Paul Bugden, Bugden + Co., London
Introduction
Arbitration as an elective dispute resolution forum competes with civil jurisdictions and other forms of binding alternative dispute resolution such as expert determination. Arbitration venues also inevitably compete with each other for arbitration business. Cost effectiveness and value for money are naturally and quite understandably a very material consideration in determining the chosen forum. Certainty as to the amount of anticipated costs is also a significant comparative factor.
This article is written primarily from the point of view of the writer’s perspective of London seated international arbitration and the provisions of the English Arbitration Act 1996 but it seems from the his own experience that much of what has said has relevance to other arbitration venues to a greater or lesser extent.
There are two main aspects to the issue of costs in arbitration, namely the costs of the tribunal itself in entering upon the reference and writing any awards or awards and the costs of the parties in presenting their respective cases to the tribunal. The two elements of the overall picture are of course inexorably connected and in many more ways than at first sight might appear; as we shall see below in this article.
Anecdotal evidence and empirical survey evidence indicates, not surprisingly, that the tribunal’s fees and expenses in a typical international commercial arbitration are usually substantially less than the fees of the parties combined and quite often significantly less than those of any one of the parties; nevertheless it is fair to say the costs of the tribunal still weigh heavily on the minds of the parties themselves for a whole variety of reasons.
Some aspects of the costs of tribunal
The starting point for determining the right of the tribunal to payment for its fees from the parties to the reference it is any contract between the tribunal and the parties or any one of them and the terms thereof. This will primarily determine not only the incidence of costs, in sense as to which party or parties accept liability for the costs of the tribunal, but also the proper amount of such costs as are agreed to be paid.
Even in the absence of an express agreement for payment of the tribunal’s fees it is likely in most cases that a contract to pay would be implied (or the court would impute a restitutionary right to a quantum meruit payment for valuable benefits conferred) and likewise in the absence of any express agreement as to the manner of the tribunal’s remuneration it is likely that the court would imply a term into any contract that payment be at a reasonable rate.
In practise a tribunal’s fees are likely to be fixed by reference to scale fees based on a percentage of the amounts claimed or by time spent charged at hourly rate; in which latter case it may of course be wise to secure agreement as to hourly rates applicable so as to restrict room for dispute to the time properly spent on the matter and nothing else.
Sect 56 of the 1996 Act, reflecting the common law of lien, confers an express right on the part of the tribunal to withhold publication of its award from the parties in the absence of full payment of its fees and expenses.
Institutional arbitration rules however usually make detailed provision for advance deposits in respect of fees of the tribunal payment and ad hoc tribunals are also now increasingly reluctant to rely simply rely upon their right of lien. The latter may seek appointment fees and perhaps ‘commitment’ fees for setting aside (reserving) oral hearing dates as well as payment for any interlocutory work performed in connection with the reference before embarking on writing of the award and security for costs by way of payment on account for the anticipated costs of the award itself.
A commensurate joint and several liabilities on the part of the parties to the reference also exist by statute (sect 28 of the 1996 Act) for such reasonable fees and expenses, if any, as are “appropriate in the circumstances”. This provision seems to reflect, by and large, the common law of contract as discussed above but the statutory liability is coupled with a power vested in the courts to assess the reasonableness of the costs of the tribunal.
As the statutory liability does not displace the common law liability the right to ask for assessment only applies to the joint and several statutory liability rather than any common law contractual right on the part of the tribunal to its fees. So if it has been agreed that the tribunal is to be remunerated on a lump sum or fixed scale fee basis there could be no abatement of such fees on the grounds of their unreasonableness and likewise if it has been agreed that the tribunal will be remunerated for its work on the basis of work done by it at a specified hourly rate could be no basis for disputing the hourly rate at least.
The right on the part of a party to recover by way of costs any expenses paid by him to the tribunal from any other party pursuant to any costs order in his favour only however extends only to the reasonable fees of tribunal. Manifestly where the tribunal itself, rather than the court, assesses the costs of the arbitration in a whole or part, it is most unlikely however to find that his own costs are unreasonable! In such instances there is provision under sect 64 of the 1996 Act for the court to determine what is reasonable.
Some aspects of the costs of parties
The costs of the parties include the costs of the tribunal; at least so far as they are the liability of the party seeking recovery thereof. The costs might be those of any agent representing the receiving party in the arbitration and are not necessarily those of any lawyer admitted to practice in the seat of the arbitration or otherwise.
By sect 61 of the 1996 Act the tribunal has power but not obligation to determine liability for costs; i.e. the incidence of costs. It would be very unusual nowadays for a tribunal to decline to exercise its power to determine the incidence of costs as between the parties and indeed not much less unusual for the tribunal to decline to exercise its jurisdiction to assess the quantum of any costs.
Assessment of the quantum of costs by the tribunal is certainly a much simpler, quicker and cheaper process than assessment by the court and is on the whole much to be preferred; if only because the tribunal is familiar with the case itself and unencumbered by the complex costs assessment processes and bill forms as used in the courts.
In those cases where the tribunal professes unfamiliarity with assessment of costs it would be prudent for the tribunal to engage the assistance of a costs assessor or like in a case of any complexity; in which case by sect 37 of the 1996 Act the costs so incurred would be part of the costs and expenses of the tribunal but with a three-man tribunal it is likely that at least one member has sufficient suitable experience in the assessment of costs to make this unnecessary.
By sect 61 of the 1996 Act the general rule as to the incidence of costs is that costs follow the event unless the tribunal finds that this is ‘not appropriate’ in relation to whole or part of the costs. A departure from the general rule might commonly occur in those cases where there is evidence before the tribunal of a failure by the successful party to beat a ‘without prejudice save as to costs’ offer in which case the successful party may typically be deprived of his costs from the date when such offer might have been accepted and indeed be ordered to pay his opponent’s own costs as from that date. In other situations where say both claim and counterclaim succeed the tribunal might decide to make no order as to costs either way.
An agreement that one party pay whole or part of the other party’s costs is prohibited by sect 60 of the 1996 Act unless such agreement is made after the dispute arose but an agreement to the that each party bear its own costs of, or that costs of both parties are limited in some way or another, would not offend.
By sect 63 of the 1996 Act the general default rule as to the quantum of costs , is that any recoverable costs awarded must be reasonable in amount and reasonably incurred. Any doubt as to whether costs were reasonably incurred or reasonable in amount is resolved in favour of the paying party rather than receiving party (the so-called ‘standard’ basis of assessment as opposed to a more generous ‘indemnity’ basis of assessment).
This general rule is however subject to any contrary agreement of the parties or any decision of the tribunal to proceed otherwise. The Act is rather oddly silent as to the circumstances in which the tribunal itself can depart from the general rule in the absence of any agreement between the parties.
Plainly where an obviously hopeless or manifestly fraudulent case has been pursued some departure from the default rule would be justified but what about other cases such as, for example, where the successful party has matched or beaten his own offer in the equivalent of what would, in a court suit, amount to a Part 36 offer under the statutory CPR procedural rules? Whether the tribunal can depart from the general rule and award indemnity costs in such cases, as with Part 36, remains a moot point. The answer would appear to be that the tribunal could only do so by reference to the justice of the particular case in hand rather than the more general considerations as to promoting settlement and much else which underlie the Part 36 rule and which are, in effect, ‘penal’ rather than compensatory.
Likewise in such cases it would seem that the tribunal could only award-enhanced interest on damages and costs awarded to the successful party where, to use the wording of sect 49 of the Act, the ‘justice of case’ requires it. This must be the justice of the particular case before the tribunal without reference-to-reference to the very much more general public interest or penal considerations underpinning the whole of Part 36. Plainly there is a difference between the ‘ justice of the case’ and ‘the interests of justice’ or like more generally and, unlike Part 36 in its latest amended form, it seems impossible to contemplate a supplementary award of costs based on a percentage of the amount recovered where a part 36 offer is equalled.
Yet other difficulties, which remain to be fully worked out, arise in those cases where the successful party seeks to recover costs on some sort of contingency basis based on, just say, a percentage of the amount claimed or recovered by award or on the basis of actual time spent at an hourly rate plus a success fee uplift.
It would seem that such costs are not in principle irrecoverable where they satisfy the default sect 63 test as being reasonable in amount and reasonably incurred (with any doubt as to same resolved in favour of the paying party) or, where the tribunal decides to depart from the default general rule imposed by sect 63, on some other expressed rational basis.
There is a very important but rarely used power vested in the tribunal (unless both parties or otherwise agree) by sect 65 of the Act to restrict the recoverable costs of the parties costs in advance of such costs being incurred otherwise. It is however none too common to meet such applications and where an application is made by a party all too common for the tribunal to decline to exercise its jurisdiction in such regard.
Some thoughts and recommendations
Effective control of costs of the arbitration lies of course with proper control of both the tribunal fees and party representation fees.
It starts with the drafting of the arbitration clause in the contract; Are we to have a one man or three-man tribunal and institutional or non-institutional arbitration? Do we exclude appeals on points of law and/or dispense with a reasoned award. Do we impose restrictions on recoverable costs and place restrictions say on the right of a party to have an oral hearing or be represented by a lawyer?
However once a dispute has arisen it extends right through to he manner of conduct of the reference and the style and content of the award.
Institutional arbitration is not necessarily more expensive than ad hoc arbitration and nor are scale fees necessarily more likely to be any greater than fees charged at an hourly rate. Scale fees also of course have the advantage of greater certainty and predictability at the expense of a certain possible unfairness in some individual cases – to either one or both of the parties or the tribunal.
Where charges fall to be paid on an hourly basis and each party appoints or nominates his own arbitrator a prudent party will of course enquire as to the tribunal’s hourly rates before appointing/nominating his arbitrator and likewise also as to cancellation, reservation fees and travel and arbitration ‘secretariat’ expenses etc. Ultimately though of course the other main determinant of the overall fees, the number of hours spent, necessarily and inevitably remains very much an unpredictable and open-ended factor.
One notable advantage of institutional (such as ICC or LCIA) or quasi-institutional (such as LMAA or UNCITRAL) arbitrations is that default procedures exist for appointment of an arbitrator or arbitrators, which avoids the necessity for a party to incur the costs of an application to the court to perfect the establishment of the tribunal.
The seldom utilised sect 46 of the 1996 Act enables the parties to a reference to agree that the tribunal shall determine the reference according to supra-national system of law or lex mercatoria or give application to some more general principles of fairness or like but (perhaps a big ‘if’) the relevant criteria or principles must be expressed or at least identified with sufficient clarity. In such cases there can be no appeal on a point of law anyway; even if such appeal is not otherwise excluded by agreement.
Appeals from arbitration awards are a source of considerable added cost but appeals on point of law can be excluded by agreement of the parties to specifically waive such rights or to have an unreasoned award; leaving a party only with the very limited rights of appeal on grounds of ‘serious irregularity’ under sect 68 of the 1996 Act.
A well-advised party to an arbitration clause will have given prudent consideration when agreeing its terms as to whether he wants a reasoned award at all and/or whether he wishes to restrict the tribunal to an award on written submissions alone or, say, otherwise restrict right of parties to be represented and/or to recover any such costs of representation.
Where it is likely that disputes may arise under other contracts between the same parties he will also have given close consideration as to whether to confer powers on the tribunal to hear a wider range of claims and counterclaims. It seems not to be generally appreciated (even amongst many non-contentious lawyers) that the right to bring into a reference issues of set-off and counterclaim arising out of other contracts between the same parties may be very circumscribed; at least in the absence of express provision in this respect. Institutional arbitral rules often now make at least some limited provision in this respect; though more extensive bespoke provision is often very desirable.
It is not unusual to encounter prolix awards with lengthy ‘cut and paste’ recitals, in the manner akin to many LCIA and ICC awards, of the procedural history of the reference and perhaps the arguments of the parties too but often very little in way of detailed analysis or testing in support of the conclusions reached; which seems all too often frankly to serve no useful purpose other than to possibly to show that tribunal has devoted an inordinate amount of time and other people’s money to matters of little consequence and far too little attention to the kernel of the matter.
The main enemy of cost-control in the reference is probably simple want of sufficient discrimination in presentation by the parties of their respective cases to the tribunal. Another factor is often seen to be excessive and unthinking replication of undesirable or unnecessary court processes and the presumption (usually mistaken) that disclosure and cross-examination of witnesses is the key to the outcome. Of course there are some cases where this is so; but the writer’s experience is that, at least in an international commercial arbitration context, these are very few and far between.
Probably the single biggest attraction of arbitration both from the costs and speed point of view is the ability of a tribunal to determine on paper, and with a high degree of informality, not only interlocutory applications in the course of the reference (e.g. for disclosure) but also the substantive issues arising on any award. This must be especially so when viewed in conjunction with the almost universal use of the humble email as the predominant (or in some case sole) means of communications between the parties and the tribunal; not only for routine correspondence but also as vehicle for applications and presentation of submissions and publication of the award.
The email offers of course the advantage of instant and direct access between a party and the tribunal and any secretariat with ability to provide simultaneous copies of communications to all other parties in a manner quite alike anything available in a court suit.
The only disadvantage of this ‘instant access’ facility perhaps lies with its tendency to encourage excessive resort to by the parties to the tribunal on a proliferation of interlocutory applications of minor consequence. Clearly also the more the parties involve the tribunal in routine correspondence the more costs the tribunal will incur; this simple point often seems however to go overlooked.
Greater encouragement might be given by tribunals to parties to seek to agree matters before applying to the tribunal for an order; the rules of the London Maritime Arbitrators Association (LMAA) specifically require that the parties endeavour to reach agreement on applications before applying to the tribunal. These rules also by the way contain much else of sound common sense and real practical value refined from many years of experience of LMAA arbitrations.
Determination of applications, and even substantive issues, on written submissions alone has not inconsiderable advantages in many cases and there is much perhaps to be said for a rebuttable working presumption in most commercial cases that awards, as well as applications, can be adequately dealt with ‘on paper’ without oral submissions or witness attendance for cross-examination.
Where there is no oral hearing there may be a greater risk that an issue of fact or law material to the outcome will be overlooked by the tribunal in the award in its findings of fact and determinations (‘holdings’) of law; this is in fact possibly the principal ground on which in practise an award is liable to be set aside for ‘serious irregularity’.
Likewise there is more risk that the importance or true relevance (or irrelevance) of an argument, or perhaps its full implications, on any one or more issues will go unappreciated or unexplored or untested by the tribunal or indeed (a very common event) that the submissions of the parties will not truly engage with each other at all or that a wholly immaterial issue will achieve undue prominence.
In truth many of the points, which can undermine witness evidence on cross-examination, can be almost as well raised in written submissions, as it is often the question or observation rather than the answer that counts.
Promotion of agreed lists of issues of fact and law (and indeed even a succinct summary of the arguments on each issue) helps to avoid risk these risk. The latter risk can be greatly reduced in many cases if tribunals were to give some suitable advance indications of their provisional views and thoughts on closing submissions. Commercial arbitration references are served badly not only by the prolix and undiscriminating advocate, but also by the sphinx-like arbitrator.
The discretion given to the parties, which is inherent in any arbitration, as to the type of representation they choose to retain for themselves must of course be a very material factor in control of costs. Many large commercial organisations now routinely employ large in-house teams of legal counsel who are well able to conduct arbitration without external assistance. Even where an external lawyer is instructed it not essential that he be a local lawyer admitted to practise in the jurisdiction of the arbitration seat.
Increased ‘front-loading’ of tribunal costs appears to be a feature of many references though this does not seem to have led to any reduction in the amount of the fees for writing the award; on the contrary these also seem to be on an upward trend. Stenographic recording of witness evidence, and even submissions, now seems to be considered almost de rigeur as does a trend towards use of lavish room hire facilities and employment of excessively large legal teams on all sides.
Use of external costs draftsmen to draw court-style ‘bills of costs’ in association with presentation of claims for costs assessment by the tribunal is sometimes encountered too but hardly seems necessary given that all that is really needed is a detailed time sheet print-out showing the work done and time spent by fee earners and a list of disbursements incurred.
The best tribunals are by no means the most expensive; at least in this writer’s experience. A pro-active arbitrator will be willing, for example, to exercise sect 65 powers in appropriate cases and to in any event actively seek to identify, with the help of the parties, the critical issues of fact and law and arguments thereon in the reference and the best way forward to determine same. However there are of course cases where both parties resolve on a certain course of action and in such cases the parties’ wishes must prevail. Just as a lawyer is the creature of his instructions, so a tribunal is the creature not only of the original arbitration agreement itself but also any subsequent procedural agreements made between the parties in the course of the reference.
Each reference is unique and most certainly no one or fixed approach can prevail. The circumstances of each contract, including the bargaining power of the parties and the overall factual matrix, must determine what type of arbitration clause is best suited to the contract under negotiation just as the nature of any emergent dispute thereunder must determine how the reference can best be proceeded with. The writer’s own experience is that arbitration can be a most cost-effective and satisfactory form of commercial dispute resolution; but only if the parties put the minds to adapting and fashioning the process to the matter in hand.