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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
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I. Introduction
1. The ICC Commission on Arbitration and ADR (the 'Commission') seeks to continue providing users of international arbitration with the means to ensure that proceedings are conducted in an effective and cost-efficient manner.
2. Party costs (including lawyers' fees and expenses, expenses related to witness and expert evidence, and other costs incurred by the parties for the arbitration) make up the bulk (83% on average) of the overall costs of the proceedings. Arbitrators' fees and case administration account for a much smaller proportion of the overall costs, as shown below.1
3. Significant work has already been done by the Commission to help keep party costs under control. It includes the 2014 guide, Effective Management of Arbitration: A Guide for In-House Counsel and Other Party Representatives, the 2012 report Techniques for Controlling Time and Costs in Arbitration,2 and a revision of the ICC Arbitration Rules leading to the latest version of 2012 (the '2012 ICC Rules').
4. The 2012 ICC Rules introduced two new additions to encourage greater control of time and costs by arbitrators. Article 37(5) provides that:
In making decisions as to costs, the arbitral tribunal may take into account such circumstances as it considers relevant, including the extent to which each party has conducted the arbitration in an expeditious and cost-effective manner.
Appendix IV of the ICC Rules further provides examples of case management techniques that can be used by the arbitral tribunal and the parties to control time and costs. One of the objectives of these techniques is to ensure that time and costs are proportionate to what is at stake in the dispute.
5. It became apparent in the preparation of this Report that arbitrators' approaches to the allocation of costs are often influenced and informed by practice in the courts and/or under the laws of the countries of origin of the parties and the arbitrators or of the place of arbitration. That practice reveals two basic approaches: either the loser pays the successful party's costs (sometimes called 'costs follow the event'); or each party pays its own costs regardless of the outcome. These approaches are understood and applied differently in different countries (see Appendix B).
6. In international commercial arbitration, various trends are emerging in relation to cost allocation practices and expectations. However, little has been written about them and it is unclear which are the prevailing approaches and practices. This Report seeks: (a) to identify the various approaches applied by arbitral tribunals by analysing decisions on costs in ICC awards rendered under the 2012 ICC Rules and the preceding version of the ICC Arbitration Rules (the '1998 ICC Rules') and in awards from eight other major arbitral institutions; and (b) to identify underlying national differences.
7. The ultimate objective of this Report is to consider how the allocation of costs between the parties can be used effectively to control time and costs and to assist in creating fair, well-managed proceedings matching users' expectations. The Report is not intended to be prescriptive, nor does it endorse any particular practice or approach. Given that party autonomy and flexibility are central to international arbitration, there is no single, universal approach to the allocation of costs.
8. With this objective in mind, the Commission established a Task Force on Decisions as to Costs, which took the following initiatives:
(i) The Task Force members met five times to develop a framework for its work and this Report.
(ii) Representatives from countries in which the ICC has a National Committee or Group responded to a survey on approaches to costs under national laws (see Appendix B)
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(iii) The Secretaries to the ICC Commission studied ICC awards to identify how arbitrators have dealt with the allocation of costs (see Appendix A)
(iv) The China International Economic and Trade Arbitration Commission (CIETAC), the Hong Kong International Arbitration Centre (HKIAC), the German Institution of Arbitration (Deutsche Institution für Schiedsgerichtsbarkeit e.V., DIS), the International Centre for Dispute Resolution (ICDR), the London Court of International Arbitration (LCIA), the Permanent Court of Arbitration (PCA), the Stockholm Chamber of Commerce (SCC) and the Singapore International Arbitration Centre (SIAC) were invited to submit analyses of awards showing how arbitrators have dealt with the allocation of costs under their respective rules (see Appendix A)
(v) On the basis of an analysis of the practices of arbitral tribunals and national courts, the Task Force identified factors that a tribunal may in its discretion take into account when making decisions on costs at any stage of the proceedings and when fixing and allocating costs in the final award.
(vi) The Task Force identified and described in this Report how the exercise of the power to allocate costs can be used to improve efficiency in arbitration.
II. Outline of the Report
9. This Report is divided into five main parts:
(i) a summary of general approaches to awarding costs, based on the Task Force's (a) analysis of commercial arbitration awards (the results of which are set out in Appendix A) and (b) a survey of national practices (in litigation and arbitration), including in relation to third-party funding, cost-capping and cost disparities (or inequalities) between parties (the results of which are set out in Appendix B) (Section III);
(ii) a discussion of how the power to allocate costs may be used for the purpose of effective case management (Section IV);
(iii) a discussion of considerations taken into account by arbitrators when allocating costs (Section IV);
(iv) specific challenges raised by funding arrangements and settlement negotiations (Sections V and VI);
(v) concluding observations (Section VIII).
III. Overriding observations
10. The detailed analyses of decisions on the allocation of costs in arbitral awards and the conclusions of the survey of ICC National Committees and Groups are set out, respectively, in Appendices A and B. The principal findings drawn from those analyses are summarized below.
a) Analysis of cost allocation decisions in arbitral awards
11. Based on its study of the allocation of costs in proceedings administered by the major arbitral institutions worldwide (see Appendix A), the Task Force has been able to make the following general observations on the way arbitrators allocate costs in awards.
12. A starting point for any decision on costs is the applicable arbitration rules. They are not identical in this respect. For example, the 2015 CIETAC Rules,3 the 1998 DIS Rules, the 2014 LCIA Rules, the 2012 PCA Rules and the 2010 UNCITRAL Rules all include an express, rebuttable presumption that the successful party will be entitled to recover its reasonable costs. By contrast, the ICC, HKIAC,4 ICDR, SCC and SIAC Rules simply authorize the tribunal to make an award apportioning costs but do not contain any presumption on their allocation. In addition, the 2012 ICC Rules and recent 2014 LCIA Rules both refer expressly to the tribunal's discretion to take into account parties' conduct, including whether they conducted the arbitration in an expeditious and cost-effective manner.
13. Despite the fact that the ICC and at least half of the other major institutional rules contain no presumption in favour of the recovery of costs by the successful party, it appears that the majority of arbitral tribunals broadly adopt that approach as a starting point, thereafter adjusting [Page17:] the allocation of costs as considered appropriate.5 This was the approach in the majority of ICC awards examined, in 91% of HKIAC awards, in the majority of ICDR awards, in 90% of SIAC awards and in more than half of the SCC awards.6 This was also the case in most LCIA and PCA7 awards, which is not surprising as LCIA and PCA Rules contain a rebuttable presumption in favour of recovery of costs by the successful party.
14. An alternative starting point is that each party will pay its own costs.8 Where this presumption applies, whether by agreement between the parties or otherwise, the recovery of costs from the other party will be permitted only in rare circumstances.
15. Irrespective of the starting point, tribunals also assess the reasonableness of the costs claimed. Although the factors taken into consideration to determine reasonableness vary, reasonableness in itself was a criterion considered in most of the awards studied. Generally, arbitrators appear to be relatively willing to deduct legal fees on the basis of unreasonableness. Even where arbitrators begin from the starting point that the successful party is entitled to recover its costs, they frequently adjust the amount recovered, by awarding less than the full amount of the fees claimed.
16. Arbitrators tend to take party conduct into account. It was observed that parties whose conduct was seen to have contributed to excessive costs often did not recover all of the costs claimed.
17. Although in the analysis of the awards reference is made to certain issues such as success fees and disparities between the legal fees of each party, the Task Force did not see enough cases to be able to draw conclusions or infer trends in relation to these.
18. Costs in arbitration include not only the legal fees and costs of the parties (party costs) but also the costs of the tribunal, institution and any facilities used (sometimes called arbitration costs). Liability for arbitration costs is of course a question peculiar to arbitration. In domestic court proceedings there are generally little or no court, judge or counsel costs as they are invariably local. Where an arbitral tribunal decides that each party shall pay its own costs, it will still need to determine which party is to pay the arbitration costs.
19. It should be noted that this Report covers international commercial arbitration awards and practices only. Investor-state arbitration, to which different considerations apply, is beyond the scope of this Report. For the purpose of its research and analysis, the Task Force took into account the rules of several arbitral institutions and the UNCITRAL Arbitration Rules, whose relevant rules can be found in Appendix C. The International Centre for Settlement of Investment Disputes (ICSID) Rules are included for reference only.
b) Approaches to costs in different jurisdictions
20. Based on its study of the allocation of costs by courts in different countries (see Appendix B), the Task Force is able to make the following observations that may be relevant to arbitration.
21. In most jurisdictions, the recovery of costs under fee arrangements, irrespective of whether such arrangements are ultimately funded by a third party, is generally acceptable. Most countries reported that such arrangements are likely permissible even where not specifically provided for in relevant statutes or rules. In a handful of countries such arrangements are specifically permitted, sometimes with certain preconditions. In at least seven jurisdictions certain fee arrangements are specifically prohibited and considered null and void by national courts. In some countries different rules apply to contingency or success fees and other types of conditional fee arrangements, so it is difficult to generalize. Frequently, the rules that apply to fee arrangements and third-party funding in domestic litigation are different from those that apply in [Page18:] arbitration, usually being more restrictive in the former. Several jurisdictions reported that the reasonableness of such fee arrangements could be taken into account when allocating costs in arbitration or that the parties' arbitration agreement would prevail.
22. The majority of jurisdictions could not cite any reported cases on the recovery of costs related to third-party funding. In Switzerland, on the other hand, the Swiss Supreme Court invalidated a law that prohibited third-party funding in domestic cases, as it violated economic freedom. In the United Kingdom the courts have found that a third-party funder can be held liable for an adverse costs order. In other jurisdictions, the reports suggested that third-party funding costs may not be recoverable, because the funder does not have standing to claim costs in the proceedings, and the party that was funded did not actually incur the costs. Singapore suggested that a third-party funding agreement could be considered champertous and therefore unenforceable by Singapore courts in both litigation and arbitration.
23. As far as pre-dispute agreements on the allocation of costs are concerned, several jurisdictions reported that they do not have specific rules. The English Arbitration Act 1996 contains a mandatory provision to the effect that parties cannot agree on paying the costs in any event unless that agreement is made after the dispute arises. Other jurisdictions reported that such agreements are seen with some frequency, be it in an arbitration agreement, when a dispute arises, or towards the end of the arbitration. Finland and Ontario described them as rare, but possible, in their jurisdictions. Such agreements are generally upheld, unless national law provides otherwise.
24. Several jurisdictions reported that their laws do not contain any rule on the arbitral tribunal's power to cap costs, but that this was generally considered permissible. The English Arbitration Act 1996 empowers the tribunal to cap the recoverability of costs, though this power is rarely used in practice. Other jurisdictions reported cost-capping mechanisms under local arbitration rules. For example, under the Polish Chamber of Commerce rules a cap would be imposed on a contingency agreement, and the rules of the Belgian arbitration centre, CEPANI, expressly encourage arbitrators to remind parties of the possibility of agreeing a cap on costs. Many jurisdictions noted that the arbitrators' assessment of the reasonableness of the costs to be allocated would constitute a form of cost-capping when the award is made.
25. With regard to disparities between expensive and less expensive legal counsel (e.g. major international law firms compared with law firms from developing countries or smaller and less expensive firms), several jurisdictions noted that arbitrators have wide discretion to take into account factors such as the complexity and importance of the case, the amount at stake, and the nature of the work involved. Austria noted that the parties' backgrounds could be taken into account, e.g. whether they are foreign and might require local counsel, or whether they are multinational corporations as compared to small businesses. Many jurisdictions noted the importance of proportionality of costs, both in relation to the dispute and between the parties.
IV. Allocation of costs and effective case management
26. The Task Force found that: (i) arbitrators were prepared and permitted to exercise their powers to allocate costs at various stages of the arbitral process, not only in the final award; and (ii) in light of the absence of any uniform approach to the allocation of costs, arbitrators and parties may wish to set out their expectations on this matter relatively early in the proceedings.
27. As to the first point, almost all arbitration rules and statutes permit the allocation of costs in the final award in international commercial arbitration. Awards allocating costs at that final stage and/or at interim stages may enable a tribunal to ensure that a successful party is reasonably compensated for all loss and damage, including the costs of the proceedings. If used carefully, the allocation of costs during the proceedings could improve the overall cost-efficiency and effectiveness of commercial arbitration. To the extent they are deemed necessary and appropriate in any given arbitration, requests for orders or awards on costs during the proceedings should be used with circumspection and tailored to the specific circumstances of each case.
28. As to the second point, the tribunal's use of the allocation of costs to encourage the efficient conduct of the proceedings was addressed in the second edition of the Commission's report [Page19:]Techniques for Controlling Time and Costs in Arbitration9 in the following terms (§ 82, emphasis added):
Using allocation of costs to encourage efficient conduct of the proceedings.
The allocation of costs can be a useful tool to encourage efficient behaviour and discourage unreasonable behaviour. Pursuant to Article 37(5) of the Rules, the arbitral tribunal has discretion to award costs in such a manner as it considers appropriate. It is expressly stated that, in making its decisions on costs, the tribunal may take into consideration the extent to which each party has conducted the arbitration in an expeditious and cost-effective manner. The tribunal should consider informing the parties at the outset of the arbitration (e.g. at the case management conference) 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. Unreasonable behaviour could include: excessive document requests, excessive legal argument, excessive cross-examination, dilatory tactics, exaggerated claims, failure to comply with procedural orders, unjustified applications for interim relief, and unjustified failure to comply with the procedural timetable.
29. The Task Force expressly recognizes the importance of controlling time and costs in arbitration and, moreover, that the tribunal may use the allocation of costs as a tool for managing efficiency and thereby controlling time and costs at every stage of the arbitral process, including:
(a) by discussing cost allocation principles at the outset or early in the proceedings, e.g. at the case management conference or in the terms of reference;
(b) throughout the proceedings, by way of interim awards on costs or orders on costs relating to interim applications, steps or decisions; and
(c) in the final award or interim awards as a means of sanctioning improper conduct or behaviour, including where it is not efficient or reasonable.
a) At the outset of the proceedings
30. The report, Techniques for Controlling Time and Costs in Arbitration, encourages a tribunal to deal with costs at the outset of proceedings by indicating 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'.
31. Irrespective of whether it so informs the parties at the outset of the proceedings, an ICC tribunal is authorized to take into account such conduct pursuant to Article 37(5) of the 2012 ICC Rules. However, by raising this matter with the parties at an early stage the tribunal can better manage their expectations and those of their lawyers for the duration of the proceedings.
32. The tribunal might also consider discussing with the parties, at the outset of the arbitration or during the proceedings (typically at the first case management meeting), other aspects of cost management, including:
(i) what cost items the tribunal considers may potentially be recoverable, e.g. in-house counsel and other staff costs and expenses, which would otherwise be assessed only at the end of the arbitration in the final award;
(ii) what records will be required to substantiate cost assessment claims;
(iii) if costs are to be assessed on an interim basis, the frequency of such assessments and the basis on which they are to be made;
(iv) sensitive matters, such as whether there is third-party funding and any implications it may have for the allocation of costs, whether the identity of the third-party funder (which could be relevant to possible conflicts of interest) should be disclosed, and whether contingency, conditional or success fee arrangements have been agreed, and how the parties expect these matters to be considered in relation to the assessment of costs;
(v) whether cost-capping might be an appropriate tool to control time and costs in the arbitration, including where expressly permitted by the lex arbitri (in some seats, unless the parties otherwise agree, the tribunal is permitted to 'direct that the recoverable costs of arbitral proceedings before it are limited to a specified amount'10);
(vi) whether (depending on the applicable regime or the agreement of the parties) and how the tribunal should be informed about settlement offers that came close to or were better than the amount determined by the tribunal and would have saved significant costs and time if they had been accepted; and
(vii) when submissions on costs should be made (e.g. at the same time as post-hearing briefs).
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33. Addressing cost issues at the outset of the proceedings can have several advantages. It will enable parties to be:
(i) fully informed about the tribunal's approach to costs, which removes uncertainty and improves predictability;
(ii) fully informed about the tribunal's expectations on submissions relating to costs, which will allow the parties to properly record time spent and costs incurred, particularly with respect to internal legal and other costs;
(iii) provided with an opportunity to discuss what is expected of them at a procedural level (e.g. observing the procedural timetable, producing documents ordered by the tribunal, timely communications);
(iv) provided with an opportunity to discuss what behaviour and professional conduct is expected of the parties and counsel; and
(v) better able to assess cost benefit and risk analysis when considering whether to undertake various interim or tactical steps in the proceedings, or even whether to pursue the proceedings as a whole.
34. There may be concerns that raising the question of costs at the outset of the proceedings could cause discomfort for the tribunal or the parties, or limit the tribunal's ability to be flexible in dealing with unexpected events during the course of the proceedings. Such concerns can be addressed if and when they arise in a given case. As a general observation, they might be adequately addressed if the tribunal clearly indicates to the parties that it will take into account the arbitration as a whole when deciding on costs, and ensures that it has full discretion to do so under the applicable rules.
35. Another way of indicating to the parties what will be taken into account is for the tribunal to address this in a (first) procedural order, as was done in an ICC case under the 2012 ICC Rules.11
b) During the proceedings (partial awards and interim orders)
36. Most institutional arbitration rules and national arbitration statutes permit tribunals to allocate costs in partial awards that finally determine preliminary issues, e.g. jurisdiction/arbitrability, applicable law or a time-bar/limitation claim. Such partial awards, including in respect of costs, will be enforceable under the New York Convention as final awards.
37. Most arbitration rules and statutes also permit tribunals to make awards or interim orders in respect of costs, including those that arise out of applications for interim relief and other procedural applications. For example, the UNCITRAL Model Law on International Commercial Arbitration specifically provides as follows in Article 17G (emphasis added):
The party requesting an interim measure or applying for a preliminary order shall be liable for any costs and damages caused by the measure or the order to any party if the arbitral tribunal later determines that, in the circumstances, the measure or the order should not have been granted. The arbitral tribunal may award such costs and damages at any point during the proceedings.
38. If the tribunal were to make a determination on costs in the form of an order rather an award, which is entirely permissible, such an order may not be enforceable under the New York Convention until or unless incorporated into a final award. However, the lex arbitri may contain a mechanism for enforcing such orders.
39. A potential downside of making an award or an order on costs at an interim stage is that it may alter the dynamic of the proceedings. Once such costs are paid, it may not be possible for them to be recovered later; often they become definitive and final for the stage in respect of which they were awarded or ordered, regardless of what may follow. Such an award or order may have an unintended impact on the paying party if it has financial or cash-flow difficulties. These factors underscore the benefit of raising these issues at the outset, at a preliminary meeting with the parties.
40. As an alternative to an interim costs award (or order), arbitrators may consider issuing a direction or order containing a final decision on the allocation of costs with respect to certain interim action or conduct, but state that payment will only fall due pursuant to the final award. In such cases, the arbitrators must obviously be mindful to incorporate such orders or directions in the final award.
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41. In addition, arbitrators may invite the parties at any time in the course of the proceedings to discuss or make proposals in relation to cost matters.
c) At the end of the proceedings
42. Finally, the tribunal has full discretion to award reasonable costs in any final award or awards. This is normally what happens in the majority of cases. The ICC Rules require the tribunal to fix costs in its final award and decide which of the parties shall bear them or in what proportion they shall be borne by the parties. Under the ICC Rules, and the rules of many other institutions, the tribunal may take into account the conduct of the parties when doing so.
43. Any final award must contain reasons for the decision on the allocation of costs. In order to render a fully reasoned decision on costs, arbitrators need to give the parties a full opportunity to be heard on the matter. Appropriate directions on the timing and nature of submissions on costs should be given in the course of the proceedings.12
V. Cost allocation considerations
44. When allocating costs in international commercial arbitration it may be necessary to:
(i) identify and establish the scope of any agreement between the parties on costs;
(ii) decide which of the parties shall bear the costs or in what proportion they shall be borne by the parties, including, where appropriate, on the basis on their relative success and failure;
(iii) assess the reasonableness and reality of the costs incurred by the parties; and
(iv) take into account other circumstances, where relevant, including the extent to which each party conducted the arbitration in an expeditious and cost-effective manner.
Some considerations relating to each of the above are set out below.
a) Agreement of the parties
45. The parties' agreement on costs is the principal factor to take into consideration in any decision on costs.13 There are at least five aspects to consider in relation to the parties' agreement: (i) the parties' written arbitration (or submission) agreement; (ii) applicable institutional arbitration rules (usually incorporated by reference in the written arbitration (or submission) agreement); (iii) terms of reference; (iv) mandatory and other applicable law; and (v) any other agreed rules or guidelines.
46. Subject to the requirements of applicable mandatory law, the tribunal should respect any agreement between the parties on the allocation of costs. That agreement may be contained in an arbitration clause, submission agreement, terms of reference or may be in some other form.
47. Standard arbitration clauses issued by the major arbitral institutions tend to be silent on costs. For example, the standard ICC arbitration clause simply provides as follows:
All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.
48. Generally, parties are not prevented from including in their arbitration agreement express wording on the allocation of costs.14 The parties' agreement will be upheld under most national laws. However, a specific agreement on costs in the arbitration agreement must not contravene any mandatory provisions of the lex arbitri or any other relevant mandatory law. For example, section 60 of the English Arbitration Act 1996 and section 74(8) of the Hong Kong Arbitration Ordinance both provide that an agreement [Page22:] requiring a party to pay all or part of the costs of the arbitration in any event is valid only if made after the dispute has arisen.15
49. If the parties have incorporated the rules of an arbitration institution into their arbitration agreement by reference, the tribunal will normally apply the rules of that institution concerning costs. As mentioned in section III above, although most institutional rules leave tribunals with broad discretion to allocate reasonable costs, there are subtle and important differences between some of them, especially in respect of presumptions.
50. Under the ICC Rules the tribunal is required to draw up terms of reference. In the terms of reference or otherwise at the outset of the proceedings the tribunal may issue, or the parties may agree on, certain directions in relation to costs. Where this is the case, the tribunal must bear those directions in mind when subsequently deciding on costs.
51. The tribunal should be mindful of any mandatory and other statutory law or case law applicable to decisions on costs.16 It is widely accepted that the law applicable to decisions on costs is the lex arbitri, although some commentators have argued that it is the law governing the contract.17
52. While giving effect to the parties' agreement on costs, arbitral tribunals will also be mindful of any applicable mandatory provisions concerning the allocation of costs, usually (but not necessarily exclusively) found in the arbitration statute of the lex arbitri (law of the seat) and potentially that of the place of enforcement.18
53. Tribunals (and parties) may further take guidance from other non-mandatory provisions in the arbitration statute of the lex arbitri. For example, Article 17G of the UNCITRAL Model Law on International Commercial Arbitration, on which many national arbitration statutes are based,19 expressly provides that a party that requests interim measures will be liable for any costs and damages caused by the measure if the tribunal subsequently determines that the order should not have been granted. In such a case, interim costs may be awarded.
54. As further examples, some national arbitration statutes expressly permit a tribunal to award interest on costs;20 order payment of security for costs, including in respect of requests for interim relief;21 or limit the amount of costs recoverable at any stage of the proceedings;22 or permit parties to seek assistance from the courts for taxation of costs.23
55. The parties may agree on the application of other rules or guidelines such as the IBA Rules on the Taking of Evidence in International Arbitration or the IBA Rules on Party Representation in International Arbitration. These rules or guidelines may contain specific provisions on costs. For example, Article 9(7) of the IBA Rules on the Taking of Evidence in International Arbitration permits the tribunal to order costs against a party that fails to conduct itself in good faith in the taking of evidence.
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56. Parties may have unspoken expectations in respect of costs. These may well be coloured by the parties' origins. Given that international arbitration generally involves parties and arbitrators of several nationalities and different legal and cultural traditions, it may be helpful to address cultural expectations early in the proceedings (e.g. at the first case management conference) to ensure greater understanding among the parties and the tribunal.
b) Relative success and failure of the parties
57. As indicated above, some arbitration rules, including those of UNCITRAL, the LCIA and the PCA, contain a presumption that the successful party is entitled to recover its reasonable costs. Some national arbitration statutes lay down a similar (non-mandatory) presumption.24 Those rules and statutes leave various questions unaddressed, including whether and when the presumption should be displaced and what amount (or proportion) of such costs is recoverable.
58. Other rules, including the 2012 ICC Rules, contain no presumption on costs but instead give the tribunal discretion to allocate costs, including reasonable legal and other costs, to either party. Article 37(4) of the 2012 ICC Rules25 provides as follows (emphasis added):
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.
Article 37(5) further provides that, when deciding on costs, the arbitrators may take into account such circumstances as it considers relevant, including the extent to which each party has or has not conducted the arbitration in an expeditious and cost-effective manner.
59. Even where the applicable rules or statute do not create a presumption that the successful party is entitled to recover its reasonable costs, awards show that when deciding on costs tribunals often pay at least some regard to the relative success or failure of the parties. However, determining relative success is not necessarily straightforward, particularly in complex disputes involving multiple causes of action, counterclaims, set-off, multiple contracts and multiple parties. As claims are added, withdrawn, modified or merged in the course of proceedings, it may become increasingly difficult to track what was originally claimed against what is ultimately awarded.
60. The general approach is to assess the degree and scope of success and, where relevant, the timing of that success. A successful party may prevail in some but not all claims brought, and/or recover some but not all damages sought. In the case of less-than-full recovery, different approaches have been taken by arbitrators.
61. Arbitrators may take into account the relative success of the prevailing party by: (i) assuming that if a claimant or respondent succeeded in its core or primary claim or outcome, then it is entitled to all of its reasonable costs; (ii) apportioning costs on a claim-by-claim or issue-by-issue basis according to relative success and failure; or (iii) apportioning success against the amount of damages originally claimed or the value of the property in dispute. Other approaches may be used as well (and in all cases there might be an additional assessment based on conduct). Whatever approach is used, it is important to take into account differences in the complexity and importance of different issues.
62. Any apportionment of costs may involve consideration of some or all of the factors discussed above, as well as bad faith or improper conduct by the parties as discussed below in paragraphs 78 to 85. Any costs so apportioned must nevertheless be reasonable.
c) Reasonableness of legal and other costs incurred by the parties
63. As indicated in paragraph 15 above, reasonableness is a standard applied to the allocation of costs under most arbitration rules. This is so even where there is a presumption that costs will be awarded to the successful party, as such a presumption remains subject (at least) to the reasonableness of the legal and other costs incurred by the parties. However, there is no definition of reasonableness in institutional [Page24:] arbitration rules or national arbitration statutes.26 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.27
64. Tribunals may be proactive in assessing the reasonableness of the amount of costs claimed in a dispute as a whole and award only those costs that they consider reasonable and proportionate. Knowing that the tribunal can do so may encourage parties to adopt a responsible attitude when making decisions on legal expenses and deter them from unnecessarily running up costs. Although it is acknowledged that the successful party is entitled to prosecute or defend its claims in the manner it considers necessary and appropriate, and arguably the party and its representatives are best placed to evaluate what resources are required to win the case, it will remain within the tribunal's discretion whether or not that party will recover its costs in full.
65. To determine whether the costs sought are reasonable in amount, the tribunal may take into account various factors, depending on the circumstances of the case, including but not limited to the following:
(i) the reasonableness of the rates and number and level of fee-earners when evaluating whether the amount of work charged was reasonable;
(ii) the reasonableness of the level of specialist knowledge and responsibility retained for the dispute, including the legal qualification of representatives, involvement of specialist teams or team members and level of seniority;
(iii) the reasonableness of the amount of time spent, at various levels and rates, on the various phases of the arbitration; and
(iv) any disparity between the costs incurred by the parties as a general indicator of reasonableness as opposed to a separate factor in itself.
66. As far as proportionality is concerned, the amount of monetary claims and the value of any property in dispute are usually high. In international arbitration claims can range from less than USD 100,000 to billions of dollars. That wide differential, coupled with the need to ensure that arbitration remains cost-effective in all cases, means that proportionality is likely to be a factor to consider. When assessing the reasonableness of the amount of costs incurred, tribunals might take into account the amount in dispute or the value of any property that is the subject matter of the dispute.
67. In this regard, it should be borne in mind that arbitration is intended to meet the needs of all users and a wide range of cases and disputes, including those of low value. However, even small cases can give rise to significant costs and the successful party should not be penalized for having commenced proceedings to recover losses caused by the unlawful conduct of the counterparty. Moreover, there are cases where the amount in dispute appears on its face to be insignificant, but very important principles affecting the parties' relationship are at issue or other related cases are dependent on the outcome of the immediate case (possibly unbeknown to the tribunal).
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68. In addition to considering whether the amount of costs is reasonable and proportionate to the amount in dispute, tribunals might also take into account, more broadly, whether they were proportionately and reasonably incurred. For example, a national court reviewing a decision on costs in arbitration observed as follows (emphasis added):28
[t]he proportionality principle was not limited to a relationship between the amount involved in the dispute and the amount of costs awarded. The principle truly meant that when legal costs had to be assessed, all circumstances of the legal proceedings concerned had to be looked into, and not only the amount of the dispute though that was an important factor, especially when assessing whether the amount of work done was reasonable.
69. Consistent with this approach, tribunals might take into account the proportionality between the amount of costs incurred and all the circumstances of the proceedings. However, doing so takes time and will in itself increase costs, so a balanced approach needs to be taken.
70. In assessing whether the amount of work done is proportionate and reasonable tribunals may, and often do, take into account various factors that may be relevant to the case, including but not limited to:
(i) the overall importance of the dispute and the matters underlying the dispute to all parties;
(ii) the overall complexity of the matter;
(iii) the accurate representation of the amount in dispute (both in the claims and counterclaims);
(iv) the existence of unnecessary and meritless claims or counterclaims;
(v) the length and phases of the proceedings and, in particular, whether parties have unnecessarily prolonged the proceedings and/or increased their cost (e.g. as a result of repeated applications for document production, other procedural motions, unnecessary steps in the proceedings);
(vi) the withdrawal of any unmeritorious claims in a timely manner;
(vii) the manner in which the parties and their representatives have dealt with document production, both when requesting the production of documents and responding to such requests;
(viii) the scope, relevance and extent of fact evidence in written witness statements and oral testimony, including cross-examination;
(ix) the scope, relevance and extent of expert evidence in written expert witness reports and oral testimony, including cross-examination (e.g. number of experts, length of reports, relevance of material);
(x) the length and conduct of any oral hearings, including but not limited to evidentiary hearings;
(xi) the parties' approaches to bifurcation and the determination of preliminary issues, including the outcome of any bifurcated or preliminary proceedings; and
(xii) where the parties have agreed to allow the tribunal to take into account settlement discussions after they have reached a conclusion on the merits, efforts by parties to resolve their dispute may be taken into account, in the event that such information is properly available to the tribunal.
71. While it is widely accepted that parties' costs in respect of outside legal counsel, witnesses and experts are recoverable, most arbitral rules are silent on internal legal, management and other costs, leaving the issue of their recoverability to the discretion of the tribunal.29
72. The decision whether to pursue arbitration increasingly depends on an extensive cost/benefit analysis carried out by companies on the basis of initial advice from in-house counsel and other internal specialists. Thus, internal costs may represent a large portion of a party's total costs when in-house counsel, managers, experts and other staff take a proactive role before and during the arbitration. They must study the case to be able to make informed decisions and provide instructions, as well as to collect evidence. [Page26:] Sometimes companies appoint a staff member specifically to manage a case, possibly even full-time. From a managerial standpoint, time spent by company staff on the arbitration cannot be used for usual business activities and thus has a cost.
73. In recognition of the above, tribunals may consider allowing the recovery of costs associated with: (i) executives' time and disbursements; and (ii) administrative costs and out-of-pocket expenses for: factual research, in-house legal advice, outside technical experts, processing the arbitration, and employees who serve as witnesses.
74. There is no principle prohibiting the recovery of internal costs incurred in direct connection with the arbitration, and some tribunals have awarded such costs insofar as they were necessary, did not unreasonably overlap with outside counsel fees, were substantiated in sufficient detail to be distinguished from ordinary staffing expenses, and were reasonable in amount.
75. Given that few parties keep detailed reports of time spent and costs incurred internally for an arbitration, tribunals may find it useful to discuss with them at the outset of the proceedings the potential recoverability of internal costs.
d) Proof of costs
76. The tribunal may award such reasonable costs as are incurred and paid or payable by the party claiming them. The tribunal must therefore satisfy itself, through proper verification, of the reality of those costs.
77. Tribunals may prefer to avoid lengthy submissions and arguments in which parties give a detailed breakdown of costs, but they will at least seek satisfactory evidence that the amount of costs claimed was in fact incurred. Copies of invoices will rarely be appropriate if they show details of work done, as they will often contain information that is confidential, of no relevance to the case itself, and may also be subject to legal privilege. Such costs should be properly substantiated in accordance with the applicable standard of proof for substantive claims in the proceedings. Any uncertainty or potential difficulties created by different expectations between parties and/or the tribunal regarding the required level of substantiation can be avoided if discussed early in the proceedings.30
e) Improper conduct/bad faith of the parties
78. As mentioned earlier, the rules of a number of institutions and guidelines issued by other bodies provide that the tribunal may take into account the conduct of the parties (and that of their representatives) when allocating reasonable costs to either party. Some national arbitration statutes contain similar provisions.31 Article 37(5) of the 2012 ICC Rules, for example, empowers a tribunal, when making decisions on costs, to consider whether a party conducted itself in an expeditious and cost-effective manner. The broad language of Article 37(5) allows the conduct of all parties to be assessed in the course of the proceedings, and in some cases even prior to the proceedings, irrespective of whether such conduct has caused a delay or otherwise increased the costs of the arbitration. This is a separate exercise from examining the parties' relative success or failure in the arbitration - if relevant - and the reasonableness and substantiation of any costs claimed. For example, it is entirely within the discretion of the tribunal to find that a party's improper conduct or bad faith is the sole determinative factor in its decision on costs. Some aspects of conduct that may be taken into account by the tribunal when apportioning costs between the parties are discussed below.
79. Procedural conduct taken into account when allocating costs between the parties may include, but is not limited to, the following:
(i) Pre-arbitral behaviour that occurred prior to commencement of the arbitration proceedings. In particular, arbitrators might look at improper conduct by a party in its dealings leading up to the proceedings, including but not limited to attempts to avoid the arbitration, threatening behaviour, parallel court proceedings in breach of an arbitration agreement, interference affecting the counterparty's business interests and/or unfair [Page27:] or prejudicial press campaigns. Although uncommon, costs arising from pre-arbitral behaviour may be expressly provided for in the arbitration statute of the lex arbitri.32
(ii) Guerrilla tactics on those rare occasions when parties seek deliberately to interfere in the conduct of the proceedings in order to render an award unenforceable or otherwise affect the tribunal's ability to finally resolve the dispute between the parties.
(iii) Post-formation conflicts aimed at destabilizing the tribunal and the arbitration. These result, for example, from counsel appointments late in the proceedings that create a conflict of interest for an arbitrator. The arbitrator in question may be forced to resign, otherwise the enforceability of the award could be jeopardized.33 The tribunal may take into account any tactic deployed by a party to create such a conflict, and any costs arising out of such conduct.
(iv) Repeated, unsuccessful challenges, known to be unfounded, against the appointment of an arbitrator or the jurisdiction or authority of the tribunal.34
(v) Unnecessary court involvement where parties commence parallel litigation in breach of the arbitration agreement, seemingly in an effort to torpedo the arbitration process.35 Although most arbitration rules and national statutes permit necessary and appropriate court support for arbitration at the seat or the place of enforcement, which is consistent with the New York Convention, the tribunal may consider certain proceedings to be an abuse of the arbitration process and may take that into account when deciding on costs.
(vi) Deliberate undermining of the arbitral process, such as through ex parte communications with arbitrators that give rise to a conflict of interest, forcing the arbitrator to resign or jeopardizing the enforceability of the award.36
80. As a preliminary remark and as made clear by the Commission in its report, Techniques for Managing Electronic Document Production When it is Permitted or Required in International Arbitration, there is no automatic duty to disclose documents, nor right to request or obtain document production (including but not limited to e-document production) in international arbitration. The report goes on to state that requests for the production of documents ( to the extent they are deemed necessary and appropriate in any given arbitration ( should remain limited, tailored to the specific circumstances of the case and subject to the general document production principles of specificity, relevance, materiality and proportionality.37
81. Overall, the use of documentary evidence in international arbitration should be efficient, economical and fair. When allocating costs a tribunal may take into account the extent to which any party has failed to conduct itself in an efficient, economical or fair manner, or has otherwise engaged in improper conduct or bad faith in the production of documents.
[Page28:]
82. Improper conduct arising out of document production may include, but is not limited to, the following:
(i) deliberately abusive or improper conduct in the form and/or manner in which documents are requested or responses made to reasonable and appropriate document requests from the other party;38
(ii) deliberately and improperly failing to comply with directions concerning requests for document production or destroying or failing to preserve documents that have been properly requested or are otherwise admissible and relevant. Although in international arbitration there is no automatic duty to preserve relevant evidence, parties and party representatives should nonetheless refrain from intentionally thwarting the disclosure of relevant and material evidence by destroying information;
(iii) deliberate falsification of documentary evidence.
83. When allocating costs, a tribunal may take into account the fact that a party has presented false testimonial evidence to the tribunal and/or that its representatives knowingly procured or assisted in the preparation of the false evidence. The conduct of witnesses and experts may also be subject to and punishable under the lex arbitri.39 The conduct of legal representatives may be further subject to sanction by the professional organizations to which they belong.40
84. When allocating costs, the tribunal may take account of any false submissions made to mislead the tribunal or undermine the integrity of the proceedings.41 Such conduct on the part of legal representatives may again be subject to sanction by professional organizations.42
85. Other factors that could influence the allocation of costs include aggressive conduct by a party or its representatives, or professional discourtesy. If unsubstantiated allegations of fraud (which are actively discouraged by some professional bodies) have been made, they too may be taken into consideration by the tribunal in its decision on costs.
VI. Funding of costs in arbitration and success fees or uplifts
86. The rationale behind allocating costs to a successful party is that the party should not be out of pocket as a result of having to seek adjudication to enforce or vindicate its legal rights.43 Recovery of the costs by the successful party therefore presupposes that they must ultimately be incurred by that party.
[Page29:]
a) Third-party-funded costs
87. Where a successful claimant or counterclaimant has been funded by a third party, the third-party funder44 is usually repaid (at least) the costs of the arbitration from the sum awarded. Therefore, the successful party will itself ultimately be out of pocket upon reimbursing such costs to the third-party funder and may therefore be entitled to recover its reasonable costs, including what it needs to pay to the third-party funder, from the unsuccessful party. The tribunal will need to determine whether these costs were actually incurred and paid or payable by the party seeking to recover them, and were reasonable. The fact that the successful party must in turn reimburse those costs to a third-party funder is, in itself, largely immaterial.
88. It should be borne in mind that the third-party funder is not a party to the arbitration and in most cases its existence is not even known. Where a funded party is unsuccessful, its own impecuniosity may render it incapable of complying with any costs award against it. In such a situation, the tribunal usually has no jurisdiction to order payment of costs by the third-party funder, as it is not a party to the proceedings.
89. Where a tribunal has reason to believe that third-party funding exists, and such funding is likely to impact on the non-funded party's ability to recover costs if successful, the tribunal might consider ordering disclosure of such funding information as is necessary to ascertain that the process remains effective and fair for both parties.
90. If there is evidence of a funding arrangement that is likely to impact on the non-funded party's ability to recover costs, that party might decide to apply early in the proceedings for interim or conservatory measures to safeguard its position on costs, including but not limited to seeking security for those costs or some form of guarantee or insurance. Such measures may be appropriate to protect the non-funded party and put both parties on an equal footing in respect of any recovery of costs.
91. When considering an application for interim or conservatory measures as a means of protecting the non-funded party's ability to recover costs, a tribunal might also consider making the applicant liable for any costs and damages caused by the measures ordered if the funded party were ultimately to prevail. This would be in line with Article 17G of the UNCITRAL Model Law on International Commercial Arbitration.
b) Success fees and uplifts
92. In reality, funding arrangements are rarely limited solely to the costs of the arbitration. Usually, the third-party funder will require payment of an uplift or success fee in exchange for accepting the risk of funding the claim, which is in effect the cost of capital. As a tribunal only needs to satisfy itself that a cost was incurred specifically to pursue the arbitration, has been paid or is payable, and was reasonable, it is feasible that in certain circumstances the cost of capital, e.g. bank borrowing specifically for the costs of the arbitration or loss of use of the funds, may be recoverable.
93. The requirement that the cost be reasonable serves as an important check and balance in protecting against unfair or unequal treatment of the parties in respect of costs, or improper windfalls to third-party funders. Tribunals have from time to time dealt with this when assessing the reasonableness of costs in general, sometimes including the success fee in the allocation of costs and sometimes not, depending on their view of the case as a whole.
VII. Unsuccessful settlement negotiations: associated costs and unaccepted offers
94. As a general matter, successful settlement negotiations can result in significant savings of time and cost, and remove the uncertainty of the ultimate outcome. If a settlement is reached, the arbitration proceedings can be terminated and the terms of the settlement implemented (including any agreed terms relating to costs). If a settlement is not reached, then the arbitration will proceed.
95. Settlement negotiations usually take place outside the purview of the arbitrators, as they are conducted privately between the parties, who generally agree that they should be confidential and not be disclosed to the arbitral tribunal (or court). To that end, settlement discussions and offers in writing will often be clearly marked as [Page30:] 'without prejudice'45 or 'for settlement discussions only and not to be presented to a court or tribunal'.46
96. Different national systems protect the confidentiality of settlement negotiations in litigation (and sometimes in arbitration) in different ways. In some national court systems a formal offer to settle made in accordance with proper procedure may affect the way in which the costs of the proceedings are allocated. Specifically, if the unaccepted offer is the same as or higher than the judgment sum, some national courts will not permit recovery by the party that rejected the offer of any costs incurred after the date of the offer.47 In some legal systems, a settlement offer is confidential between counsel, and therefore if not accepted cannot be referred to elsewhere.48 In all cases, parties should take care not to bring settlement offers to the attention of the arbitrators prior to final determination on the merits, so as to avoid prejudice (usually against the offering party).49
97. The ICC Secretariat (and no doubt other arbitral institutions) may assist parties to put information relating to unsuccessful negotiations and/or unaccepted settlement offers before the arbitrators in time for the final award in appropriate cases, without disadvantaging the offering party. For example, the offer might be produced in a sealed envelope and deposited either with the arbitrators, or preferably with the ICC Secretariat, to be held until after the arbitrators have determined the merits of the dispute. Once the decision on the merits is reached and the arbitrators are ready to proceed to the allocation of costs, the sealed offer would be revealed to the arbitrators by the Secretariat. The reason for holding back the sealed offer is to prevent the settlement offer from influencing the arbitrators' decision on the merits.
98. The existence of settlement negotiations potentially gives rise to two main cost allocation considerations.
99. First, when allocating costs arbitrators may take into account those costs arising out of or associated with efforts by the parties to seek to settle their disputes, including mediation proceedings. In a number of ICC awards, costs were ordered to be paid for a party's work and loss of time on unsuccessful negotiations with a view to settlement. In one case, the tribunal expressly noted the relevance of such negotiations to the party's claim, and the costs incurred in unsuccessful settlement negotiations were considered part of its preparation of the litigation.
100. Second, in certain circumstances, the tribunal may take into account the existence of unsuccessful negotiations and/or unaccepted offers between the parties when allocating costs. There is no general provision in international arbitration for the use of settlement offers to reduce costs, but, if appropriate, it could be considered at the first case management meeting.
VIII. Concluding observations
101. Given that party autonomy and flexibility are inherent to arbitration, it is no surprise that arbitral awards reveal a variety of approaches to costs. This also reflects the diversity of approaches found in national legal systems.
102. The Task Force has endeavoured to demonstrate the many facets of decision-making on costs. The Report and the material assembled in its comprehensive appendices aim to give users of international arbitration a better understanding of the issues that are and need to be considered when deciding on costs and how they are to be allocated. These concern not only the nature and amount of the costs, but also the relevant instruments, presumptions, standards and expectations that have a bearing on their assessment and allocation.
103. Further, pursuing the work already undertaken by the Commission on case management, the Task Force has highlighted the relevance of cost decision-making to case management, and particularly the use of cost allocation as a means of incentivizing efficient and cost-effective procedural conduct and sanctioning inefficient and improper conduct.
1 The calculations were based on 221 ICC awards from 2012.
2 Both available at http://www.iccwbo.org/About-ICC/Policy-Commissions/Arbitration/.
3 Article 52(2) of the 2015 CIETAC Rules is not a new provision and has long been CIETAC's practice. The 'costs follow the event' rule was first written into the CIETAC's arbitration rules in 1994, where the principle was simply stated, without listing factors to consider in determining the reasonableness of the costs and with a 10% cap (10% of the amount awarded to the winning party). This provision changed to the current version as early as 2005. Arbitrators in cases administered by CIETAC accordingly follow this rule in practice.
4 This is the case in the 2013 HKIAC Rules; the 2008 HKIAC Rules stated that other arbitration costs, e.g. costs not for legal representation and assistance, shall in principle be borne by the unsuccessful party (see HKIAC report in Appendix A).
5 This is sometimes called 'costs follow the event', 'loser pays' or the 'English approach'. Within national court systems where this approach is followed, the recovery of costs by the successful party generally involves a commonality of charges and understanding of the way the system works. However, that same commonality does not always exist in international arbitration where parties and counsel are often from very different backgrounds. In some countries statutory/official rates are set for specific activities, e.g. meetings, preparing submissions, attending hearings, at least in court litigation.
6 These figures must be treated with some caution; they represent only the sub-group of awards selected for analysis (i.e. those awards that contained a decision as to costs) and not the entire body of existing institutional awards.
7 The PCA reports however that there is a notable difference in approaches to costs between its administered interstate arbitrations and mixed arbitrations (investment treaty and contract-based arbitrations). In interstate arbitrations, the trend is for each party to bear its own legal fees and half of the other costs of arbitration regardless of case outcome. In mixed arbitrations cost allocation decisions vary, referring to factors such as relative successes of the parties, circumstances of the case and the reasonableness of the costs.
8 This is sometimes called the 'American approach'.
9 2d ed. (2012), available at http://www.iccwbo.org/About-ICC/Policy-Commissions/Arbitration/.
10 Hong Kong Arbitration Ordinance, s. 57. The English Arbitration Act contains a similar provision in s. 65.
11 The tribunal indicated as follows: 'The Parties are reminded that pursuant to Article 37(5) of the ICC Rules, the Arbitral Tribunal may take into account, inter alia, "the extent to which each party has conducted the arbitration in an expeditious and cost-effective manner" when making its decision as to the costs of the arbitration.'
12 For instance, some tribunals direct the parties to include their cost submissions in their post-hearing briefs.
13 See Appendix A.
14 See e.g. the JAMS Comprehensive Arbitration Rules, Rule 24(f) of which provides (emphasis added): 'The Award of the Arbitrator may allocate Arbitration fees and Arbitrator compensation and expenses, unless such an allocation is expressly prohibited by the Parties' Agreement. (Such a prohibition may not limit the power of the Arbitrator to allocate Arbitration fees and Arbitrator compensation and expenses pursuant to Rule 31(c).)' Rule 24(g) of the same Rules provides (emphasis added): 'The Award of the Arbitrator may allocate attorneys' fees and expenses and interest (at such rate and from such date as the Arbitrator may deem appropriate) if provided by the Parties' Agreement or allowed by applicable law. When the Arbitrator is authorized to award attorneys' fees and must determine the reasonable amount of such fees, he or she may consider whether the failure of a Party to cooperate reasonably in the discovery process and/or comply with the Arbitrator's discovery orders caused delay to the proceeding or additional costs to the other Parties.' http://www.jamsadr.com/rules-comprehensive-arbitration/#Rule 24
15 Note that such restrictions do not necessarily prevent parties from agreeing that the unsuccessful party will pay the successful party's costs, in the form of the JAMS provision above.
16 In France, there have been some court cases on how an impecunious party may be denied access to justice if an arbitrator refused to hear that party's claim/counterclaim solely because it could not afford to pay its advance on costs. See LP v. Pirelli, Paris Court of Appeal, 17 Nov. 2011; Pirelli v. LP, Court of Cassation, Civ. 1re, 28 Mar. 2013, no. 11-27.770; Société Lola Fleurs v. Société Monceau Fleurs, Paris Court of Appeal, 29 Feb. 2013, no. 12/12953.
17 See G. Born, International Commercial Arbitration, 2d ed. (Kluwer Law International, 2014), c. 23 'Form and Content of Awards' at 3099.
18 See e.g. English Arbitration Act, s. 60; Hong Kong Arbitration Ordinance, s. 74(8).
19 See e.g. Hong Kong Arbitration Ordinance, Singapore International Arbitration Act, New Zealand Arbitration Act, German Arbitration Law.
20 Hong Kong Arbitration Ordinance, s. 79; Singapore International Arbitration Act, s. 20.
21 Singapore International Arbitration Act, s. 12(1)(a); New Zealand Arbitration Act, Schedule I, s. 17I; German Arbitration Law, § 1041(1); Spanish Law 60/2003 on Arbitration, Art. 23(1).
22 Hong Kong Arbitration Ordinance, s. 57; English Arbitration Act, s. 65.
23 Hong Kong Arbitration Ordinance, s. 75; Singapore International Arbitration Act, s. 2I.
24 E.g. English Arbitration Act, s. 61(2); Argentine National Code of Civil and Commercial Procedure, Art. 68 (cross-reference from Art. 772); Turkish International Arbitration Law (Law No. 4686 of 21 June 2001), Art. 16(D).
25 See also the HKIAC, ICDR, SCC and SIAC Rules, which simply set out the tribunal's authority to make an award apportioning costs, but do not include any presumption on costs.
26 Hong Kong Arbitration Ordinance, s. 74(7) (emphasis added): 'The arbitral tribunal (a) must only allow costs that are reasonable having regard to all the circumstances; and (b) unless otherwise agreed by the parties, may allow costs incurred in the preparation of the arbitral proceedings prior to the commencement of the arbitration.' The Austrian Arbitration Law, § 609(1), in part (emphasis added): 'The arbitral tribunal shall, in exercise of its discretion, take into account the circumstances of the case, in particular the outcome of the proceedings. The obligation to reimburse may include any and all reasonable costs appropriate for bringing the action or defence. ' The 2012 CIETAC Arbitration Rules, Art. 50(2), lists some factors that may be taken into account by the arbitral tribunal to assess reasonableness (emphasis added): 'The arbitral tribunal has the power to decide in the arbitral award, having regard to the circumstances of the case, that the losing party shall compensate the winning party for the expenses reasonably incurred by it in pursuing the case. In deciding whether or not the winning party's expenses incurred in pursuing the case are reasonable, the arbitral tribunal shall take into consideration such specific factors as the outcome and complexity of the case, the workload of the winning party and/or its representative(s), and the amount in dispute, etc.'
27 This approach has been approved in some common law jurisdictions, including in a Singapore High Court decision, VV and Another v. VW, [2008] SGHC 11, [2008] 2 SLR 929, which refers also to similar English Civil Procedure Rules. The Swiss Federal Tribunal, in a ruling of 9 Jan. 2006, 4P.280/2005, specified that it could only intervene with respect to an arbitrator's decision on costs exceptionally if the costs awarded were wholly disproportionate to the necessary costs of defence. The German Arbitration Law also alludes to concepts of necessity and proportionality at § 1057(1), which provides (emphasis added): 'Unless the parties agree otherwise, the arbitral tribunal shall allocate, by means of an arbitral award, the costs of the arbitration as between the parties, including those incurred by the parties necessary for the proper pursuit of their claim or defence. It shall do so at its discretion and take into consideration the circumstances of the case, in particular the outcome of the proceedings.'
28 VV and Another v. VW, [2008] SGHC 11, [2008] 2 SLR 929.
29 But see Paris Arbitration Rules, Art. 7.6 (emphasis added): 'The Arbitral Tribunal may, in any award, allocate all or part of the costs, in its discretion. Costs may include the fees and expenses of the arbitrators (including the Interim Arbitrator), the cost of legal representation, of experts and consultants (including witnesses acting as consultants). Costs may also include management time and expenses. In making decisions as to costs, the Arbitral Tribunal may take into account such circumstances as it considers relevant, including the extent to which each party has conducted the arbitration in an expeditious and cost-effective manner.'
30 Few tribunals will wish to become involved in taxation of costs as in English courts, where the cost of each piece of work is analysed, together with the seniority of the lawyer involved and the rates charged. It also can result in unnecessary additional fees and costs and can be time-consuming.
31 E.g. Brazilian Arbitration Act, Art. 27 (emphasis added): 'The arbitral award shall decide on the parties' responsibility regarding the costs and expenses of the arbitration, as well as on any amounts resulting from bad faith litigation, as the case may be, with due respect to the stipulations of the arbitration agreement, if any.'
32 Hong Kong Arbitration Ordinance, s. 74(7) (emphasis added): 'The arbitral tribunal (a) must only allow costs that are reasonable having regard to all the circumstances; and (b) unless otherwise agreed by the parties, may allow costs incurred in the preparation of the arbitral proceedings prior to the commencement of the arbitration.'
33 In an effort to alleviate concerns caused by the arbitrary occurrence of such a scenario, some arbitral institutions have expressly empowered the tribunal to withhold approval of the change of counsel, and some tribunals include such provisions in the terms of reference or their terms of appointment (e.g. LCIA Rules (2014), Art. 18.4; IBA Guidelines on Party Representation in International Arbitration (2013), Guidelines 4 to 6).
34 In an effort to alleviate concerns that arise from increasing unmeritorious challenges, some arbitral institutions have expressly prohibited such conduct and provided sanctions for breach, including through costs (e.g. LCIA Rules (2014), Annex, para. 2).
35 The New York Convention provides for the enforceability of arbitration agreements as well as awards and is fundamental to the pro-arbitration approach adopted by most contracting state courts.
36 In an effort to alleviate concerns that arise from inappropriate unilateral contact with an arbitrator relating to the arbitration or the parties' dispute, some arbitral institutions and other professional organizations have published rules or guidelines in an effort to prohibit such conduct or direct as to the best approach (e.g. LCIA Rules (2014), Annex, para. 6; IBA Guidelines on Party Representation in International Arbitration (2013), Guidelines 7 and 8). This type of conduct also may fall within Article 35(7) of the ICC Rules.
37 § 5.31: 'Tribunals should avoid importing from other systems notions with regard to the preservation of evidence that may give rise to unnecessary inconvenience or expense. While a party's intentional efforts to thwart disclosure of relevant and material evidence by destroying or altering an electronic document may warrant appropriate sanctions (such as an adverse inference contemplated by Article 9(5) of the IBA Rules of Evidence), inadvertent destruction or alteration of an electronic document as a result of routine operation of that party's computer network does not ordinarily reflect any culpable conduct or warrant any such sanctions. Moreover, whilst a party may wish, for its own benefit, to take steps to preserve relevant evidence, it is under no automatic duty to do so. Nor should a tribunal consider imposing such a duty absent a specific reason to do so, such as credible allegations of fraud, forgery or deliberate tampering with evidence.'
38 In an effort to alleviate concerns that arise from abusive requests to produce documents or abusive responses to requests, the IBA published guidelines for parties and tribunals on the best approach (see IBA Guidelines on Party Representation in International Arbitration, Guidelines 12(17). This type of conduct may also fall within Art. 35(7) of the ICC Rules (as well as Art. 9.7 of the IBA Rules on the Taking of Evidence in International Arbitration).
39 E.g. see English Perjury Act 1911; China's 2010 law on measures of punishment for the illegal acts of lawyers and law firms.
40 In an effort to alleviate concerns that arise from intentionally false testimony, some arbitral institutions and other professional organizations have published guidelines or rules in an effort to direct the tribunal as to the best approach (e.g. LCIA Rules (2014), Annex, para. 4; IBA Guidelines on Party Representation in International Arbitration (2013), Guidelines 9(11). This type of conduct may also fall within Art. 35(7) of the ICC Rules (as well as Art. 9.7 of the IBA Rules on the Taking of Evidence in International Commercial Arbitration).
41 Counsel are usually governed by professional codes or rules of conduct and may be subject to sanction by their governing professional organizations for any breach arising out of such conduct. However, counsel typically come from different jurisdictions with different ethical rules, and the ethical rules of a particular jurisdiction are geared to practice in that jurisdiction and not necessarily to international arbitration practice. Some arbitral institutions and other professional organizations have published rules or guidelines in an effort to prohibit such conduct or offer directions on the best approach (e.g. LCIA Rules (2014), Annex, para. 3; IBA Guidelines on Party Representation in International Arbitration (2013), Guidelines 9(11).
42 See also the Chartered Institute of Arbitrators Code of Conduct.
43 In England, this historic rationale for allocating costs was set out in Harold v. Smith (1860), 5 H. & N. 381, 385, where Bramwell B. said: 'Costs as between party and party are given by the law as an indemnity to the person entitled to them; they are not imposed as a punishment on the party who pays them, nor given as a bonus to the party who receives them.' Similarly, in France, Art. 700 of the Code of Civil Procedure empowers the judge to order an unsuccessful party to pay legal costs to compensate the other party but with regard to 'equity and the financial situation of the unsuccessful party'. This provision seeks to ensure the fundamental right of every individual to have access to justice rather than to punish the losing party. Accordingly, the French Court of Cassation has held in regard to this provision that it is not necessary to demonstrate the existence of a dilatory or abusive appeal nor liability on the part of the party ordered to pay (2d Civil Chamber, 23 June 1982, appeal no. 7917094).
44 A third-party funder is an independent party that provides some or all of the funding for the costs of a party to the proceedings (usually the claimant), most commonly in return for an uplift or success fee if successful.
45 This is the legal expression used in England to keep offers outside courts and tribunals.
46 This is the language more frequently used in the USA.
47 E.g. in England, Civil Procedure Rules (CPR), Part 36.
48 In France, there are no specific provisions on settlement offers and cost implications, but legal professional privilege applies to correspondence between two lawyers according to Art. 66-5 of amended Law No. 71-1130 of 31 Dec. 1971 and an unaccepted offer between counsel cannot therefore be referred to in court. In England, an unaccepted settlement offer will usually be subject to without prejudice protection and therefore be subject to privilege and may not be disclosed. This consequence is only avoided where the offer is made without prejudice save as to costs (or in litigation subject to CPR Part 36 procedure).
49 In fact, some national arbitral statutes expressly forbid this.