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( Source of the document: ICC Digital Library )
The assistance of the members of the Task Force and ICC National Committees was enlisted to report on how the issues listed below are addressed in the legal systems and arbitration practice in their respective countries:
1. Where lawyers have worked under some form of conditional fee, contingency or upgrade arrangement, can legal fees and costs be recovered, do the same rules apply in arbitration as in litigation, and are such arrangements contrary to professional codes of ethics?
2. What information is relevant to the recovery of costs funded by a third party, and how is the role of third-party funders regarded?
3. What, if any, legal provisions and precedents are there allowing contracting parties to agree funding arrangements in advance of a dispute or in their arbitration agreement (e.g. to protect the weaker from the stronger party), and how are costs divided (e.g. each party to pay its own costs in any event, or costs to be paid by the unsuccessful party)?
4. Is cost-capping by tribunals authorized, what form does the rule take, and how is it implemented or applied?
5. How have arbitrators explained their decisions on the allocation of costs in cases where there was a disparity between expensive and less expensive lawyers, or between major international law firms and law firms from developing countries or smaller and less expensive firms?
Answers ('national reports') were received from Algeria, Argentina, Austria, Bahrain, Belgium, Brazil, Canada, Egypt, Finland, France, Germany, Ghana, Guatemala, Lebanon, Iraq, Ireland, Italy, Jordan, Kuwait, Lebanon, Mexico, Morocco, the Netherlands, New Zealand, Nigeria, Oman, Poland, Qatar, Russia, Saudi Arabia, Senegal, Singapore, Spain, Sweden, Switzerland, Thailand, Tunisia, Ukraine, the United Arab Emirates, the United Kingdom and the United States.
Before presenting a summary of those national reports, the Task Force notes that, in a global review of costs in national court litigation conducted by the law firm Lovells (now Hogan Lovells) in February 2010, it was reported that:1
the general principle that the 'loser pays' … generally applies in 49 of the 56 surveyed jurisdictions ... In a few others very limited costs may be 'shifted' to the loser. …
Japan is a less well understood example of the jurisdiction where lawyers' fees are not recoverable in any event. As a further contrast, in Taiwan, the fees are recoverable only when the lawyer has been appointed by the court.
In about 75% of jurisdictions the costs that can be recovered include most of the range of items that would normally be included within the recovery in England and Wales. Thus, lawyers' fees, counsels' fees, agency fees and disbursements such as copying charges and witness expenses are recoverable in the majority of instances where costs are permitted to be recovered …
As to the level of costs which may be recovered, here the variation is greater.
The 41 national reports received by the Task Force revealed broad acceptance of some form of cost shifting in arbitration proceedings, as well as in national court systems. Likewise, the jurisdictions concerned appeared to be reasonably accepting of funding arrangements, including third-party funding and various fee structures or agreements, even when not specifically foreseen in local legislation. Yet, the reports show that there are some important differences between jurisdictions, as the following summary will show.
1. Right to recover under fee arrangements
Most national reports mentioned that, although not specifically covered in statutes or rules, such arrangements are likely to be permitted in their jurisdictions (Austria, Brazil, British Columbia, Egypt, France, Kuwait, Lebanon, Ontario, Poland, Mexico, Saudi Arabia, the United Arab Emirates and the United States). Such arrangements are specifically permitted in Finland (if there is a particular reason for the arrangement), Nigeria (provided they comply with rules of professional conduct), Spain, Sweden (if reasonable), the Netherlands (provided the lawyer's costs and a modest salary are covered and the fee is not entirely contingent on outcome), New Zealand (if based on a 'normal fee plus premium' rather than [Page56:] a percentage), Argentina, Ghana (if an invoice signed by the lawyer is issued and the client has been given one month's notice), Senegal, Tunisia (provided the agreement in writing, the conditional fee does not exceed 2% of the result to be achieved, is not payable in kind and does not affect the lawyer's 'dignity and honour') and British Columbia (if in compliance with the statutory cap).
Contingency fees are specifically prohibited and considered null and void in Austria, Bahrain, Iraq, Ireland, Morocco, Oman and Qatar. In French domestic proceedings contingency fees are prohibited where they are based solely on the outcome of the case; they are not prohibited in international arbitration. In Mexico they are prohibited in one code of ethics but regarded as admissible by another, provided the lawyer does not draw greater benefit than the client. In Guatemala, although not prohibited, such arrangements are contrary to ethical rules applicable to lawyers.
In Germany contingency fee arrangements are contrary to national standards of professional conduct and are generally prohibited, although the German Federal Constitutional Court ruled in 2008 that outright prohibition was unconstitutional because it unduly restricts the professional freedom of lawyers. Thus, fee arrangements may be allowed on a case-by-case basis where it is reasonable to assume that the client, due to its economic situation or the level of financial risk involved, would otherwise be barred from pursuing its claims. Nonetheless, in both arbitration and litigation, contingency fee arrangements remain uncommon in Germany.
In Singapore contingency and uplift fees are prohibited in both litigation and arbitration for Singapore lawyers, but appear to be permitted for foreign lawyers and law firms so long as they do not engage in the practice of Singapore law. They are also prohibited under ethical rules. An arbitration seated in Singapore or governed by Singapore law is likely to amount to the practice of Singapore law as Singapore procedural law will apply. This trend may change in the future.
In some countries contingency fees are subject to different rules from success fees or other arrangements, with success fees being generally permitted but restrictions imposed on contingency fees (France, Ireland, Switzerland and the United Kingdom). The opposite is true in Sweden where success fees are prohibited but 'no cure no pay' and conditional fee arrangements permitted.
Several countries reported that the rules applying to domestic litigation and arbitral proceedings differ, with those applying to domestic proceedings usually being more restrictive (Austria, Egypt, France, Ireland, Jordan, Mexico, New Zealand, Poland, Spain, Switzerland and the United Kingdom). In Austria, Egypt, the Netherlands, New Zealand, Poland and Switzerland the courts apply tariffs to costs, whereas arbitral proceedings are more flexible. In Spain the costs recovered in the courts may not exceed one third of the amount of the claims, whereas in arbitration the tribunal is likely to be less restrictive. In Guatemala, Lebanon2 and Senegal the rules are the same for litigation and arbitration.
The national reports for Brazil and the United Kingdom enquired whether success fees and contingency fees can be considered as procedural costs when they have not actually been incurred at the time of the award.
In Russia it was reported that contingency fee arrangements are not prohibited by statute or under any professional rules. However, Russian courts have in the past refused to enforce such arrangements because they were often used to legitimize the reimbursement of illegal payments made by counsel to bribe the judiciary. In recent years, the courts have become more open to enforcing contingency fee arrangements where the fees corresponded to work actually done and were in line with market rates. Arbitral tribunals normally take a more liberal approach than state courts and allow contingency fees, provided they are reasonable.
Several national reports indicated that the reasonableness of such fee arrangements can be taken into account in the awarding of costs (Austria, British Columbia, Italy, Ontario, Quebec, Mexico, Russia, Spain, Switzerland and the United Kingdom).
In Ireland, Mexico and Quebec the arbitration agreement between the parties is generally considered to prevail, so it could cover such arrangements.
It was reported that in Argentina and Poland contingency agreements are only binding on the client and its lawyers and will not be taken into consideration in the calculation of the costs of the arbitration.
2. Third-party funders
Most countries were unable to cite any reported cases dealing with this issue (Argentina, Austria, Belgium, Brazil, the Canadian provinces of Alberta and Quebec, Finland, France, Ireland, Italy, Lebanon, Mexico, Nigeria, Ukraine, Russia, Spain and Sweden), while case law in the Canadian provinces of Ontario and British Columbia was inconsistent and unrelated to arbitration.
A law prohibiting third-party funding in domestic cases was invalidated by the Swiss Supreme Court, as it violated economic liberty.
Many national laws do not refer at all to third-party funding. They include those of Austria, Brazil, Finland, France, the Netherlands, Nigeria, Senegal, Spain, Ukraine and the Canadian provinces.
In the United Kingdom and Ireland there is no obligation to disclose the details of third-party funding in court proceedings, and such an arrangement has no impact on the recoverability of costs. A third-party funder can be held liable for an adverse costs order, and is usually insured against such an order. There are no rules or guidance on the subject in arbitration, although such arrangements appear to be common. Arbitral tribunals have no jurisdiction to make an adverse costs order against a third-party funder, as it is not a party to the arbitration. It is suggested that any funding arrangement should be disclosed early in the arbitration, so that an application for interim security for costs can be made.
In Germany there is no obligation to disclose information on third-party funding in court proceedings. Such arrangements do not generally affect the recoverability of costs and usually remain undisclosed.
The national reports for Brazil, Finland, Nigeria and Sweden all suggested that the costs of third-party funding may not be recoverable, because the funder has no standing to make such a claim in the proceedings, and the party for which the funding was provided did not actually incur the costs and therefore would not be entitled to claim their recovery. Likewise, it was suggested that in Ontario and Ukraine third-party funding does not qualify as a legal service and may not be recoverable unless specifically mentioned in the arbitration agreement. In Singapore a third-party funding agreement could be considered champertous and therefore unenforceable by Singapore courts in both litigation and arbitration.
A few arbitration cases involving Lebanese parties and funding provided by a (non-Lebanese) third party were reported from Lebanon. It was believed that there are no legal principles or specific regulations or laws preventing a party to a dispute related to Lebanon from contracting with a third-party funder, and that such a contract would therefore be enforceable under the general rules of Lebanese contract law. In particular, Lebanese law contains no potential impediment or obstacle, such as the prohibition of champerty and maintenance, which would bar a party (and a third party) from funding litigation or arbitration by such means. On the contrary, it would appear to be endorsed by Lebanese contract law on the assignment of disputed rights, which could be applicable to such funding.3
It was reported that in Argentina third-party funding is unlikely to be taken into account in calculating the costs of the arbitration.
The national reports for Austria and Ghana suggested that a third-party funding arrangement would not alter the recoverability of costs, although the funder is unlikely to be held directly liable for the winning party's costs.
In Poland it was suggested that third-party funding is likely to be considered akin to commercial financing (i.e. a loan) or the raising of capital, which cannot be reimbursed as a legal cost.
It was suggested that in Switzerland that arbitral tribunals may not be bound by a funding arrangement, although in principle they could indemnify a party for the percentage of fees it has to share with the funder, if the percentage were considered reasonable.
The national reports for Mexico, Switzerland and the United Kingdom all mentioned disclosure of the arrangement as a relevant consideration. It was also observed that in the United Kingdom third-party funding could give rise to a conflict of interest between funders and arbitrators, for instance if an arbitrator is counsel in another case requiring funding.
In France third-party funding arrangements are uncommon, as access to courts is inexpensive and the awarding of costs strictly regulated, making such arrangements less attractive. However, they would not be invalid.
Case law was reported from New Zealand indicating that the third-party funder should not have played an active role in strategic decision-making in relation to the dispute. There is no requirement to disclose third-party funding, and a tribunal would likely consider it a matter between the parties.
In Guatemala third-party funding is used neither for litigation nor arbitration.
In Egypt, Iraq, Tunisia and the United Arab Emirates there are no rules prohibiting third-party funding and although there is no case law available, such agreements are likely to be upheld.
In Morocco third parties, including lawyers, are prohibited from funding claims and there are thus no professional funders active in the local market. In Algeria, Kuwait and Qatar third-party funding is not yet available in local markets.
3. Funding arrangements agreed in advance between the parties
Several jurisdictions were reported to have no specific rules on such agreements. They include Brazil, the Canadian province of Alberta, France, Germany, Guatemala, Lebanon, Nigeria, Poland, Russia, Switzerland and Ukraine.
The United Kingdom's 1996 Arbitration Act contains a mandatory provision forbidding agreements whereby a party undertakes to pay the costs in any event, unless they are made after a dispute arises.
Agreements on funding arrangements between the parties were reported to occur with some frequency in Austria, the Canadian province of Quebec, Mexico, Nigeria and Sweden, be it in the arbitration agreement, when a dispute arises, or (as in Austria) towards the end of the arbitration. Such agreements were reported in Singapore, too. In Finland and Ontario they are rare, but possible. Brazil reported that if the arbitration agreement is silent, the parties will often make such an arrangement in the terms of reference. Sweden reported that an arbitration agreement could be attacked on equitable grounds in the absence of such an arrangement.
In many jurisdictions, including Alberta, Austria, Bahrain, British Columbia, Finland, Germany, Ghana, Ireland, Italy, Jordan, Lebanon, Mexico, Morocco, the Netherlands, New Zealand, Oman, Quebec, Russia, Senegal, Spain, Sweden, the United Arab Emirates and the United States, such agreements will generally be upheld. In Belgium the 2013 CEPANI Arbitration Rules allow parties to agree on a maximum upper limit for the reimbursement of costs, and arbitrators can draw the parties' attention to this possibility.
In Iraq agreements between the parties on the allocation of costs are likely to be respected. Failing such an agreement, the rule in domestic proceedings is that the losing party bears the legal costs of the successful party, but in accordance with statutory rates and fees.
In Algeria, Egypt and Qatar such agreements on funding arrangements would be valid, although the general rule in domestic proceedings is that the losing party bears all costs. In Qatar it is not uncommon for arbitrators to refer to the provisions applicable to domestic proceedings in this respect.
Similarly, in Saudi Arabia such an agreement would be enforceable, but the general rule applicable in domestic proceedings is that each party bears its own costs. Failing an agreement between the parties, arbitral tribunals typically order each party to bear the costs of its own legal counsel and the arbitrator it appointed, whereas the costs of the presiding arbitrator and the arbitration itself are shared between the parties.
In Tunisia party agreements on the allocation of costs are respected. In the absence of an agreement between the parties, the principle in domestic litigation and domestic arbitration is that the unsuccessful party bears all legal costs. In ad hoc arbitrations conducted under Tunisia's Arbitration Code, arbitral tribunals generally order each party to bear its own legal fees.
In Kuwait such party agreements would likely be enforced in domestic proceedings and in arbitration. However, case law shows that courts have reduced the agreed legal fees where they were considered to be unreasonably high. This issue has not arisen before an arbitral tribunal. In the absence of an agreement between the parties, the statutory rules on domestic proceedings provide that the losing party bears all costs. In arbitration, the tribunal has discretion to decide on the allocation of costs in its final award.
In Brazil it is common to agree that the losing party will pay all costs, whereas in the United States it is more common to use the 'American rule' of each party paying its own costs. Parties wishing to agree on the 'costs follow the event' rule would need to make this clear.
It was reported that courts in Poland are likely to treat agreements between the parties on funding arrangements as valid, but that a waiver of statutory regulations on the division of costs cannot be made in advance but only once the litigation has ended. Such agreements are likely to be upheld by arbitral tribunals.
Under Guatemalan legislation the loser generally has to indemnify the winner, but courts can make exemptions to recognize good faith. The Guatemalan Chamber of Industry's rules state that the award should determine who pays the costs.
It was suggested that in Finland such agreements would be considered binding on the parties, which therefore cannot deviate from it unilaterally by requesting costs contrary to their agreed arrangement. However, if both parties were to do so, it could be held that they had waived the agreement.
In Switzerland such an agreement between the parties is likely to be seen as trumping any institutional rules on the division of costs, which would otherwise apply in an arbitration. It is possible that a court faced with such an agreement could still use its discretion when awarding costs.
In French domestic proceedings costs are divided between court costs and other costs such as attorney's fees. Court costs are at the judge's discretion and any agreement relating to them would be null and void. An agreement on attorney's fees would be permissible, although subject to the court's discretion, and a party would be unlikely to recover its attorneys' fees in full. In arbitration, the recognition of either kind of agreement is unlikely to be problematic.
The following countries were reported to have no statutory rules on a tribunal's power to cap costs: Algeria, Austria, Bahrain, Brazil, Canada (provinces of Alberta, British Columbia and Ontario), Egypt, Finland, France, Germany, Ireland, Italy, Jordan, Mexico, Morocco, the Netherlands, Nigeria, Oman, Poland, Qatar, Tunisia, Saudi Arabia, Singapore, Spain, Sweden, Switzerland and the United Arab Emirates.
Cost-capping by tribunals was reported to be forbidden in Argentina and Guatemala.
The United Kingdom's 1996 Arbitration Act authorizes the tribunal to cap recoverable costs, although this power is rarely used in practice. In Ukraine, tribunals are given broad power to determine their own procedure, which would include the power to limit costs, but there is no evidence of any cost-capping orders having been issued. Tribunals in Ghana are reported to have discretion to cap costs, and when so doing have regard to a number of factors including the amount in dispute.
It was suggested that in the Canadian province of Ontario, although party spending cannot be capped, a cap could be imposed on the recoverable amount.
In Poland it was reported that under the Polish Chamber of Commerce rules a cap would be applied to contingency agreements.
The national reports from Bahrain, Egypt, Kuwait, Lebanon, Morocco, the Netherlands, Oman, Qatar, Saudi Arabia, Senegal, Switzerland and the United Arab Emirates suggested that a cap agreed by the parties is likely to be upheld. The rules of the Belgian arbitration centre, CEPANI, expressly invite arbitrators to remind parties of the possibility of agreeing to cap costs.
In several jurisdictions it was reported that tribunals are likely to consider the reasonableness of the costs incurred when making an award on costs (Alberta, Belgium, British Columbia, Egypt, Finland, Guatemala, Italy, Nigeria, Russia, Spain, Sweden and Tunisia). In Brazil it was noted that a tribunal, while having regard to the parties' arbitration agreement, has the power to take account of tactics undertaken in bad faith. Quebec's Code of Civil Procedure contains a provision on the proportionality of expenditure, which could potentially be relevant.
It was reported that German tribunals do not impose caps without the parties' authorization, although they may limit the amount of costs that are recoverable. Only costs that are necessary for the proper pursuit of a claim or defence are recoverable. Arbitral tribunals have wide discretion in assessing necessity. Arbitrators have assessed the reasonableness of the time spent on the case by counsel on the basis of their own preparation time or even their own experience as legal practitioners. Case law is inconsistent on the question of what hourly rate may be deemed reasonable. When allocating costs, tribunals tend to consider the outcome of the case, without regard to the procedural behaviour of the parties, although some have apportioned costs on the basis of procedural behaviour or other factors rather than outcome.
It was suggested that in Mexico, Nigeria, the Netherlands and New Zealand a spending cap could be seen as affecting the right of a party to present its case. Prudence required that tribunals should not to impose a cap without the parties' authorization in Austria and Jordan, while in Finland and Switzerland tribunals were considered to have no power to impose a cap at all.
No cases were reported to have arisen on this issue in the Canadian provinces of Alberta, British Columbia, Ontario and Quebec, or in France, Qatar and Ukraine.
5. Reasoning in decisions on costs where there are cost disparities
Courts and tribunals in several countries (Austria, Germany, Lebanon, Russia, Singapore, Ukraine, the United Kingdom and the United States) were reported to have wide discretion in making orders on costs, which could take into account factors such as the complexity and importance of the case, the amount at stake, and the nature of the work involved. In Germany arbitrators generally do not place particular emphasis on the types of law firms used by the parties. In Austria the parties' backgrounds may be taken into account (e.g. whether they are foreign parties requiring local as well as foreign counsel, whether they are multinational corporations or small businesses). In Russia both tribunals and courts may take account of the cost of comparable legal services in a particular region. Tribunals in Ghana are in practice guided by the scale of fees of the Ghanaian Bar, and the tendency is to award costs up to 15% of the amount claimed.
The Canadian provinces and Tunisia were reported to frequently apply the principle of proportionality when awarding costs, such that a mid-range sum of fees may be awarded if the party with higher costs wins. In Tunisia, an international tribunal faced with this issue found that the fees claimed by the party represented by an international law firm were in line with the rates to be expected, but reduced the amount recoverable by 20% to align the legal costs with those incurred by the unsuccessful party, which had retained a smaller Tunisian firm. In Ireland proportionality is likely to be an important factor in the allocation of costs.
It was reported that in Argentina, Iraq, Morocco, Sweden, the United Arab Emirates and the United States the nature of the law firm retained has no impact on the apportioning of costs. In Egypt, Saudi Arabia and Sweden consideration would be given to the reasonableness of the expenditure and the amount. In Jordan and the United Arab Emirates the successful party is typically awarded its legal costs regardless of the type of law firm used.
Reference was made to a commercial arbitration case in Spain, in which the losing party, which had retained a small law firm, was ordered to pay legal fees of the successful party, which had retained a large international law firm. The tribunal considered the costs as reasonable given the procedural complexity of the case, which had been exacerbated by the losing party persisting with claims that had little chance of success.
In the Netherlands, although arbitrators have the power to award the legal costs actually incurred, in practice legal costs are awarded on the basis of fixed tariffs, unrelated to the costs actually incurred.
It was reported that in Mexico parties are usually ordered to pay their own costs, and that if costs are awarded to one party the reasonableness of the lawyers' fees could be taken into account. In Nigeria, costs generally follow the event, and the awarding of actual costs will be subject to their being reasonable. In New Zealand, too, the winning party will be awarded reasonable costs, which often leads to an award of two-thirds of the amount claimed.
In Singapore the wide variety of nationalities found among the members of arbitral tribunals based there leads to a corresponding variety of decisions on costs.
No cases addressing this issue have been reported in Brazil, Finland, France, Guatemala, Italy, Oman, Qatar, Senegal and Ukraine.
The national report from France suggested that the disparity may not have to be addressed, as more expensive firms may create more work for the tribunal (through lengthy submissions, etc.) but their past experience may make them more efficient and enable them to accomplish their work in fewer hours, which would balance out the cost. Similar comments on the efficiency of large firms were raised in the national reports from Argentina and New Zealand.
Lovells, At what cost? A Lovells multi jurisdictional guide to litigation costs (2010) at 4, http://www.chrysostomides.com/assets/modules/chr/publications/16/docs/LitigationCostsReport.pdf.
Article 69 of the Lebanese Advocacy Law No. 8/70.
Articles 280 and 281 of the Lebanese Code of Contracts and Obligations.