What is a more cost effective way of litigating an international trade dispute?
Court proceedings in the Commercial or Admiralty Court?
Or an arbitration often taking place in London, perhaps with English law as the substantive law and before an English arbitrator?
Leaving aside the fact that the question on one analysis, might beg the counter-riposte “how long is a piece of string?” it is possible to note from the rules and criteria that apply to arbitral awards of costs, that they have the potential to be far more costly, due to the unpredictability they engender in respect of what award of costs might be made by the arbitral tribunal.
In the courts of England and Wales, awards of costs although discretionary in nature are made within well trammelled grooves of principle. The key principles are contained within the Civil Procedure Rules 1999 and the patina of case law which adds a sheen to the bare wording of the rules.
As has been observed in other contexts, a judicial discretion gives a judge a discretion to do what he must. In the context of international arbitrations held in London, it is often the case, that no such clarity will be found.
This is because an arbitrator’s power to award costs will often be open textured in a way not countenanced by the Civil Procedure Rules: not only will the terms of the arbitration agreement be largely silent about the basis on which costs may be awarded, or the international body of rules invoked by the arbitration clause contain a very broad discretionary basis for the making of an award of costs, but the procedural provisions contained within the Arbitration Act 1996, which will apply unless the parties have agreed the contrary are themselves elliptical.
The unfortunate consequence of broad unfettered discretion is that it is quite hard to predict how costs will be awarded in any given case, and particularly how the quantification of those costs will be assessed, given that some enabling provisions seem to go beyond pure legal costs. Adding to the uncertainty, is the fact that rarely will it be apparent at the start of the arbitral process, what interest rate will be applied to awards of costs and from when.
I will go on to consider each of these provisions which have something to say about costs in turn, starting with the agreement made by the parties to go to arbitration.
In a sense the mischief starts with the arbitration clause contained within the contractual documentation, which gives an aggrieved party a right to go to arbitration. Although the clause will be clear as to which set of international rules apply, the procedure for appointing an arbitrator, the place of the arbitration and the law which will govern it, the clause will usually be silent as to the costs provisions, or more particularly silent as to the basis on which a discretionary power to award costs should be exercised.
I cannot help thinking that in a sense, the easiest way to reduce uncertainty in arbitrations heard in London, is to ensure that specified in the agreement, are clauses spelling out the basis on which an award of costs will be made, and possibly incorporating the principles of English law which govern an award of costs in the courts of England and Wales.
Equally, it is quite rare to see a clause which does justice to the basis on which an award of interest should be made: in circumstances where the Arbitration Act 1996 gives an arbitrator a discretion to award compound as opposed to simple interest, this can result in huge sums changing hands, depending on how long it has taken since a dispute has arisen to go to arbitration.
Looking at some of the more familiar sets of international rules, one is immediately struck by how little they each have to say on the question of costs. Starting with the International Chamber of Commerce (ICC) Rules of Arbitration 2012, in respect of the ICC rules, the relevant provisions are articles 36 and 37. Article 36 is concerned with the costs of the arbitration itself including paying the arbitrators, whilst article 37 deals with the larger questions of costs between the parties:
Article 37 says
1 The costs of the arbitration shall include the fees and expenses of the arbitrators and the ICC administrative expenses fixed by the Court, in accordance with the scale in force at the time of the commencement of the arbitration, as well as the fees and expenses of any experts appointed by the arbitral tribunal and the reasonable legal and other costs incurred by the parties for the arbitration.
2 The Court may fix the fees of the arbitrators at a figure higher or lower than that which would result from the application of the relevant scale should this be deemed necessary due to the exceptional circumstances of the case.
3 At any time during the arbitral proceedings, the arbitral tribunal may make decisions on costs, other than those to be fixed by the Court, and order payment.
4 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.
5 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.
6 In the event of the withdrawal of all claims or the termination of the arbitration before the rendering of a final award, the Court shall fix the fees and expenses of the arbitrators and the ICC administrative expenses. If the parties have not agreed upon the allocation of the costs of the arbitration or other relevant issues with respect to costs, such matters shall be decided by the arbitral tribunal. If the arbitral tribunal has not been constituted at the time of such withdrawal or termination, any party may request the Court to proceed with the constitution of the arbitral tribunal in accordance with the Rules so that the arbitral tribunal may make decisions as to costs.
The criteria could not be broader: unlike English law, there is no starting point that the “loser pays”. Similarly, when one considers the American Arbitration Association (AAA) International Arbitration Rules 2014, there is a criteria of “reasonableness” but no provision for a “loser” pays rule.
Article 34: Costs of Arbitration
The arbitral tribunal shall fix the costs of arbitration in its award(s). The tribunal may allocate such costs among the parties if it determines that allocation is reasonable, taking into account the circumstances of the case.
Such costs may include:
- the fees and expenses of the arbitrators;
- the costs of assistance required by the tribunal, including its experts;
- the fees and expenses of the Administrator;
- the reasonable legal and other costs incurred by the parties;
- any costs incurred in connection with a notice for interim or emergency relief pursuant to Articles 6 or 24;
- any costs incurred in connection with a request for consolidation pursuant to Article 8; and
- any costs associated with information exchange pursuant to Article 21.
Again, where there is detail, it tends to be focused on determining the arbitrators fees and the basis on which they should be paid by the parties, in eg the further article 35.
The London Court of International Arbitration Arbitration Rules 2014 go further than the alternatives I have looked at to apply the English model of cost attribution and recoverability, but do not contain the numerous and detailed provisions that experienced litigators expect to see in parts 36, and 44 to 47 in the Civil Procedure Rules.
Article 28 provides 28.1 The costs of the arbitration other than the legal or other expenses incurred by the parties themselves (the “Arbitration Costs”) shall be determined by the LCIA Court in accordance with the Schedule of Costs. The parties shall be jointly and severally liable to the LCIA and the Arbitral Tribunal for such Arbitration Costs.
28.2 The Arbitral Tribunal shall specify by an award the amount of the Arbitration Costs determined by the LCIA Court (in the absence of a final settlement of the parties’ dispute regarding liability for such costs). The Arbitral Tribunal shall decide the proportions in which the parties shall bear such Arbitration Costs. If the Arbitral Tribunal has decided that all or any part of the Arbitration Costs shall be borne by a party other than a party which has already covered such costs by way of a payment to the LCIA under Article 24, the latter party shall have the right to recover the appropriate amount of Arbitration Costs from the former party.
28.3 The Arbitral Tribunal shall also have the power to decide by an award that all or part of the legal or other expenses incurred by a party (the “Legal Costs”) be paid by another party. The Arbitral Tribunal shall decide the amount of such Legal Costs on such reasonable basis as it thinks appropriate. The Arbitral Tribunal shall not be required to apply the rates or procedures for assessing such costs practised by any state court or other legal authority.
28.4 The Arbitral Tribunal shall make its decisions on both Arbitration Costs and Legal Costs on the general principle that costs should reflect the parties’ relative success and failure in the award or arbitration or under different issues, except where it appears to the Arbitral Tribunal that in the circumstances the application of such a general principle would be inappropriate under the Arbitration Agreement or otherwise. The Arbitral Tribunal may also take into account the parties’ conduct in the arbitration, including any co-operation in facilitating the proceedings as to time and cost and any non-co-operation resulting in undue delay and unnecessary expense. Any decision on costs by the Arbitral Tribunal shall be made with reasons in the award containing such decision.
28.5 In the event that the parties have howsoever agreed before their dispute that one or more parties shall pay the whole or any part of the Arbitration Costs or Legal Costs whatever the result of any dispute, arbitration or award, such agreement (in order to be effective) shall be confirmed by the parties in writing after the Commencement Date.
28.6 If the arbitration is abandoned, suspended, withdrawn or concluded, by agreement or otherwise, before the final award is made, the parties shall remain jointly and severally liable to pay to the LCIA and the Arbitral Tribunal the Arbitration Costs determined by the LCIA Court.
28.7 In the event that the Arbitration Costs are less than the deposits received by the LCIA under Article 24, there shall be a refund by the LCIA to the parties in such proportions as the parties may agree in writing, or failing such agreement, in the same proportions and to the same payers as the deposits were paid to the LCIA.
Moving abroad again, the Stockholm Chamber of Commerce (SCC) Rules 2010 provide for an award to shift costs from one side to another, but again does not expressly include a “loser pays” rule.
Article 44 Costs incurred by a party
Unless otherwise agreed by the parties, the Arbitral Tribunal may in the final award upon the request of a party, order one party to pay any reasonable costs incurred by another party, including costs for legal representation, having regard to the outcome of the case and other relevant circumstances
Finally, the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules 2010 moves to define both what costs are recoverable and the basis on which they will be awarded in articles 40 and 42:
1.The arbitral tribunal shall fix the costs of arbitration in the final award and, if it deems appropriate, in another decision
2. The term “costs” includes only:
(a) The fees of the arbitral tribunal to be stated separately as to each arbitrator and to be fixed by the tribunal itself in accordance with article 41;
(b) The reasonable travel and other expenses incurred by the arbitrators;
(c) The reasonable costs of expert advice and of other assistance required by the arbitral tribunal;
(d) The reasonable travel and other expenses of witnesses to the extent such expenses are approved by the arbitral tribunal;
(e) The legal and other costs incurred by the parties in relation to the arbitration to the extent that the arbitral tribunal determines that the amount of such costs is reasonable;
(f) Any fees and expenses of the appointing authority as well as the fees and expenses of the Secretary-General of the PCA.
3. In relation to interpretation, correction or completion of any award under articles 37 to 39, the arbitral tribunal may charge the costs referred to in paragraphs 2 (b) to (f), but no additional fees.
1. The costs of the arbitration shall in principle be borne by the unsuccessful party or parties. However, the arbitral tribunal may apportion each of such costs between the parties if it determines that apportionment is reasonable, taking into account the circumstances of the case.
2. The arbitral tribunal shall in the final award or, if it deems appropriate, in any other award, determine any amount that a party may have to pay to another party as a result of the decision on allocation of costs.
It can be seen that these rules, referenced in the arbitration clause, simply lack the precision of part 44 of the Civil Procedure Rules 1998, but also fail to incorporate such provisions as part 36, leading the writer to observe in many costs submissions to arbitrators, the parties trying to argue that part 36 style consequences should be applied by way of a discretionary decision of the arbitrator, or other instances of the rules should apply by way of analogy.
Given the lack of express provision made in either the arbitration clause or the international rules, in many cases it is the unadulterated provisions of the Arbitration Act 1996 which govern the award of costs. In effect the Arbitration Act 1996 serves as the source of procedural rules governing arbitrations, though large parts of the Act can be disapplied by the parties.
The starting point is to define what are costs for the purposes of the arbitration: this finds its expression in section 59 and keen readers will note the terms of section 59(1)(c) which permits the recovery of legal or “other” costs. The limits of “other costs” have not been finally defined: whether they will include management time, is moot, whether they could be stretched to include ATE premiums or litigation funding costs is doubtful.
59.— Costs of the arbitration.
(1) References in this Part to the costs of the arbitration are to—
(a) the arbitrators’ fees and expenses,
(b) the fees and expenses of any arbitral institution concerned, and
(c) the legal or other costs of the parties.
(2) Any such reference includes the costs of or incidental to any proceedings to determine the amount of the recoverable costs of the arbitration (see section 63).
Section 61 governs the principles on which an award of costs can be made:
61.— Award of costs.
(1) The tribunal may make an award allocating the costs of the arbitration as between the parties, subject to any agreement of the parties.
(2) Unless the parties otherwise agree, the tribunal shall award costs on the general principle that costs should follow the event except where it appears to the tribunal that in the circumstances this is not appropriate in relation to the whole or part of the costs.
This is a clear expression of the English rule and provides some discretion for making a “different order”, though it should be noted that the circumstances such as an offer to settle, or conduct, or delay, which might justify such an order are not defined as circumstances which should have this effect within the statute.
Section 63 deals with the recoverable costs of the arbitration and also the mechanism by which costs can be determined. Assuming that an arbitrator determines the principle of costs, there is no reason why he has to determine the costs by way of carrying out an assessment himself: instead the matter of adding up the pounds and pence can be transferred to the SCCO:
(1) The parties are free to agree what costs of the arbitration are recoverable.
(2) If or to the extent there is no such agreement, the following provisions apply.
(3) The tribunal may determine by award the recoverable costs of the arbitration on such basis as it thinks fit.
If it does so, it shall specify—
(a) the basis on which it has acted, and
(b) the items of recoverable costs and the amount referable to each.
(4) If the tribunal does not determine the recoverable costs of the arbitration, any party to the arbitral proceedings may apply to the court (upon notice to the other parties) which may—
(a) determine the recoverable costs of the arbitration on such basis as it thinks fit, or
(b) order that they shall be determined by such means and upon such terms as it may specify.
(5) Unless the tribunal or the court determines otherwise—
(a) the recoverable costs of the arbitration shall be determined on the basis that there shall
be allowed a reasonable amount in respect of all costs reasonably incurred, and
(b) any doubt as to whether costs were reasonably incurred or were reasonable in amount
shall be resolved in favour of the paying party.
(6) The above provisions have effect subject to section 64 (recoverable fees and expenses of arbitrators).
(7) Nothing in this section affects any right of the arbitrators, any expert, legal adviser or assessor appointed by the tribunal, or any arbitral institution, to payment of their fees and expenses.
The provisions on interest contained in the Arbitration Act 1996 are also of note because of the scope for an award of compound interest and because the wording of the section 49(4) contrasted with section 49(3) seems to contemplate that an award of interest on costs, should only run from the date of the award, and not as can now be done in the High Court, from an earlier date.
Set against that, the scope for an award of interest on costs on a compound basis, running until the costs are assessed, could be eyewatering in terms of its scope and far more costly than 8% simple interest under the Judgment Act 1838:
(1) The parties are free to agree on the powers of the tribunal as regards the award of interest.
(2) Unless otherwise agreed by the parties the following provisions apply.
(3) The tribunal may award simple or compound interest from such dates, at such rates and with such rests as it considers meets the justice of the case—
(a) on the whole or part of any amount awarded by the tribunal, in respect of any period up to the date of the award;
(b) on the whole or part of any amount claimed in the arbitration and outstanding at the commencement of the arbitral proceedings but paid before the award was made, in respect of any period up to the date of payment.
(4) The tribunal may award simple or compound interest from the date of the award (or any later date) until payment, at such rates and with such rests as it considers meets the justice of the case, on the outstanding amount of any award (including any award of interest under subsection (3) and any award as to costs).
(5) References in this section to an amount awarded by the tribunal include an amount payable in consequence of a declaratory award by the tribunal.
(6) The above provisions do not affect any other power of the tribunal to award interest.
So what could be done to reform these provisions and make awards of costs more settled and predictable in international arbitrations ?
In my opinion there is no need to try to argue for greater precision in the next round of arbitral rules, published by the organisations noted above.
These rules are made by pan-national bodies or emanate from countries, such as the USA with its lack of a cost shifting tradition or civil law countries, with intricate regimes of fixed and limited costs, to whom the English common law tradition of costs shifting, which can trace its roots back to the Statute of Westminster in 1275 is an alien concept.
Nor is there any need for a reform to the Arbitration Act 1996: since this Act only applies in its full rigour, where the parties do not agree alternatives to its default provisions, the answer it seems to me, lies in greater precision in the arbitration clauses which are drafted by lawyers and bind the parties.
If those clauses were specific about the powers of an arbitrator to award costs, perhaps in the case of a London arbitration governed by English law, incorporating the principles of the Civil Procedure Rules 1998 and specifying or delineating the basis on which interest, including interest on costs could be awarded, that would serve tremendously to reduce uncertainty.