The costs of arbitration are increasingly a concern in many respects. What was in the beginning a relatively inexpensive method of dispute settlement has unfortunately become in some cases an extremely expensive way of deciding disputes, more often when the arbitration takes place in a common law procedural environment rather than in a civil law procedural context. Defence costs, which twenty years ago did not exceed a few hundred thousand dollars, sometimes amount nowadays to millions or tens of millions of dollars. Costs have therefore become a major concern. Some parties have reached the conclusion that arbitration has become too expensive, too burdensome, too lengthy and consequently wonder whether it is still the quick and cost-effective method of dispute settlement that their lawyers suggest.

The purpose of this paper is to present the issue of parties' costs as part of the overall compensation of the damages they are claiming. This is an important issue, considering the substantial amounts involved, which in some cases may even exceed the damages allocated, with the consequence that an improper allocation of costs would seriously affect the importance of the winning party's success.

In ICC arbitration, costs are dealt with in Articles 30 and 31 of the Rules. Article 30 provides for the payment of the costs of the arbitrators and the ICC advance, in several stages, while Article 31 is concerned with their final determination. Article 31 also requires the Arbitral Tribunal to decide how such costs should be borne by the parties, together with the fees and expenses of any experts appointed by the Arbitral Tribunal and the reasonable legal and other costs incurred by the parties for their defence in the arbitration. [Page213:]

I will not deal in this paper with the issue of the arbitrator's fees and expenses and the ICC administrative costs. It will be strictly limited to the parties' costs. 1

1. The parties' costs

Article 31(1) of the Rules provides that the costs of the arbitration will also include "the reasonable legal and other costs incurred by the parties for the arbitration". What are these costs?

In the first place, the wording of Article 31(1) is intended to permit the Arbitral Tribunal the greatest possible discretion in fixing the costs of the arbitration pursuant to Article 31(3). Since there is no definition of these costs, their determination and the manner in which the relevant language of Article 31(1) should be construed is left to the discretion of the arbitrators. I will not deal in this section with the reasonableness of these costs but only with what is included therein.

The legal and other costs that form part of the costs of the arbitration include the fees and expenses of legal counsel, that is, those that are incurred during the arbitration procedure, but not necessarily all those that have been incurred before the start of the arbitration. 2 Among the latter, only expenses which were necessary for the preparation of the case and directly linked to the filing of the arbitration are considered as costs of the arbitration. Costs of a preliminary mediation or conciliation, for example, will not be considered costs of the arbitration.

On the other hand, should one consider as costs of the arbitration the fees and expenses that will have to be incurred after the issuance of the award until payment by the losing party? The answer is definitely negative. 3 Eventually, such costs could be considered and recovered as costs of the enforcement of the award.

The costs of the parties will also include the costs of experts and consultants who have been used in the instruction of the case. Article 31(1) refers to the expenses of experts appointed by the Arbitral Tribunal, pursuant to Article 20(4), and not experts designated by the parties. It is agreed, however, that[Page214:] by referring specifically only to tribunal appointed experts, Article 31(1) does not mean to exclude the costs of experts retained by the parties from the costs of the arbitration. These costs will not only include the fees and expenses of the experts and consultants, but also the costs associated to their testimony, costs of travel, accommodation and other ancillary costs.

The same rule applies to the costs of fact witnesses: costs for the preparation of their witness statements, costs of traveling to the place of hearing, accommodation and ancillary expenses, including telephone, telefax and photocopies.

Another type of parties' costs are the costs associated with the production of documents: not only the costs of searching, photocopying and dispatching, but also the costs of investigating into the archives of the other party if the latter authorizes its counterpart to have access to said archives and retrieval of any documents that it deems necessary or useful for the defence of the case.

It is not disputed that costs of interpreters and translators, whenever they are necessary, are to be included in the costs of the arbitration. Very often, the Arbitral Tribunal will determine in a procedural order that any document or testimony submitted in a language other than the language of the arbitration will have to be translated or interpreted in that language, that the costs of such translation or interpretation will be advanced by the party concerned and will be added to, and finally allocated with, the costs of the arbitration.

Another issue that is less easy to decide is whether the costs of ancillary proceedings may be added to the parties' costs. One will normally expect that the costs incurred in another arbitration proceeding cannot be claimed as costs of the arbitration. But what about court proceedings if a party to the arbitration had to go to court or to defend in court in relation to conservatory or provisional measures or other urgent (in the context of a référé or a request for a Mareva injunction) procedures directly connected with the arbitration? It seems that the allowability of these costs as costs of the arbitration is generally not accepted. 4 They should be claimed and allocated in the relevant procedures. Some of them might also be claimed as damages. 5

In a few cases, the parties have claimed the payment of pre-award interest on the costs incurred in the course of the arbitration. In the cases which[Page215:] have been reported, this request has always been rejected6 on the ground that "interests for costs awarded to claimant cannot be adjudged, these costs becoming due only at the date of service of the present award". 7

Can a party claim the reimbursement of costs, such as defence costs, which have been, or will be, reimbursed by an insurer or other indemnifier not itself a party to the arbitration? The issue seems to have been addressed only in one case. 8 The Arbitral Tribunal concluded that such costs were properly recoverable in the arbitration, since counsel was retained, not by the insurer, but by respondents and that consequently the duty to pay counsel was incumbent on respondents; the counterpart being that respondents were obliged to reimburse the insurer all the corresponding costs paid by the losing party in performance of the award.

Another more important and much debated issue is whether the parties' costs include the costs of the time of the parties' personnel, including in particular in-house legal staff. Such costs are still not so often claimed in arbitration procedures. When they are, especially in large cases, they seem to be increasingly accepted, at least in respect of in-house counsel to the extent that the costs can be satisfactorily substantiated. 9

In ICC case No. 6564 of 1993, 10 the Arbitral Tribunal decided that these costs were admissible in principle - but refused to grant them - on the following grounds:

"In the Arbitral Tribunal's view in-house legal costs may well form part of a party's normal legal cost incurred in the conduct of a case. It is for each party to decide whether it wishes to retain outside counsel or prepare and argue the case by its own staff. There is no justification to privilege a party in terms of costs for the sole reason that it retained outside counsel.

"A claim for a party's internal costs is admissible in principle also in those cases where outside counsel had been retained. A party must be free in allocating the work between its outside counsel and its own services. A party which decides to perform most of the preparatory work for the case by its own legal and technical departments should not be placed at a disadvantage compared to one which confers all work to outside counsel and experts. [Page216:]

"There is, however, an important difference between the costs for outside counsel and those incurred in-house: the former are expenditures and can be clearly identified and evidenced; in the case of the latter this is not always the case. In view of this difference it appears justified to require some substantiation inter alia with respect to the nature of the cost, the personnel involved and type of work performed. In the present case, neither Party satisfied these requirements. Their claims are too general to permit an assessment of the justification and reasonableness of the costs claimed. Therefore, no allowance will be made for internal costs of the Parties."

On the other hand, in-house counsel's costs were fully rejected by the Arbitral Tribunal in ICC case No. 629311 on the following grounds:

"Claimant has claimed compensation for the time of its personnel involved in the preparation of its case. This claim does not in my view form part of the costs of the arbitration, in the sense of being part of Claimant's 'normal legal costs', contemplated in Article 20(2) of the ICC Rules. It is really a separate head of damages claimed by Claimant and must be rejected together with its other damage claims. Assuming, however, that Claimant had proven that it was entitled to damages as a result of the breaches complained of in this arbitration, I do not consider that the twenty-three man-days claimed by it for its four employees involved in preparation of the case should be compensated. The per diem sum claimed for each employee, whether for salary alone or salary plus overhead, does not represent a special cost incurred by it for purposes of the arbitration but is part of its normal operating expenses. It is for the same reason that such amounts cannot in my opinion, form party of its legal costs."

2. May parties' costs be allocated before the issuance of the final award?

Article 31(2) of the Rules provides that decisions on costs other than those fixed by the Court may be taken by the Arbitral Tribunal at any time during the proceeding. As determined in Article 31(3), the general rule in ICC arbitration is that the costs of the arbitration are fixed in the final award, unless the arbitration is terminated earlier. It is also the final award that includes the arbitrators' decision on the allocation of those costs between the parties. [Page217:]

It is not usual to have costs fixed and allocated before the final award, because the ICC Court is not in a position to fix the fees of the arbitrators and the ICC administrative costs earlier. Moreover, the costs of the arbitration will be dependent on the outcome of the case. However, there may be circumstances in which it might be appropriate for the Arbitral Tribunal to decide upon the allocation of the parties' legal and other costs before the final award, for example, in a partial award resolving certain of the issues in the arbitration; or if the Arbitral Tribunal decides in a partial award that it does not have jurisdiction over one of the parties to the arbitration and the party in question should therefore recover its costs from the party that improperly included it in the proceedings. This is why the last sentence of article 31 (2) has been included in the Rules.

3. The final determination and allocation of the parties' costs

Fixing costs

Article 31(3) of the Rules provides that the final award shall fix the costs of the arbitration and decide which of the parties shall bear them or in what proportion they shall be borne by the parties.

The parties' costs, that is the determination of their amount, will be fixed in the final award. There is, however, no duty for the arbitrators to fix them if they decide that each of the parties shall bear its own costs, or if the arbitration clause provides so, which is not unusual. What is less usual is that even if it is so provided in the arbitration clause, it happens that the parties subsequently conclude in their submissions that the adverse party should bear the costs of the arbitration. The parties should then be questioned on their real intention. The tribunal might end up deciding that by their submission in the memorials, the parties have waived the provision included in the arbitration clause.

How will the Arbitral Tribunal determine what are the costs of the parties? The parties will generally make submissions on costs. In most arbitrations, they are even invited to do so after the final hearing or the post-hearing submissions. In large cases, each party will even be invited to comment on the costs submissions of the other party. These submissions should not only include the details of the costs, but also all relevant justifications such as invoices. [Page218:]

It happens sometimes, in relation to fees, that counsel does not tell the Arbitral Tribunal how much they have charged or will charge to their client. Instead they only report what their fees would normally be on the basis of a national fee schedule, or they fix their fees at a certain amount, without joining an invoice, having an understanding with their client that their honoraria will be fixed at the amount mentioned in their submission if they win the case and at a lower amount if they lose. In such cases, the Arbitral Tribunal will fix the fees at the amount it considers appropriate and will not necessarily allocate the full amount that is claimed.

It also happens from time to time that counsel claim, beyond their legal fees, a success fee. Such success fees are normally not included in the costs fixed by the Arbitral Tribunal. They are not properly defence costs, since they do not cover real costs exposed for the defence of the case. They are rather a reward granted in consideration of the success obtained in the defence of the case and should be fully supported by the party concerned.

How do Arbitral Tribunals deal with the requirement that the legal and other costs incurred by the parties for the arbitration have to be "reasonable"? 12 Do arbitrators refer to national law? They sometimes do so, but rarely. It is the exception rather than the rule. 13 Sometimes, they also refer to the general principles of international commercial arbitration, as in ICC case No. 8496 of 1996. 14 In most cases, they only refer to the discretionary power they are granted by Article 31 of the Rules. In one case, 15 the Arbitral Tribunal pointed out that acting as amiable compositeur, he enjoyed an even wider amount of discretion and decided that in view of the final result of the arbitration for each party, it was an equitable solution to decide that the costs of the arbitration were to be borne by the parties in the same proportion as their advances, namely one-third by claimant and two-thirds by respondent.

Whether the costs claimed by the parties and in particular their legal costs will be considered reasonable is a function of various factors, for example whether the submissions on costs have been disputed by the other party. But the fact that the submissions have not been disputed does not mean that the costs submitted will always be taken for granted by the Arbitral Tribunal. Arbitrators are auxiliaries of justice. They should make sure that the arbitration process is fair, including an award of costs. In one case, for example, the Arbitral Tribunal rejected part of the costs because the party concerned was[Page219:] represented by three law firms, which was found excessive by the members of the panel16 . The arbitrators did the same in another case where invoices had been submitted in relation to the engagement of foreign counsel and where there was no evidence that the work of these lawyers was related to an alleged participation in the arbitration. 17 A similar decision has been reached when the amount claimed by a party is not supported by enough evidence; 18 or when the Arbitral Tribunal has determined that part of the submissions and witness statements was totally useless or dealt with issues which were not relevant to the arbitration. 19

The allocation of costs

How are costs allocated by Arbitral Tribunals? The approaches of ICC arbitrators are diverse. 20 Sometimes awards contain just a few sentences relating to the question. In other cases, the matter of costs is dealt with in a more elaborate fashion. Still in other cases, it may be the subject of a separate, final award, after the merits have been dealt with in an earlier partial award.

According to Article 31(1) of the Rules, the arbitrators have complete discretion to allocate the costs as they see fit. Unlike some other arbitration rules, such as for example Article 40 of the UNCITRAL Rules, 21 the ICC Rules do not provide that the unsuccessful party will in principle bear the costs of the arbitration.

According to Yves Derains and Eric A. Schwartz, 22 the treatment of costs by Arbitral Tribunals is often influenced by their national backgrounds. These authors refer to three different approaches that are most commonly followed. One is to order that all the costs be borne by one of the parties, normally the losing party. This is often the case in England where it is said that "costs follow the event". Another approach, which seems to prevail in Germany, Switzerland and Austria in particular, is the allocation of costs in proportion to the outcome of the case, taking into consideration the relative success of the claims and defences. A further possibility is to require that the costs be shared equally by the parties or that they each bear their own costs. The arbitrators may also consider that administrative costs and arbitration fees and expenses, on the one hand, and legal and other possible expenses, on the other hand, should be treated differently. [Page220:]

In practice, the formulas adopted by Arbitral Tribunals are as diverse as the awards. In 1991, the ICC Secretariat undertook a study of the final awards rendered in ICC arbitrations between March 1989 and September 1991 in order to determine the manner in which the arbitrators had dealt with the allocation of arbitration costs in ICC cases. Reference is made to the conclusions of this study, which have been reprinted in the ICC Study, 23 as well as in the book of Yves Derains and Eric A. Schwartz. 24

Many factors may enter into consideration in the determination of the final allocation of costs. The various approaches followed by ICC arbitrators are often influenced not only by their procedural backgrounds, but also by the substantive outcome of the arbitration and the behaviour of the parties. In some cases, the Arbitral Tribunal will conclude that although the claimant loses the whole case, the issues were extremely difficult to decide and one could easily understand why the case had been filed. Consequently, even though a respondent wins an arbitration, each party may have to bear its own costs. In other cases, the Arbitral Tribunal will penalize the bad faith or uncooperative behaviour of a party which has tried by all means to delay or to derail the arbitration. 25 But whatever the decision, the arbitrators are normally expected to provide reasons for their decisions, in accordance with Article 25 (2) of the Rules. 26

One should also be candid and recognize that the final allocation of costs is in some cases an argument put forward by a member of the panel to have him accept a result that is different from the one he wanted to reach, with the consequence, for example, that the claimant wins the case in totality but is not awarded the totality of its costs.

Equitable concerns may also play a role in some decisions on the allocation of the parties' costs. In one such case, a claimant, originating from a developing country, lost the arbitration. The claimant was not condemned to bear the entire arbitration costs, given its good faith in bringing its claims and the fact that the defence of an arbitration claim in Paris - with several witnesses coming from that remote country - had already been a very expensive exercise. [Page221:]

Conclusion

Determining the costs of arbitration and how they should be allocated is an important issue. Arbitrators in ICC cases generally have no difficulty dealing with the issue and very wisely use the discretionary power that they are granted by Article 31 of the Rules. One area of greater concern is the continuous increase of these costs which, in some cases, have exceeded US$25 million on each side. If they are fully justified given the magnitude of the case, there is nothing to say about their amount. But this is not always the case. As was rightly pointed out by Professor Bruno Oppetit, 27 arbitration has become a business. Priority is consequently given by some lawyers to the generation of work and fees. Once again, it should not be overlooked that there is an increasing concern of parties that arbitration tends to become too expensive, too burdensome, too lengthy and is therefore drifting away from the traditional values of rapidity, efficacy and cost-effectiveness which have made its success. These parties wonder whether they should not go back to national courts. Let us make sure all together that they do not chose this alternative. [Page222:]

1
The most comprehensive coverage of this issue is to be found in Yves Derains and Eric A. Schwartz, A Guide to the ICC Rules of Arbitration, International Court of Arbitration, 2nd ed., Kluwer, 2005, Chapter 7, and the bibliography which is included. One will also refer to the article on the costs of ICC arbitration published by Eric A. Schwartz in the ICC Bulletin, Vol.IV, No. 1, 1993, p. 8, which is followed by the publication of extracts of ICC awards on costs, hereinafter referred to as the "ICC Study".

2
Award in case No. 5896 of 1992, ICC Study, p. 37, in which the arbitrators have decided that the costs of arbitration could not include those exposed before the filing of the arbitration, that is, the reception of the arbitration request by the ICC Secretariat. Some of these costs may be claimed as damages, for example if buyer, claimant in the arbitration, had to defend before criminal courts because of purchaser's (respondent's) fraudulent conduct before the acquisition.

3
Case No. 5759 of 1989, ICC Arbitral Awards, Vol. III, pp.175, 184, reprinted from the Yearbook Commercial Arbitration, 1993, 34.

4
See in this respect the references cited by Yves Derains and Eric A. Schwartz at footnote No. 95. The reasoning is that these costs should be claimed from the court which has to deal with these proceedings.

5
See above, the example cited at footnote 2.

6
ICC case No. 5896 published in ICC Study, p. 37 and ICC case No. 5759 of 1989, ICC Arbitral Awards, Vol. III, pp. 175, 184, reprinted from the Yearbook Commercial Arbitration, 1993, 34.

7
Idem.

8
ICC case No. 7006, reprinted in ICC Study, p. 49. See also Yves Derains and Eric A. Schwartz, footnote No. 98.

9
See Yves Derains and Eric A. Schwartz, footnote No. 96 and corresponding text.

10
ICC Study, pp. 45, 46.

11
ICC Study, p. 43.

12
Article 31 (1).

13
ICC final award in cases No. 6282 of 1992 and 6345 of 1991, ICC Study, pp. 42, 44.

14
ICC Arbitral Awards, Vol. IV, 321.

15
Final award of 28 March 1984 in case No. 3267, ICC Arbitral Awards, Vol. II, pp. 43, 52.

16
ICC final award in case No. 5726 of 1992, ICC Study, p. 35.

17
Final award in case No. 6564 of 1993, ICC Study, p. 45.

18
Final award in ICC case No. 8032 of 1995, ICC Arbitral Awards, Vol. IV, pp. 66, 74.

19
Final award in ICC case No. 5731 of 1989 and in ICC case No. 6959 of 1992, ICC Study, pp. 36, 48.

20
Yves Derains and Eric A. Schwartz, p. 370.

21
Article 40 (1) : "1. Except as provided in paragraph 2, the costs of arbitration shall in principle be borne by the unsuccessful party. However, the arbitral tribunal may apportion each of such costs between the parties if it determines that apportionment is reasonable, taking into account the circumstances of the case."

22
P. 371.

23
See supra, note 1.

24
Idem, pp. 371-373.

25
See for example final award in ICC case No. 7453 of 1994, ICC Awards, Vol. IV, pp. 94, 111: "The first defendant's conduct at the hearing was dilatory from the beginning until the end of the proceedings and that conduct was obstructive, and it was calculated to be obstructive, of the tribunal in carrying out its task. Much extra and unnecessary work was caused thereby for everyone concerned. The first defendant must bear and pay the entire costs of this arbitration [...] and also the entire legal costs of the claimant and out-of-pocket expenses of the counsel to the claimant [...]"; and final award in case No. 8486 of 1996, ICC Arbitral Awards, Vol. IV, 321, 331: "In the present case, the defendant loses its counterclaim, but the claimant's claim is granted only in part [...]. Nonetheless, the costs of the arbitration shall be borne totally by the defendant. According to the general principles of international arbitration law, the Arbitral Tribunal must take into account for its decision on costs not only the result of the proceedings but also the behaviour of the parties during the proceedings. According to good faith, the parties to an international arbitration must in particular facilitate the proceedings and abstain from all delaying tactics. The behaviour of the defendant during the entire proceedings did not comply with these requirements in any way [...]."

26
When the parties have spent substantial amounts of money for the defence of their case and have made detailed submissions on their costs to the Arbitral Tribunal, they even expect a very detailed decision and reasoning on costs.

27
Théorie de l'Arbitrage, PUF, 1998, p. 107.