. Hence, except for reasonable out-of-pocket expenses necessarily incurred in the arbitration, the parties’ internal costs for instructing external counsel, reviewing case documents and draft submissions or attending the hearings are ‘normally irrecoverable on the general principle that they fall under the general operational expenses of the company’. However, as emphasised by the Chartered Institute of Arbitrators, it may well be appropriate to decide differently where the work done internally obviates the need for outside assistance and leads to an overall saving of costs; for example, where necessary technical expertise or accounting skills are available internally, certain aspects of the case may be more efficiently dealt with than when engaging external experts.
Expert witness and support services costs
As mentioned above, the costs for experts appointed by the parties to assist them in assessing or proving their case are generally considered recoverable to the extent that such assistance appears appropriate and relevant for the case and the resulting costs seem reasonable. The recoverable costs will include the expert’s fees, costs of travel and ancillary expenses. Where tribunals decide not to give any weight to an expert’s report and testimony because of a lack of credibility of the expert evidence, they will usually also dismiss any claim for reimbursement of the costs incurred for such expert. Other recoverable costs for external professional services may include the costs of interpreters, translators, court reporters, IT-support services, investigative services, paralegal services, etc., depending on the particular needs of the case, provided such costs were incurred specifically for the purpose of the case and appear justified for presenting the case to the arbitral tribunal.
Costs for fact witnesses and evidence
Expenses incurred for witness and other evidence are generally regarded as recoverable to the extent reasonably incurred. Witness costs include not only those for attendance at the hearing but also for preparing witness statements. In cases where the fact witnesses are not employees of a party, the latter may agree to reimbursement for loss of income and for his time. However, they should be mindful that such arrangement may need to be disclosed and that any such compensation should remain modest to avoid an appearance of undue influence on the witness. Although it is not rare that parties also claim costs for the time spent by internal witnesses, arbitral tribunals can be expected to be slow to accept such costs as recoverable, mainly for the same reasons that they are reluctant to allow compensation for management time.
Timing and contents of decisions on costs
Parties will usually have made a claim for cost reimbursement at the very outset of the proceedings (i.e., with the notice of arbitration or the answer thereto) by including a yet unquantified claim for costs in their prayers for relief. As a general rule, an arbitral tribunal must not award legal costs to a party absent a claim submitted to that effect. Counsel coming from jurisdictions where legal costs are awarded as a matter of course in state court proceedings, even without submitting an express claim to that effect, should be wary of not forgetting to include a cost claim in their prayers for relief.
Before deciding on the costs of arbitration and prior to rendering the final award, the arbitral tribunal must give the parties an opportunity to file cost statements. The tribunal will usually do so at the close of the hearing or shortly thereafter by setting the parties a time limit for the filing of simultaneous cost submissions, be this with their closing submissions or, for practical reasons, shortly thereafter.
The tribunal is well advised to clarify in advance the degree of substantiation and proof it requires, in order to avoid subsequent discussions. On the one hand, the arbitral tribunal will need to be satisfied that the costs claimed for reimbursement have in fact been incurred by the claiming party (and with respect to external counsel fees that they have either been paid or are outstanding for payment). On the other hand, detailed supporting documents such as copies of fee invoices or proof of payment may not always be required. In particular, invoices for legal fees often contain confidential and privileged information, which makes them inappropriate for disclosure. For that reason, arbitral tribunals often accept cost statements made in the form of an itemised list of the legal fees invoiced by outside counsel during the arbitration, unless the invoices or their amounts are challenged by the other party. Other arbitrators may ask from the outset for more detailed information and request, for example, a written confirmation by the party that it has paid the legal fees claimed, or require the parties to indicate the time spent and hourly rates charged by the specific lawyers deployed in the arbitration.
Tribunals usually request simultaneous cost submissions by both sides in order to prevent that a party is tempted to adapt its cost claim in light of the amounts, hourly rates and numbers of hours spent on the case as invoked by the opponent. The parties must be given an opportunity to comment on their opponent’s statement of costs, in particular as to the recoverability and reasonableness of the costs claimed. If neither party objects to the other side’s costs, the arbitral tribunal will usually see this as an indication that the costs are reasonable. Depending on the issues raised in the parties’ comments, and in case of substantial disparities between either the parties’ degree of substantiation and proof or the amounts claimed, it may be appropriate to invite the parties for a second round of cost submissions and to file (further) supporting documents. While tribunals will usually strive to avoid that the exercise of determining the recoverable costs degenerates into a mini-arbitration on costs, the party requesting reimbursement of a given cost item ultimately bears the burden of proof of establishing that such cost was effectively and reasonably incurred.
In most of the cases, the arbitral tribunal will decide on the costs of the arbitration in its final award. Indeed, it is at this stage of the arbitration only that the tribunal knows the outcome of the case and can fully assess all other circumstances capable of influencing its decision as to how the costs shall be allocated.
This notwithstanding, under many arbitration rules and national arbitration statutes, the arbitral tribunal may make interim decisions on costs and allocate costs in partial awards when finally determining preliminary issues (e.g., jurisdiction, locus standi, liability or a time-bar defence) or when deciding on procedural applications (e.g., an application for interim measures or security for costs). Rendering a cost decision during the course of the proceedings may be appropriate where a given self-contained issue has been finally decided on which the parties spent significant expenses or as a sanction against frivolous unsuccessful procedural applications. In any event, a tribunal should only award costs prior to the final award if it is satisfied that such cost allocation, for the issues for which it is made, shall be definitive. If the cost decision is intended to be immediately enforceable, the arbitral tribunal should issue a partial award rather than a mere procedural order, as the latter may not be considered enforceable under the New York Convention.
Bearing in mind that their mandate ends once they issue their final award, arbitrators should make sure to include their decision on costs in the final award. All major arbitration rules expressly require that the final award shall include a determination as to costs. Such determination should specify the recoverable cost items and their respective amounts. Any cost claim awarded to a party is to be repeated, and the amount owed indicated, in the dispositive section of the award in order to provide a proper basis for enforcement.
Arbitral tribunals will usually be slow to grant a claim for pre-award interest on the specific cost items based on the argument that the claim for cost reimbursement only becomes due upon notification of the cost award. On the other hand, one would expect that a party entitled to the reimbursement of costs based on a final and binding cost award will, under many national laws, be entitled to claim post-award interest if payment is delayed. Nonetheless, and not least because of possible controversies as to which national law determines the issue of interest, the award of post-award interest should be expressly requested in the cost submission, whereas the arbitral tribunal should expressly specify in its cost award which interest rate applies and from which date.
Finally, arbitrators should be mindful that they are required to give reasons for their decision on the allocation of costs and that any final award should at least explain the basic rationale underlying the decision on costs.
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