Introduction: The Unpredictability of Costs Decisions in International Arbitration
For a party to an international arbitration, discovering the tribunal’s ruling on costs can be a frustrating experience. For instance, it is not uncommon for the prevailing party to recover only a small portion of its costs—even in cases in which that party could have reasonably expected to be reimbursed for a significant portion of the expenses that it had to incur (filing fees, administrative costs, attorneys’ fees and expenses, etc.). The main reason for this frustration is that decisions on costs are unpredictable: put simply, two similarly situated parties, with the same result in the arbitration, may end up with very different rulings on costs.
Why this unpredictability?
The primary driver is the unfettered discretion that arbitrators have when it comes to cost shifting issues. Most arbitration rules grant arbitrators very broad discretion in dealing with costs (see, e.g., ICC Rules of Arbitration, Article 31; LCIA Arbitration Rules, Article 28, and ICSID Arbitration Rules, Article 47). With the exception of the LCIA Arbitration Rules which provide that “costs should reflect the parties’ relative success and failure in the award or arbitration,”1 major arbitration rules do not generally provide any guidance regarding how costs should be split between the parties. Arbitrators are therefore left for the most part to their own devices when deciding whether the prevailing party should be reimbursed for all or part of its costs.
Another factor is the arbitrators’ legal backgrounds. The diversity of the arbitrators’ legal backgrounds is most often put in terms of the civil law and common law traditions. However, the reality is not as straightforward, because arbitral practice combines civil law and common law traditions. In any event, with respect to the issue of costs, the dividing line is not between civil law and common law. Indeed, most civil law and common law countries broadly follow the so-called “English Rule,” which provides that costs follow the event. By contrast, the United States applies a different rule (unsurprisingly called the “American Rule”) providing that each party must bear its own costs and expenses (including attorneys’ fees). Of course, there are many exceptions and adjustments to these two rules. For instance, in countries following the English Rule, the prevailing party may be reimbursed for all of its costs, or only in proportion to its success. Many of these countries, such as France, also distinguish between the costs of the proceedings (filing fees, administrative costs and, in the case of arbitration, arbitrators’ fees and expenses), which are generally recoverable, and the parties’ costs (attorneys’ fees and expenses, experts’ fees and expenses, etc.), which are generally recoverable only to the extent reasonable or according to a particular scale. Depending on the circumstances, this could result in the prevailing party recovering only a small portion of its attorneys’ fees and related expenses.
It is therefore difficult to explain the unpredictability of costs decisions based on differences between legal cultures—even though one cannot exclude that, for example, an English arbitrator would tend to follow the English practice, or a German arbitrator the German practice. This is especially true because arbitral panels are generally composed of arbitrators from several countries.
There may be other factors at play. Arbitrations tend to be factdriven, and the arbitrators’ subjective views about the parties’ behavior both before and during the arbitration is therefore an important factor when it comes to making a ruling on costs.
Decisions on costs may also be the result of a compromise within the arbitral panel, which can in turn be explained by the arbitrators’ overall preference for unanimous awards. For instance, the arbitrator appointed by the “losing” party may get a decision on costs which is relatively favorable to that party in exchange for agreeing to the decision on the merits. For obvious practical reasons, it is difficult to ascertain the true impact of such bargaining. And one should stress that unanimity is not generally required in order for an arbitral award to be final and binding.
Whatever the reason(s) for the unpredictability of costs decisions, it remains that this unpredictability is harmful to the institution of international arbitration. There is no simple way to resolve this difficulty, but one could argue in favor of guidelines issued, for instance, by international arbitration institutions or by the International Bar Association (IBA), that would provide parameters to arbitrators in order to help them deal with cost shifting issues.
Costs in International Arbitration—A Plea for a Debate on Early Guidance by the Arbitral Tribunal on the Principles it will Apply When Deciding on Costs
One of the greatest challenges for international arbitration in recent times is the user‘s complaint that the process has become too costly. In-house counsel are under pressure to control costs, and they grumble that arbitrators and international arbitration counsel are not sufficiently responsive to their concerns.
Outside counsel are rightly troubled by these complaints. Frustrating as it is for a client to win on the merits but to be stuck with the bill, it is as frustrating for outside counsel to win a hard-fought battle for a client which feels it has not been made whole because the tribunal decided not to award it any costs.
Much disappointment could, in our view, be avoided if the outcome on the costs of the arbitration were more predictable.3 Whereas the outcome on costs is often almost as important as the outcome on the merits, this is an area where uncertainty reigns. Major international arbitration rules, such as the ICC Rules of Arbitration, leave the decision on costs entirely to the discretion of the arbitral tribunal.4 And because the approach to the recovery of costs incurred in legal proceedings diverges widely across legal systems, it is difficult to make any predictions. This sets international arbitration apart from national litigation, where the outcome on costs is usually predictable.
We will leave for another day the question whether international arbitration rules should provide more guidance with respect to costs. This article focuses on another possible solution: early guidance by the arbitrators on the principles they will apply when the time has come to decide on the costs of the arbitration.
The case for early guidance on costs
The arbitral tribunal must make various decisions with respect to the costs of the arbitration. For each of these, there are several reasons why early guidance would benefit the arbitral process:
- The tribunal must decide whether it will allocate the costs of the arbitration between the parties depending on the result on the merits.
In different legal cultures, entirely different approaches are taken in this respect, with at one end of the spectrum the US “costs remain where they fall” rule and on the other end the English “costs follow the event” approach. Without early guidance, it is impossible to predict where within the spectrum any given tribunal will come out. Early guidance allows counsel to provide the client with more accurate predictions in this respect. This may, in certain cases, foster early settlement. It will also allow the client to budget better. And if the approach taken is some form of apportionment, this may encourage the parties not to inflate their claims.
- The tribunal must decide whether it will, where necessary, use its power to allocate the costs of the arbitration in order to police the proceedings.
Whereas to some this may seem self-evident, others take an entirely different view. Early guidance on whether the tribunal will award costs depending on the parties’ conduct during the arbitration is a powerful tool. A party will think twice to submit excessive document production requests when told that this may lead to an award of the cost involved to the other side.
- The tribunal must determine which types of costs are considered costs of the arbitration, which can then be allocated between the parties. For instance, there is no clear consensus on whether time spent by in-house counsel or project personnel on a case could be recoverable.
Early guidance in this respect allows the parties to plan and to keep records of costs that may be recoverable.
Early guidance would also encourage the tribunal to discuss and think through these matters up front. Most importantly, early guidance would help manage the parties’ expectations with respect to the outcome on costs and thereby avoid unnecessary disappointment.
The case against early guidance on costs
In view of the above considerations, it is almost surprising that arbitral tribunals scarcely provide guidance at an early stage of the proceedings on how they plan to deal with costs. We presume that such guidance is rarely requested and, if requested, not easily granted. At least three reasons come to mind as to why tribunals might be reluctant to provide early guidance on costs.
First, tribunals may be adverse to early guidance in view of the fact that this is not commonly done. Few will disagree that novelty alone cannot be a sufficient reason for dismissing early guidance on costs.
Second, it is said that a unanimous award is often reached through compromise in the decisions on costs. The importance of finding common ground among the members of a three-person tribunal cannot be underestimated. But we are not convinced that early guidance on costs should be sacrificed for potential compromise down the road. As already stated, costs have become an increasingly important aspect of an international arbitration. An adverse decision on costs may leave a party just as unsatisfied as an adverse decision on jurisdiction, merits or quantum. Third, arbitrators wish to retain flexibility with respect to the decision on costs. However, we do not see why the decision on costs is less worthy of principled and thorough reasoning than other aspects of the award. Further, in its early guidance, the tribunal would only set forth the principles that it considers should be followed, and the tribunal would retain the flexibility to apply these principles to the case.
We thus see few reasons why early guidance on the costs of the arbitration would not be appropriate in a majority of cases.
Timing and form of the early guidance
Our proposal is that early guidance on the costs of the arbitration be part of the planning that is done at the outset of every international arbitration. The parties’ views on the matter could be solicited at the same time as their views on, e.g., the amount of submissions required, and the parties’ agreements and/or tribunal decisions could be set forth in the document which memorializes the ground rules for the arbitration. For instance, in ICC arbitration, this guidance could be set forth in the Terms of Reference or the first procedural order.5
The dissatisfaction of corporate counsel with the cost of international arbitration is, in our view, due in significant measure to the fact that an arbitral tribunal’s decision on costs is unpredictable. Leaving aside whether there should be some form of harmonization of the substantive principles regarding costs, serious consideration should be given to a procedural harmonization towards early guidance by arbitral tribunals on the principles they will apply when deciding on costs. We believe that this would enhance the process and thereby the users’ satisfaction.
Draft UNCITRAL Arbitration Rules Permit an Independent Body to Review Arbitrator Fees
There is increasing client dissatisfaction with excessive arbitrators’ fees. Two cases decided at the end of last year where parties have challenged arbitrators’ fees6 reflect this growing problem. This is in line with the general criticism that arbitration is becoming increasingly expensive.
The situation is particularly difficult with UNCITRAL ad hoc arbitration. So far, the UNCITRAL Arbitration Rules do not include detailed rules on arbitrators’ fees. This disadvantage is less problematic if the applicable arbitration law allows courts to reduce arbitrators’ fees where the courts consider them excessive, such as in Sweden. However, this is the exception.
In contrast, if parties opt for institutional arbitration, arbitrators’ fees are generally at least roughly predictable as they are based on the amount in dispute. In an arbitration under the rules of the German Institution for Arbitration for example, the arbitrators’ fees will depend on the value of the dispute in question, so that the parties can calculate beforehand what fees to expect. In an ICC arbitration, the ICC Court will determine the arbitrators’ fees within a certain range based on the amount in dispute.
Such problem of excessive arbitrators’ fees in UNCITRAL ad hoc arbitration is addressed by the UNCITRAL Working Group on Arbitration. The Working Group is currently revising the UNCITRAL Arbitration Rules. Although the original goal of introducing the new rules by the end of this year has not been met, it is expected that the revision will be finalized by next year.
The new Draft UNCITRAL Rules provide for the possibility of an independent body to control the arbitrators’ fees. This relates either to the methodology that the tribunal proposes to follow when calculating the fees or to the fixing of the amount as such. This independent body can even adjust the fees agreed on. The current version of the Draft UNCITRAL Rules reads:
Art. 39 (3) Promptly after its constitution, the arbitral tribunal shall communicate to the parties the methodology which it proposes to follow for the determination of the fees of its members. In its decision on the costs of the arbitration pursuant to article 38, the arbitral tribunal shall set forth the computation of the amounts due, consistent with that methodology.
Art. 39 (4) Within 15 days from the date any proposal or decision is communicated by the arbitral tribunal to the parties, any party may refer the matter to the appointing authority, or if no appointing authority has been agreed upon or designated, to the Secretary-General of the PCA, for final determination in accordance with the criteria in paragraph (1). Any modification to the fees decided by the appointing authority or the Secretary- General of the PCA shall be deemed to be part of the award.7
As a result, the arbitrators will no longer have the final say in determining their fees. The Secretary-General of the Permanent Court of Arbitration (PCA) has already consented to take over this important task. The provision as drafted is undisputed so it can be expected that it will enter into force.
The UNCITRAL Working Group on Arbitration has expressed its hopes that courts will not have to deal with these sorts of disputes any more because it can never be excluded that courts might enter into the merits of the case.
In sum, the new provision will erase one of the disadvantages of UNCITRAL arbitration compared to institutional arbitration. Parties will have to take this into account when choosing a set of arbitration rules. It remains to be seen whether parties will take advantage of the provision in the future.
Costs and Their Apportionment in International Investment Arbitration
The extent and eventual apportionment of arbitration costs constitute important considerations when parties explore the possibility of resolving a dispute through international investment arbitration.
Arbitration costs include all expenses associated with an international arbitral proceeding, namely: (1) the administrative cost of the arbitral institution, if such an institution is designated by the arbitration agreement; (2) the cost of the arbitral tribunal and (3) the cost of counsel and experts. Usually parties cover these costs in installments during the proceedings, and may attempt to recoup costs as part of the arbitral award.
The Cost to Arbitrate
At the outset, parties to investment arbitration proceedings under the auspices of a certain institution must pay certain administrative fees to initiate and maintain the arbitration process. Usually, these fees are either fixed or are calculated as a percentage of the value of the case.
For example, the International Center for Settlement of Investment Disputes (ICSID) provides for the payment of fixed fees. ICSID’s Revised 2008 Schedule of Fees requires a party requesting the institution of arbitration proceedings under the ICSID Convention to pay a nonrefundable lodging fee of US$25,000.8 Parties are also responsible to pay US$20,000 annually following the constitution of the arbitral tribunal or ad hoc committee.9 Other administrative charges include reimbursement for certain expenses incurred by the ICSID Secretariat, and a daily fee of US$1,500 if the proceedings are held outside of the seat of the Center in Washington, DC.10 If a party requests special services, such as translations, copies or the provisions of transcript, it must pay for it and provide deposit of a sufficient advance.11
Parties to noninstitutional arbitral proceedings will not incur such expenses, although administrative costs would presumably be incorporated in the cost of the tribunal, either by the use of a tribunal secretary or an increased number of hours spent by arbitrators, or directly internalized by the parties as part of legal fees (for example, for translations, transcripts, arbitration venues, etc.).
Cost of the Tribunal
Another type of cost unique to arbitration is the cost of the arbitral tribunal. As in most forms of arbitration, parties to investment arbitration may choose the members of their arbitration tribunal and must pay for their fees.
Fees may be calculated in relation to the value of the case or as a fixed sum. ICSID provides for a daily arbitrators’ fee of US$3,000 as well as for a subsistence allowance, and the reimbursement for travel expenses and for direct expenses reasonably incurred. All fees are calculated in advance and are payable to ICSID.12 It is also possible for arbitrators and parties to agree otherwise in relation to fees.13 In reality, this is not uncommon, as a pro-rated fee of US$3,000 daily can be well below the hourly rate of the experienced lawyers usually appointed as arbitrators in investment arbitration cases.
Parties normally have the option to choose between an arbitral tribunal composed of either three members or a sole arbitrator. The choice, mostly linked to the complexity of the case, obviously will have an impact on overall arbitral costs.
Cost of Counsel
The cost of counsel and associated expenses represent the most substantial expense in international arbitration. A recent Report by the Commission on Arbitration of the International Chamber of Commerce found that legal costs amounted to an average of 82 percent of the total arbitration costs.14 This finding can be used as a proxy for a discussion of costs in investment arbitration as well. Such costs include legal fees and expenses (often including those of local counsel), and the cost related to legal and other experts, witness interviews and preparation, and document collection.
Some of the legal costs of investment arbitration are inherent to complex international legal proceedings, where witnesses and experts often come from several different countries and speak different languages, and documents may be found in several different locations. More importantly, counsel fees in international arbitration can be lower than the cost of bringing a comparable case to a domestic court, especially in the US. For example, discovery in arbitration is typically less extensive, and depositions are rare. Similarly, appeals are very limited, and the entire process generally shorter.15
To contain arbitration costs, including those of legal counsel, it is essential for parties to avail themselves of the advice of expert counsel familiar with the arbitration process and its attendant expenses.
The Apportionment of Legal Costs
Arbitral tribunals in investment arbitration usually have wide discretion with respect to the apportionment of legal representation fees and arbitration expenses.16 Tribunals have often adopted the rule that each party should share the costs of arbitration equally and bear their own legal costs.17 Several recent cases, however, indicate that tribunals are willing to apply the ‘loser-pay principle,’ especially when spurious claims are brought, or when parties unnecessarily prolong the process or act in bad faith.
For example, in Plama v. Bulgaria, the tribunal found the claimant guilty of fraudulent misrepresentation in obtaining its investment in Bulgaria and thus decided that claimant should bear all of the fees and expenses of the tribunal and ICSID’s administrative charges plus US$7 million in reasonable legal fees and other costs incurred by the prevailing respondent.18 Similarly, in the recent Europe Cement v. Turkey case, an investment arbitration under the Energy Charter Treaty, the tribunal found that the claimant made fraudulent misrepresentations with respect to the validity of its investment. The tribunal ordered the claimant to pay all arbitration costs of respondent, including US$3.9 million in legal fees and US$129,740 in arbitration costs.19 In Rumeli Telekom v. Kazakhstan, an investment arbitration under the Turkey-Kazakhstan Bilateral Investment Treaty, the tribunal reached a middle ground based on the balance of the equities, ordering each party to bear its own arbitration costs, but also ordering respondent to cover 50 percent of claimant’s legal fees.20
International arbitration remains the preferred option for the expeditious resolution of international contracts or treaty disputes, especially when the value of the dispute is substantial. Rising costs often undermine the efficiency of investment arbitration proceedings. It is paramount to select counsel with specific experience in investment arbitration. Further, parties and their counsel can take several steps to ensure that arbitration costs remain reasonable:
First, cost considerations must be part of the negotiations and drafting of the arbitration clause: carefully and clearly worded clauses leave less room for interpretive disputes and expedite the arbitral process.
Second, counsel and parties must carefully evaluate available choices of institutions and arbitrators (including whether a sole arbitrator or a panel is more desirable) before initiating an arbitral proceeding.
Third, counsel and parties can contain costs, for example by selecting an appropriate venue for hearing, and the use of electronic filings and video-conferencing. Procedurally, they can agree to limiting discovery and reducing the examination of legal experts and witnesses at hearings.