Challenging costs awards in international arbitrations

Arbitrations in the international context, can be an expensive business. Arbitrators frequently can and do, make awards of costs, on a broad brush basis, and then go onto award compound interest on those costs, adding further expense to the losing party’s bill.

The assessment of costs can take place in the SCCO, but there is an increasing tendency for arbitrators to roll up their sleeves and enter into the nitty gritty of awarding particular items of costs, or what are claimed to be costs.

From time to time, they go onto award items of costs, which would not be recognisable as items of costs under the common law of England and Wales, such as, for example the cost of litigation funding, as a discrete head of costs, rather than as a cost compensable through an award of interest. This could be regarded as the cost of financing the costs of the arbitration, rather than the costs of the arbitration itself.

What is a paying party to do in such a situation?

There is an immediate difficulty in relation to any challenge to the arbitrator’s conclusion that he has the power to order an award of the costs of litigation funding against the respondent namely that this is an arbitration conducted according to a particular set of international rules, such as the ICC rules.

By way of example, the  former 1998 ICC rules provided in article 28 (6) that the parties by submitting the dispute to arbitration had waived their rights for a further determination: in this respect they have excluded the option of an appeal on a point of law to the High Court pursuant to section 69 of the Arbitration Act 1996.

In the context of such a challenge, there would be no point of jurisdiction here permitting a challenge under section 67 of the Arbitration Act 1996 and it follows that the only possible route of challenge is an arbitration claim issued and pursued further to section 68 of the Arbitration Act 1996. This is however a most problematic route.

The reason is that the limited grounds for a challenge contained within section 68 mean that the respondent would have to establish that there had been a serious irregularity in making the award and serious irregularity means according to section 68 (2) an irregularity in one of a closed list of 9 categories of potential faults, which has caused or will cause substantial injustice to the applicant to such a challenge.

Looking at the 9 categories, these are matters which include the failure by the tribunal to comply with section 33 (the general duty of the tribunal); or the failure by the tribunal to conduct the proceedings in accordance with the procedure agreed by the parties; or the failure by the tribunal to deal with all the issues that were put to it; or any arbitral or other institution or person vested by the parties with powers in relation to the proceedings exceeding its powers; or uncertainty or ambiguity in the effect of the award; or the award, being obtained by fraud or being contrary to public policy; or failing to comply with the requirements as the form of the award; or any irregularity in the conduct of the proceedings which is admitted by the tribunal or some other body.

The only real potential ground for challenging an award of costs, such as eg, the award of the cost of litigation funding, is that set out in section 68 (2) (b) which provides for a ground of challenge on the basis that the tribunal has exceeded its powers. That is, that it has acted in a way that amounts to an error far more serious than a simple error of law.

What does this mean? And how do sections 68 and 69 relate to each other? The leading case on the correct approach remains that of Lesotho Highlands Development Authority v Impregilo SpA [2006] 1 AC 221 a decision of the House of Lords which is the guiding authority on this particular point.

A V B [2011] EWHC 2345 and Kaneria v England and Wales Cricket Board [2014] EWHC 1348 (Comm) , are more recent cases, but these are first instance decisions which cite the House of Lords decision, rather than expanding upon the principles set out within in it.

The essential question arose in the Lesotho Highlands case as to how section 68 and section 69 were meant to work and the question that fell to be grasped in that case was whether an alleged error of arbitrators in interpreting the underlying or principal contract was an excess of power or simple error of law?

In the case of a simple error of law as the parties had excluded a right of appeal under section 69 they would effectively be left without a remedy and so had to pin their hopes on shoehorning the challenge into section 68. At paragraph 24 Lord Steyn said:

But the issue was whether the tribunal exceeded its powers within the meaning of section 68 (2) (b). This required the courts below to address the question whether the tribunal purported to exercise a power which it did not have whether erroneously exercised the power that it did have. If merely a case of erroneous exercise of power investing in the tribunal no excessive power under section 68 (2) (b) is involved. Once the matters approach correctly, it is clear that the highest in the present case on the currency point, there was no more than an erroneous exercise of the power available under section 48 (4). The jurisdictional challenge must therefore fail.

He noted that the requirement of a serious irregularity was a new concept in English arbitration law. A high threshold must be satisfied. He also noted the requirement that the regularity must cause substantial injustice to the applicant and was designed to eliminate technical and on meritorious challenges.

In particular at paragraph 29 he noted that there was no hint in section 68 that a failure by the tribunal to arrive at a correct decision could afford a ground for challenging the section 68.

On the other hand section 68 had a meaningful role to play where for example in conflict with an agreement in writing of the parties under section 37 the tribunal appointed an expert to report to it.

He also noted an example where an arbitration agreement expressly permitted only the award of simple interest and the arbitrators in disregard of the agreement awarded compound interest.

I think this is interesting or particularly this latter example is interesting because of course if the tribunal had no power to award compound interest but only simple interest but went ahead in so doing it would plainly be acting contrary to section 68.

One could argue by way of analogy that if a tribunal awards the costs of financing the costs of the arbitration as opposed to the costs of the arbitration itself then it is acting in a way which is in excess of its powers.

Lord Steyn concluded his analysis by stating it was necessary in paragraph 32 to focus intensely on the particular power under an arbitration agreement, the terms of reference  and the  relevant provisions of the 1996 Act which are engaged, judged in all the circumstances of the case. Noting, that it must always be borne in mind that the erroneous exercise of an available power cannot by itself amount in excess of power. A mere error of law does not amount to an excess of power.

Thus any challenge to an arbitrator’s costs decision, is going to be fraught with difficulty, with a very limited scope for challenge existing in the Commercial Court.

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