On 1 December 2015, the Arbitration Commission of the International Chamber of Commerce published a report entitled ‘Decisions on Costs in International Arbitration’.
Reaffirming that 83% of costs in arbitration are those incurred for the parties in the defence of their case, the Report lists the different approaches in allocating the costs in arbitration (1), studies how allocation of costs can be used to increase efficiency of the arbitration (2), and finally, analyses the different criteria taken into account for their allocation (3).
- General comments on costs allocation
The Report first compares decisions on costs in arbitral awards with those rendered by national courts.
1.1 In arbitral awards
The Report adopts a comparative approach, by analyzing the approach advocated in various arbitration rules. There are two opposite trends:
- “Costs follow the event”, trend whereby the reasonable costs incurred in the arbitration by the winning party are reimbursed by the other party: this is the case of the China International Economic and Trade Arbitration Commission (“CIETAC”) rules, the German Institution of Arbitration (“DIS”) rules, the London Court of International Arbitration (“LCIA”) rules, the Permanent Court of Justice (“PCA”) rules, and the 2010 UNCITRAL (“United Nations Commission on International Trade Law”) rules.
- The sovereign power of the arbitral tribunal to allocate the arbitration costs: this trend is found in the ICC rules, the Hong Kong International Arbitration Centre (“HKIAC”) rules, the International Centre for Dispute Resolution (“ICDR”) rules, the Arbitration Institute of the Stockholm Chamber of Commerce (“SCC”) rules, and the Singapore International Arbitration Center (“SIAC”) rules.
Despite these differences, the Report stresses that the majority of arbitral tribunals presume the losing party must pay the arbitration costs. This solution can then be adjusted depending on the peculiarities of the case. It is interesting to note that, even if the “costs follow the event” approach is popular in England, the practice in the US is more to each party bearing its own costs.
1.2 Approaches of national courts
According to the Report, most States allow agreements on the allocation of costs, including in presence of a third party funder. For example:
- In France, decree n°2011-48 of 13 January 2011 remains silent on the question of arbitration costs, but courts allow that parties organize their allocation;
- The 1996 English Arbitration Act and the Hong Kong Arbitration Ordinance judge that a clause whereby a party will pay all or part of the arbitration costs is valid provided it is concluded after the dispute arises;
- It should also be noted, still in the United Kingdom, that judges have ruled that there is no duty to disclose the existence of a third party funding agreement; consequently the funder may see itself obliged to bear the costs of the opposing party;
- However, there are exceptions to party autonomy: in Singapore, agreements on costs and third party funding agreements would be prohibited and voided.
- The allocation of arbitration costs : a tool to manage the proceedings
The Report then describes, for each step of the procedure, how allocation of costs can be used as a tool to increase the efficiency of arbitration.
- At the beginning of the arbitral proceedings: the Report encourages arbitral tribunals to consider the issue of costs with the parties, at the beginning of the procedure, notably by setting up with them rules on the management of costs, such as (i) the definition of recoverable costs, (ii) the acceptable standard of proof in relation to costs, or (iii) the opportunity to regularly evaluate the costs incurred by the procedure… These measures should enable the parties and their counsels to better manage costs during the procedure, and to be aware of the arbitral tribunal’s opinion on the issue.
- During the arbitral proceedings : according to the Report, most arbitration rules and national courts allow arbitral tribunals to allocate arbitration costs in a partial award, which thereafter can be granted the exequatur to be enforced;
- At the end of the arbitration proceedings: the arbitral tribunal can discretionarily allocate arbitration costs in one/several awards (article 37.4 of the ICC rules), taking into account the parties’ behavior during the procedure (article 37.5 of the ICC rules). The decision of the tribunal is thereafter motivated in the award.
- Determination of elements to be taken into account in the allocation of costs
The Report finally lists, in a third part, the elements arbitral tribunals may take into consideration when allocating the costs of the arbitration. These include notably:
- The existence of a prior agreement between the parties:
The Report finds that cost allocation is rarely envisaged in arbitration clauses, whereas such agreements are allowed in most domestic legislations.
Furthermore, parties can agree to apply a-national rules that may themselves contain rules on cost allocation. For example, article 9(7) of the IBA Rules on the Taking of Evidence in International Arbitration allow an arbitral tribunal to take into account a party’s bad faith in the production of the evidence when ruling on the costs.
- The reasonableness of the costs:
Generally, the costs must be reasonable, even when the arbitration rules or the applicable law provide for an assumption against the losing party.
In addition, the Report recommends a definition of the “reasonableness” of the costs: are reasonable and proportionate the costs which seem to be consistent with the amount in dispute between the parties.
The emerging issue of parties’ “internal” costs incurred by the arbitration, i.e., the costs arising from the work of the legal department or the management of the company, party to the arbitration: The Report clarifies that these emerging costs are not usually taken into account by arbitration rules. In France, the Decree of 2011 remained silent on that question. Thus, it is up to the arbitration tribunal to determine if they must be included in the arbitration costs (see the article of Caroline DUCLERCQ on the new costs in arbitration).
- Production of the evidence of the costs incurred:
The tribunal must investigate whether the amount claimed for costs is the amount the parties actually paid or will have to pay. Evidence of these costs must be brought in accordance with the rules on the taking of evidence applicable in the arbitral proceedings.
- Party bad faith:
According to the authors of the Report, the potential bad faith of the parties, before the beginning of the arbitral proceedings (e.g., dilatory attempts to avoid applying the arbitration clause, threatening behavior, etc…) or during the procedure (e.g., false testimony, challenging the arbitral tribunal’s jurisdiction without any grounds), should be taken into account by the arbitrators.
With this Report, the ICC continues its analysis of costs in arbitration, already initiated with its Techniques to control time and costs in international arbitration, analysis that encourages arbitration users to grasp the question of costs as early as possible in the procedure.
This research is in line with the general trend in international arbitration to enhance the efficiency of the arbitration, both in terms of costs and duration. In this respect, the analysis conducted by the LCIA, on the duration and procedural costs of arbitrations conducted under its auspices, and which conclusions were made public in November 2015, is of note.
The complete Report is available here.