Few topics in international arbitration arouse more controversy than its cost. Clients, the consumers of international arbitration, understandably want a quick, effective and cost-efficient form of dispute resolution, and they frequently express concern about the legal and administrative costs involved in international arbitration.
By comparison, the arbitral institutions and lawyers involved are quick to defend the cost-effectiveness of what they do, bearing in mind the benefits it provides (including finality of award (no appeal), an enforceable award internationally, choice of tribunal and governing law, and confidentiality). While conceding that arbitration can be expensive, they advocate that it is important to plan for this and that it is, therefore, possible to endeavour to contain costs throughout the arbitration process while obtaining a first class and timely service.
The focus of this article is on international arbitration under the rules of the International Chamber of Commerce (the ICC) and on the award of the costs and expenses of the parties who participate in it, whether as claimants or respondents.
The ICC Arbitration Rules
Arbitration administered by the ICC is generally regarded as the preeminent form of international arbitration; the ICC has been in operation since the 1920s, has administered more than 17,000 cases, and is not linked to any particular country. Of course, there are important regional and national centres including the Hong Kong International Arbitration Centre and the Singapore International Arbitration Centre. The ICC Arbitration Rules (ICC Rules) are the procedural rules which apply to an arbitration if parties so choose. Whilst the 1998 version is currently in force (a copy of which may be found on the ICC website), it is worth bearing in mind that the ICC Rules are currently under review and that the new rules should be issued during 2011. In drafting the new version, a great deal of thought is being given to provisions for the management and control of costs that should be included or referred to, and how the allocation of costs by the Tribunal can be used to encourage efficient conduct of proceedings.
When do costs issues arise in an arbitration?
Issues as to costs and expenses can arise in an arbitration at various stages, from before the arbitration begins (during preparation) and during the arbitration proceeding, to when the Arbitral Tribunal publishes its award and sets out its decision as to who should pay the costs and expenses, and when making application to enforce an award, generally to a Court, if the unsuccessful party does not voluntarily comply with the award.
Article 31 of the ICC Rules provides for the “Decision as to the Costs of the Arbitration”, and sets out the meaning of “Costs and Expenses” under the rules. In summary, the costs of the arbitration include:
• The fees and expenses of the arbitrators;
• The ICC’s administrative expenses arising from their provision of administration services in an arbitration;
• The fees and expenses of any expert witnesses appointed by the Arbitral Tribunal; and
• The “reasonable” legal and other costs incurred by the parties for the arbitration.
Fees and expenses of arbitrators
All the fees of an ICC arbitration are fixed by the International Court of Arbitration of the ICC (the ICC Court), which consists of representatives of the 90 or so countries that are members of the ICC, all of whom are experienced arbitration professionals. The arbitrators’ fees are fixed in accordance with the Scale of Fees published by the ICC (the ICC Scale) (a copy of which can be found at the back of the ICC Rules).
Both the ICC’s administrative expenses and the arbitrators’ expenses are also fixed by the ICC Court, once again in accordance with the ICC Scale. The latter expenses may include transcription services and telecommunications, the costs of the Secretary of Tribunal (if any), travelling, accommodation and other associated costs.
Legal fees and costs of the parties
As to the legal fees and costs of the parties, these are determined by the Arbitral Tribunal in accordance with the principles set out in the ICC Rules. Article 31(1) of the ICC Rules refers to “The reasonable legal and other costs incurred by the Parties for the arbitration”, the concept of “reasonableness” having been introduced by the 1998 ICC Rules. The costs of the parties include their legal fees, which in Hong Kong can consist of fees for solicitors, barristers, and in-house counsel (in appropriate cases – this is a developing area). The costs can also include the fees of any party-appointed experts, and other disbursements such as couriers, telephone and fax costs, travel and accommodation costs, and transcription services.
Does the winner take all?
Pursuant to Article 31(3) of the ICC Rules, the Arbitral Tribunal has discretion as to whom to award the costs and expenses. This section provides that the Arbitrators shall, in the final award, fix the costs of the arbitration and decide which of the parties to the arbitration shall bear them, or in what proportion they shall be borne by each of the parties. In deciding how to exercise that discretion, the Tribunal will consider the conduct of the parties and other factors, including:
• The reasonableness of the costs claimed;
• A comparison of costs, including whether hourly rates are appropriate, and pre and post commencement costs; and
• Different national approaches as to costs calculations, contingency fees, and whether a party generally bears its own costs (as in the US).
It is important to remember that a winning party will not automatically be awarded all their costs and expenses. If, by their conduct, they have prolonged the arbitration, or if they have won only some of their claims, they may be awarded only a proportion or none of their costs, and in rare cases may have to pay some of the costs of the unsuccessful party.
ICC techniques for controlling time and costs
Given the growing importance of controlling costs to parties and the arbitration profession, in 2008 the ICC published the ICC Techniques for Controlling Time and Costs in Arbitration, which it prepared with the assistance of in-house and external lawyers and members of the business community. The ICC sends a copy of the techniques (which can be found on its website) to arbitrators and parties at the commencement of each arbitration, to encourage them to think about this important topic
both at the beginning of the arbitration and throughout.
Hong Kong legal framework
In Hong Kong, provisions for costs are also found in the Arbitration Ordinance (Chapter 341) of the Laws of Hong Kong, and in the Hong Kong Rules of the High Court. Rising costs have also been an issue in Hong Kong litigation, and in response to this the special administrative region’s Government and judiciary recently agreed upon Civil Justice Reforms (the Reforms) to the litigation system. Among other things, the Reforms are intended to reward those who seek to keep costs down by conducting their litigation efficiently and fairly, and penalise those who fail to do so. The Reforms are likely to impact on the approach to arbitration conducted in Hong Kong, as an aggrieved party to an arbitration can generally apply for taxation of its costs by the High Court in a similar way to litigation, although this is rarely done.
How to contain costs
Techniques to contain costs include the following:
• Making provision in the relevant Arbitration Agreement for: paper arbitration (if considered appropriate by the Arbitration Tribunal and parties); fast track arbitration, which utilises an accelerated timetable for hearing (once again, if considered appropriate); providing for one arbitrator where a smaller or less complex dispute is likely to arise; specifying the relevant expertise required of the arbitrators; and considering which arbitration rules are best suited for the type of dispute that is likely to arise.
• Choice of counsel – parties should choose experienced and efficient counsel and make fee arrangements with counsel that reward efficiency and timeliness.
• Choice of arbitrators – parties should choose experienced, efficient and robust arbitrators who have time to focus on the arbitration.
• Case management by the Tribunal, including: capping costs at the beginning of the arbitration proceedings with the agreement of the parties; requesting detailed submissions by the parties at the beginning of the proceedings so that the issues in dispute are clear and preparation can be focused; establishing a procedural calendar and schedule for the arbitration hearing early so that there is a clear timetable for the proceedings; and establishing at an early time in the proceedings how disclosure of documents and evidence will be provided and in what level of detail.
The future
Costs pressures in arbitration need to be addressed effectively to ensure its survival as a popular dispute resolution technique. However, its well-known benefits – including, as outlined in the introduction, finality of award (no appeal), international recognition and enforcement of arbitration agreements and awards under the 1958 New York Convention, independence of a national court, choice of arbitrators (as decision makers), choice of law, and its confidentiality potential (if agreed upon) – should ensure that it does survive, provided it does not price itself out of contention.
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