Singapore, like many common law jurisdictions, permits a person to recover costs incurred in pursuing or defending a cause of action. At the risk of over-simplification, the winner is entitled to recover its costs from the loser. However, the amount of costs that the court orders the losing party to pay in a commercial case is subject to review by the court. In international arbitration, tribunals may also award costs to the winning party but, in contrast to litigation, the amount awarded is not subject to a court’s review.

The difference in the rate of recovery of costs in litigation and arbitration derives from policy considerations in litigation pertaining to access to justice that have no application in private commercial dispute resolution. So the Singapore High Court has held that “in relation to civil litigation, the courts, recognising their pivotal role in the provision of justice to the public, are concerned that access to justice shall not be obstructed or nullified by excessive costs orders. This concern is reflected not only in the way that the courts approach the making and taxation of costs orders but, among other measures, also in the differing jurisdictions of the various judicial bodies that operate in Singapore so that individuals with smaller claims can pursue them in the Magistrate’s Court or District Court rather than the High Court and thereby incur a lower level of expense”.1

In making costs orders, the court determines what would be a reasonable amount to be paid. In doing so, the court will assess the relative complexity of the matter, the work supposedly done against what was reasonably required in the circumstances, the reasonableness and proportionality of the amounts claimed on an item-by-item basis and thereafter assess the proportionality of the resulting aggregate costs.2 For example, a plaintiff successfully brought defamation claims in the Singapore High Court and was awarded S$210,000. It cost the plaintiff over S$1.1 million to prosecute the case at trial and on appeal. He was awarded S$250,000 in costs, leaving him over half a million dollars out of pocket. It was held that the case had not been sufficiently complex or long-running to merit a higher costs order.3 What this case and a great many others reveal is that, in practice, the amount of recovery considered to be reasonable in the High Court is less, sometimes substantially less, than the costs incurred by a successful party. The court recognises that there is a bench-marking process inherent to any common law system that would assess the reasonable figure for the cost of counsel within the general prevailing legal market. Thus, the court has held that although a senior counsel should be able to ask his client to pay his market rate, “a client would pay this price knowing that, even if successful, he may not thereafter be able to recover all amounts so paid from his opponent”.4

The position is rather different when it comes to cost recovery in international arbitration. Arbitrators have an unfettered discretion when making costs awards. In practice, they determine the issue of costs by reference to what is reasonable. However, they are not bound by public policy considerations that may limit recovery of costs. The approach adopted by arbitrators tends to commercial and pragmatic, though sometimes influenced by the practice of cost recovery in the courts of the seat of arbitration and/or those of the arbitrator’s ‘home’ jurisdiction. For example, one occasionally sees arguments in arbitration relating to award of costs on ‘the standard basis’ or ‘the indemnity basis’, which are references to a principle developed in common law countries referring to who (i.e. the paying or receiving party) has the burden of proving the reasonableness of an item of costs being claimed. The practice has developed as a means of censuring a party for improper conduct in the course of litigation. No such principle applies in arbitration, though of course there would be nothing to stop a tribunal adopting a similar course when exercising its discretion in awarding costs. In addition, arbitrators tend to treat costs on a broader brush basis than on an item-by-item analysis seen in the courts. Experience shows, however, that recovery rates are higher than in litigation.

Uncertainty over cost recovery in disputes matters is by no means limited to Singapore. In particular, two trends have emerged in other common law jurisdictions. The first is the use of contingency fee agreements, also known as damage-based agreements or no-win no-fee arrangements. These agreements provide that a client agrees to pay a portion of any damages it ultimately wins to its lawyer; the lawyer receives nothing if the client loses. In many jurisdictions, contingency or no-win no-fee arrangements have been treated with suspicion. There is a perceived moral hazard that a lawyer with a pecuniary interest in the outcome of a client’s case may be tempted to take a step that is his own rather than his client’s best interest. For example, the lawyer might recommend his client to accept an early offer of settlement, which would allow him to earn a fee for doing relatively little work, but which might short-change the client. The Singapore courts have recently confirmed that such agreements are not enforceable and that Parliament would need to intervene to alter the current state of the law.5

For many years in England, contingency fee agreements were not enforceable. However, conditional fee arrangements have existed for some time. This is where a lawyer charges a (typically reduced) rate for representing a client who, if successful, will pay the lawyer an uplift or success fee (subject to a cap). This limited relaxation of the rules relating to lawyers assuming an interest in the outcome of litigation has proved to be a popular way in England for clients to manage their costs.

The second trend which has emerged is the rise of third party funding in litigation. This phenomenon, where companies fund the costs of litigation in exchange for a percentage of sums recovered, has arisen in the wake of successive judicial pronouncements in England that the rules of ‘maintenance’ (the funding of a person’s claim by a third party) and ‘champerty’ (a sub-set of maintenance where the third party receives a share of the proceeds recovered) are archaic and ought no longer to be a bar against a third party providing funding for another’s case. 6 Champertous arrangements between lawyer and client, i.e. the no-win no-fee agreements discussed above, remain unlawful in Singapore by reason of the Legal Profession Act and also amount to a breach of the Legal Profession (Professional Conduct) Rules. The position in relation to third party funders is currently unclear.

The debate surrounding cost recovery in dispute resolution is set to become an important topic for 2014. It remains to be seen how the Singapore International Commercial Court may approach this debate for the benefit of its users.