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Copyright © International Chamber of Commerce (ICC). All rights reserved.
( Source of the document: ICC Digital Library )
Let's talk about costs
This may seem rather a mundane subject for a celebratory book such as this, yet it is at the heart of users' preoccupations.2 It is also a subject dear to the book's dedicatee. During his presidency of the ICC International Court of Arbitration, John Beechey championed initiatives that have brought the management of costs in arbitration to the centre of attention. These initiatives reflect three distinguishing features of John's presidency: (i) active engagement with arbitration's corporate user base; (ii) recognition that efficiency and the management of time and costs in international commercial arbitration warrant serious attention; and (iii) the willingness and ability to engage with other major arbitral institutions on issues affecting international commercial arbitration as a whole. I will elaborate on each of these in the course of this essay, which considers the most recent work product of the ICC Commission on Arbitration and ADR - its report on decisions as to costs (the 'Costs Report').3 The Costs Report is the latest manifestation of a dynamic of user-led improvements in the duration and cost of arbitration proceedings that has underpinned the ICC's dispute resolution activity in recent years and for which we owe much to John. It follows a number of earlier Commission products addressing similar issues, which will also be considered in this essay, insofar as they help to explain the context and significance of the Costs Report.
Active engagement with corporate users
First and foremost, John's presidency heralded an unprecedented engagement by the ICC International Court of Arbitration and the ICC Commission on Arbitration and ADR with corporate users of arbitration services. John actively encouraged synergy between the broader ICC business community leaders and membership and the work of the ICC International Court of Arbitration and the policy and rule-making of the ICC Commission on Arbitration and ADR.
The ICC exists to promote international trade and investment. In the words of the ICC's current Secretary General, John Danilovich, ICC arbitration is 'a form of impartial and dependable private justice that gives more security to commercial partners doing business across frontiers'.4 Under John's leadership, alignment and integration between the ICC at large and its International Court of Arbitration and Commission on Arbitration and ADR has been greatly strengthened. And so it should be: if the broader ICC represents 'merchants of peace', then ICC arbitration is the prime mechanism for resolving disputes that might otherwise threaten that merchant-led peace. It is incumbent on the Court and its leadership to protect and preserve that role.
Unfortunately, the benefits and dependability of a dispute resolution mechanism will be severely undermined if its cost and duration increase beyond the reasonable expectations (and sometimes means) of its users. In the course of the first decade of the 21st century, user concerns arising from escalating time and cost in arbitral proceedings reached a level requiring focused and serious action.
Such action necessarily required engagement with the business community. After all, the detrimental effects of escalating time and cost directly impact corporate users of arbitration, as opposed to legal counsel, arbitrators and other arbitration-related service providers, who rather stand to benefit from increased fee generating opportunities. By increasing the number of in-house counsel appointees to the ICC International Court of Arbitration and Commission on Arbitration and ADR, and actively engaging those appointees in the work of the Commission's task forces and rule-making initiatives, the ICC has been better able to serve and promote their business interests. Arbitration retakes its rightful role as a service provided to the business community to protect business interests globally.
Efficiency and the management of time and cost
From the outset of John's presidency in 2009, a number of important initiatives were undertaken by the ICC Commission on Arbitration and ADR, many of which focused on time- and cost-efficiency. In response to increasing concerns expressed by the user community, the ICC Court [Page281:] and Commission have explored new and innovative ways of controlling time and costs. In doing so, they have ensured that in-house counsel and corporate representatives were involved in the process and the various actions undertaken for their ultimate benefit as users.
2012 ICC Rules of Arbitration
In 2009, the first year of John's presidency, the ICC Commission on Arbitration and ADR commenced its work on a new revision of the ICC Rules of Arbitration. For over a decade, those Rules had stood unrevised. The mammoth and hugely delicate task of changing such a painstakingly negotiated and widely approved set of procedures took time, patience and dogged determination. Active involvement of corporate users in the exercise achieved the objective of ensuring that the focus remained on commercial and user-friendly outcomes. However, the addition of voices from a broader range of stakeholders brought with it an even stronger need for careful diplomacy and consensus building.
The revisions to the ICC Rules of Arbitration were adopted in 2012 (the '2012 ICC Rules'), after several years of consultation, discussion and drafting rigour. Significantly, the Rules now include changes that are expressly intended to improve the efficient management of arbitral proceedings. They further create sanctions for failing to do so by way costs.
The two new provisions in the 2012 ICC Rules specifically designed to promote greater control of time and costs in proceedings are found in Article 37(5) and Appendix IV. At the time, these innovations were unprecedented, although other institutional arbitration rules have followed suit since.
Article 37(5), which provides a sanctioning mechanism, reads as follows:
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 lists examples of case management techniques that may be used by arbitral tribunals and the parties to promote greater control of time and costs.
2012 report on techniques for time and cost control
The 2012 ICC Rules were closely followed by the re-edition of a report entitled 'Techniques for Controlling Time and Costs in Arbitration' originally published in 2007. The report was updated to reflect the various modifications made in the 2012 Rules and pursue the objectives underlying those modifications. Peter Wolrich, the then Chair of the ICC Commission on Arbitration and ADR, explained in his preface that [Page282:] the second edition of the Report 'should be seen as an adjunct to the 2012 Rules' and would hopefully 'help ensure the success of the tailor-making process under the 2012 Rules and thereby contribute to the increased effectiveness and attractiveness of international arbitration'.
The ICC recognized that the necessary improvements to time and cost management in arbitral proceedings could not be achieved by rule changes alone. The second edition of the report on controlling time and costs therefore contains detailed suggestions and proposals of concrete techniques and practices that may be adopted by arbitrators and counsel throughout the process. However, the success of such techniques depends in large part on the expertise and will of all participants in the process, beyond counsel and arbitrators. Something more was required to empower - and, where necessary, motivate - corporate users themselves to implement procedures that genuinely facilitate time and cost savings in proceedings.
In anticipation of this, the 2012 report recommended the following:5
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.
Immediately following that report, a new ICC task force of the Commission on Arbitration and ADR commenced the preparatory work that was to lead to the publication of the Costs Report. In the intervening period, however, the Commission produced a guide designed specifically for in-house counsel, whose purpose was to inform corporate users themselves on how to promote time- and cost-efficiency in the arbitration process.
2014 guide for in-house counsel
The Commission on Arbitration and ADR's 2014 guide entitled 'Effective Management of Arbitration: A Guide for In-House Counsel and Other Party Representatives' was a significant innovation. This guide was the first designed expressly for in-house counsel and other representatives [Page283:] of business people who agree to arbitrate their commercial disputes. It provides corporate users with a modus operandi to check and balance the decisions of counsel and arbitrators throughout the arbitral process. It builds on the reality that the stakeholder who will most effectively drive efficiency is the one that foots the bill of any inefficiency. To this end it provides in-house counsel and other party representatives, such as managers and government officials, with 'a practical toolkit for making decisions on how to conduct an arbitration in a time- and cost-effective manner, having regard to the complexity and value of the dispute'.6
The 2012 ICC Rules, the second edition of the report on controlling time and costs, and the in-house counsel guide all put in place techniques for improvement and, as such, are invaluable. However, as privacy and confidentiality in arbitration restrict user ability to gauge the effect, if any, of these initiatives in practice, there was still a need for something more. The normative effect of the new provisions and recommendations on time and cost would remain unknown and unchecked (and potentially sluggish) until or unless empirical analysis of existing awards was completed and conclusions published.
2015 Costs Report
The ICC Commission on Arbitration and ADR's 2015 Costs Report effectively overcomes the challenges presented by privacy and confidentiality in commercial arbitration in relation to treatment of allocation of costs in awards. The Commission conducted a thorough and comprehensive analysis of decisions on costs in arbitral awards dating back to 2009. They included awards rendered both before and after the 2012 ICC Rules came into effect, capturing the impact of those Rules on practice and conduct.
Given the enormous value of this exercise, the Commission was then able to draw on its strong foundation of cross-institutional relations with the London Court of International Arbitration (LCIA), the Swedish Chamber of Commerce (SCC), the American Arbitration Association's International Centre for Dispute Resolution (ICDR), the Permanent Court of Arbitration (PCA), the Singapore International Arbitration Centre (SIAC), the China International Economic and Trade Arbitration Commission (CIETAC), the Hong Kong International Arbitration Centre (HKIAC) and others to glean data on practices under other institutional rules and in ad hoc proceedings. The result was a comprehensive empirical analysis of costs decisions in arbitral awards across all major arbitral institutions. From that analysis, the Commission was able to study in detail how the practice of allocating costs between parties in international commercial arbitration can be used as an effective tool to control time and costs and help create fair, well-managed proceedings that meet the expectations of users.
One of the most startling observations from this empirical analysis across institutions was that in the vast majority of international commercial arbitration cases considered - often in excess of 90% ( awards on costs order cost shifting in favour of the successful party with respect to both arbitration costs (i.e. institutional administrative costs and arbitrator fees and costs) and party costs (i.e. legal and other costs incurred by the parties). This statistic marked an important change from previous practice.
By contrast, a previous study of ICC awards dating from 1989 and 1991 revealed that, at that time, largely successful claimants were awarded a substantial portion of the arbitration costs in most cases and a substantial portion of their legal costs in about half of all cases.7 However, where claimants were only partially successful, or where both parties obtained some relief, arbitrators typically ordered the parties to bear their own legal costs and shares of the arbitration costs. Moreover, where claimants had obtained substantially less than half of the amounts claimed, or where the respondent recovered larger amounts than the claimant, tribunals had generally left the arbitration and legal costs with the party that incurred them or ordered the unsuccessful claimant to pay some or all of the respondent's costs.8 In some cases, the claimants were awarded a proportion of their legal costs relative to the extent of their success vis-à-vis their claims.
A decade and a half later, the practice of awarding successful parties a substantial portion of their legal costs (as opposed to administrative and arbitrator costs) is no longer applied in just 50% of cases; it now appears to be the prevailing practice in the vast majority of ICC awards, and in awards under the rules of most other major arbitration institutions.
Nevertheless, the Costs Report was careful not to be prescriptive or endorse any particular practice or approach to decisions on the allocation of costs. As a process based on party autonomy and flexibility, international arbitration does not embody a single, universal approach to any procedure, including the allocation of costs. In order to make a useful summary of the data resulting from its cross-institutional empirical analysis, the ICC Commission on Arbitration and ADR sought to identify the various approaches to costs taken in the awards. Following on from the 2012 Rules, the 2012 report and the 2014 guides, the Costs Report is intended to inform corporate users how tribunals may help to control time- and cost-efficiency when allocating costs in accordance with the parties' agreement and/or any applicable rules or law. Its dual objective is to improve predictability and to enhance the service provided.
It bears noting that despite their similarities, institutional arbitration rules also contain important differences, including in their treatment of costs. For example, the 2015 CIETAC Rules, the 1998 DIS Rules, the 2014 LCIA Rules, the 2012 PCA Rules and the 2010 UNCITRAL Rules include an express, rebuttable presumption that the successful party will be entitled to recover its reasonable costs, while the ICC, HKIAC, ICDR, SCC and SIAC Rules simply state the tribunal's authority to make an award apportioning costs but make no presumption on how they are to be allocated. In addition, the 2012 ICC Rules and 2014 LCIA Rules both refer expressly to the tribunal's discretion to take into account the parties' conduct, including whether they have conducted the arbitration in an expeditious and cost-effective manner.
Given the absence of any presumption as to how costs should be allocated in over half of the major institutional rules, the prevailing practice in arbitral awards of allocating costs in favour of the successful party is all the more surprising. This aside, most decisions as to costs actually come down to an examination of the reasonableness of the amount and the conduct of the parties in incurring those costs. Although reasonableness is a common standard applied across most awards, how it is determined and the factors taken into consideration for this purpose vary. Examples include seeking damages far exceeding actual loss, or inefficient behaviour in relation to the hearing or document production.
The Commission's research revealed a small but growing practice of using - or threatening to use - costs to sanction bad or inefficient conduct. Heeding the increasing insistence placed on time- and cost-efficiency, arbitrators are showing a greater willingness to take a more directive approach to counsel and/or party conduct. By clearly explaining what is expected of them, a tribunal gives itself a better grip on time and cost control, which will be to the benefit of the parties and the process. Given the absence of a uniform approach to the allocation of costs, the Costs Report suggests that arbitrators and parties may wish to set out their expectations in this regard relatively early, i.e. at the outset of proceedings or, in ICC cases, at the mandatory case management conference. ICC tribunals are in any event authorized by Article 37(5) to take into account the efficiency with which the parties have conducted themselves when deciding on costs, regardless of whether this has been previously discussed. However, by addressing the matter at an early stage, the tribunal is better placed to manage party expectations.
The Costs Report identifies a number of additional issues relating to costs that might be raised with the parties at an early stage of the proceedings, including: (i) the determination of what costs are recoverable (e.g. in-house counsel and other staff costs); (ii) identification of the records required to substantiate claims; (iii) the frequency and calculation of interim cost assessments; (iv) third party funding; (v) cost caps; and/or (vi) settlement offers.
To sum up, the Costs Report is a direct response to demands for better management of costs in international commercial arbitration. It draws attention to the benefit of dealing with cost issues at the outset of proceedings and, by encouraging a greater awareness of the issues involved (e.g. the treatment of presumptions and the factors taken into account to determine whether costs are reasonable or how they are to be apportioned), it will lead to greater openness and more responsible behaviour. Perhaps even more importantly, however, at least for purposes of procedural efficiency, it underlines the importance of cost sanctions as a means of combatting unethical behaviour by parties and their representatives. By setting clear expectations on standards of conduct and reinforcing those expectations by indicating the possibility of cost sanctions if they are not met, arbitrators are better able to uphold good conduct and practice. It is highly encouraging to see that the ICC is not alone in this particular initiative. The 2014 LCIA Rules include as an annex 'General Guidelines for the Parties' Legal Representatives', which are 'intended to promote the good and equal conduct of the parties' legal representatives'.
Cross-cooperation between arbitration institutions
Finally, the work leading up to the Costs Report marked a new era of cross-institutional cooperation on initiatives intended to benefit users of international arbitration globally. John recognized that those who use ICC arbitration may also, at times, use other forms of institutional or ad hoc arbitration. Practices that preserve and enhance the global attractiveness of international arbitration as a mechanism for resolving commercial disputes transcend institutional differences and deserve to be shared. The unprecedented cooperation between eight of the world's leading arbitral institutions in Europe, Asia and the US that underlies the Costs Report bodes well for challenges that lie immediately ahead, including such issues as corruption, sanctions and transparency.
John's highly successful presidency has been one of increased internal and external communication, understanding, cooperation and integration. John's efforts to create and exploit opportunities for cooperation and joint initiatives have left the ICC stronger and even more highly regarded, and consolidated the Court's position as a world-renowned flagship for 'merchants of peace'. This can only be a source of comfort for his successor, Alexis Mourre, who begins his presidency with the challenge of maintaining relevant and viable dispute resolution mechanisms in a world of international business that faces increasingly complex and high value trade and investment disputes amid a background of climate change, shifting sovereign borders, and increasing demand on diminishing resources.
Queen's Counsel; partner and global head of arbitration in the London office of Boies, Schiller & Flexner; Vice-President, ICC International Court of Arbitration; firstname.lastname@example.org.
As underlined by the words of Michael O'Reilly quoted at the start of a survey by the Chartered Institute of Arbitrators: 'The topic of costs is hardly glamorous … Although it is the last thing to be dealt with in any arbitration, it is usually the first thing on the client's mind.' See CIArb Costs of International Arbitration Survey 2011 at iii.
At the time of writing, the Costs Report had not been published by the ICC (its publication is scheduled for the end of 2015). References to the Costs Report in this essay are based on the author's participation in the preparatory work and drafting of the Report as Co-Chair of the ICC Commission on Arbitration and ADR's Task Force on Decisions as to Costs.
'A word from our Secretary General', ICC website, http://www.iccwbo.org/about-icc/organization/.
ICC Commission Report, Controlling Time and Costs in Arbitration, ICC Publication 861, § 82; available at www.iccwbo.org/ICC-Arbitration-Commission.
Effective Management of Arbitration, ICC Publication 866, page 1.
The findings of this unpublished study are summarized in Y. Derains & E.A. Schwartz, A Guide to the ICC Rules of Arbitration, 2d ed. (Kluwer, 2005) at 371(373.
Final Award in ICC case 9466, XXVII (2002) Yearbook Commercial Arbitration 170 at 180.