Costs

Introduction

As international commercial transactions have become larger and more complex, international arbitrations arising out of those transactions have become correspondingly more intricate and expensive. Cost awards^[2] now frequently exceed US$1 million. In large-scale arbitrations between well-capitalised parties represented by top-tier international law firms, cost awards can exceed US$10 million.^[3]

Although leading arbitral institutions in recent years have focused on providing specific guidance to assist tribunals and parties in managing the cost of arbitrations,^[4] the trend of increasing costs has not abated. The 2015 Queen Mary University of London (QMUL) International Arbitration Survey found that stakeholders in international arbitration (e.g., party representatives and in-house counsel) perceive ‘cost’ as ‘the worst characteristic of international arbitration’. The QMUL Survey in 2018 likewise concluded that ‘by a significant margin . . . cost continues to be seen as arbitration’s worst feature’.^[5]

Despite the increasing importance of cost recovery in international arbitration, there is a surprising lack of uniformity as to the standards applied by tribunals when deciding issues of costs. Cost awards, including whether and to what extent certain categories of fees and expenses are recoverable, are ‘often arbitrary and unpredictable’.^[6] This lack of predictability engenders uncertainty, which can, in turn, curtail a party’s ability to make an informed, threshold decision as to whether it is in that party’s interest to invest in the arbitration process or to seek an early, and likely less favourable, settlement. Empirical evidence also reflects that the parties’ pre-dispute actions in negotiating and drafting relevant contractual provisions, as well as counsel’s strategic choices and conduct during the arbitration, will likely affect the ultimate allocation and recovery of costs.

This chapter considers these and other issues regarding the recovery of costs in inter­national arbitration, including a brief overview of the effects of the covid-19 pandemic.

Sources and scope of arbitrators’ authority to determine costs

The parties’ arbitration agreement, or the applicable investor-state treaty, is the starting point in a tribunal’s analysis regarding cost allocation and recovery, as ‘party autonomy is paramount on all procedural matters, including cost control and cost determinations’.^[7] Virtually all developed legal regimes will give primary effect to the parties’ express agreement with regard to cost allocation.^[8] Notwithstanding this precept, contracting parties often give little thought to cost issues when they are negotiating and drafting their arbitration agreements. Accordingly, arbitration agreements are frequently inadequate as to whether and how tribunals should allocate costs.^[9]

In the absence of explicit guidance in the parties’ arbitration agreement, arbitrators’ power to award and allocate costs is governed by the procedural law of the arbitration.^[10] Unless the parties specify otherwise, this procedural law typically comprises the domestic, national law where the arbitration is taking place (also known as the lex loci arbitri), as well as any applicable agreed arbitration rules.^[11]

As explained below, within the framework of the parties’ arbitration agreement, most jurisdictions’ arbitration laws, and most established arbitration rules, provide arbitrators with broad discretion to award and allocate costs, subject to due process considerations.^[12] As certain commentators have observed, however, in practice, ‘arbitral tribunals rarely discuss the issue of the applicable law, and prefer to follow the general principles in awarding costs, unless a clear case on other applicable national norms is pleaded and substantiated’.^[13]

National arbitration legislation

Although most national arbitration statutes grant arbitrators broad authority to make an award of costs, these laws usually do not specify the substantive standards that govern the exercise of that authority.^[14]

• UNCITRAL Model Law: Although the United Nations Commission on International Trade Law Model Law on International Commercial Arbitration is designed to provide a universal framework to ‘assist States in reforming and modernizing their laws on arbitral procedure’ and seeks to ‘cover[] all stages of the arbitral process’, it is silent on the topic of allocation of cost.^[15] Because of this lacuna, ‘a number of States that have adopted the Model Law have added provisions expressly granting tribunal jurisdiction over costs awards’.^[16]
• Federal Arbitration Act: Like the UNCITRAL Model Law, the US Federal Arbitration Act (FAA) is silent on allocation of cost.^[17] For US-seated arbitrations, this gap is sometimes filled, either explicitly or implicitly, by resorting to the prevailing rule in US civil litigation (i.e., the American Rule), which requires each party to bear its own costs regardless of the ultimate outcome, unless specifically shifted by the parties’ agreement or a particular statute.^[18]
• English Arbitration Act: In contrast to the UNCITRAL Model Law and the FAA, the 1996 English Arbitration Act (EAA) explicitly addresses both the arbitrators’ authority to award costs and the substantive cost-shifting standard that tribunals ought to apply.^[19] The EAA suggests, as a starting point, that arbitrators adopt the ‘costs should follow the event’ rule, under which the unsuccessful party pays the successful party’s costs.^[20]
• Other national legislation: Although most other domestic arbitration statutes do not adopt the same degree of specificity as the EAA when it comes to allocating cost,^[21] the majority of national laws reflect a general presumption that arbitrators possess the authority to issue cost awards, so long as the parties’ agreement does not specify to the contrary.^[22]

Arbitration rules

In addition to considering the applicable lex arbitri when determining costs, arbitral tribunals are also controlled by the applicable arbitral rules, whether institutional or ad hoc. ‘While most institutional rules ultimately leave cost decisions to the discretion of the arbitrator, they vary among those that are wholly silent on the matter of costs, those that simply provide broad discretion, and those that provide guidance on the criteria for awarding costs.’^[23] As discussed below, the leading ad hoc arbitral rules provide varying levels of guidance as to cost allocation.

• UNCITRAL Rules: Unlike the UNCITRAL Model Law, the UNCITRAL Arbitration Rules provide specific guidance to aid tribunals (whether ad hoc or institutional) in issuing cost awards. The UNCITRAL Rules provide that the ‘costs of the arbitration shall in principle be borne by the unsuccessful party or parties’.^[24] This standard comports with the prevailing ‘loser pays’ or ‘cost follows the event’ approach adopted by courts and international arbitral tribunals in most jurisdictions.
• ICC Rules: The new 2021 International Chamber of Commerce Rules of Arbitration, like the 2017 ICC Rules, provide broad discretion but vague guidance to tribunals to determine costs by ‘tak[ing] into account such circumstances as it considers relevant’.^[25] Without specifying how costs should be apportioned, the ICC Rules provide that the costs of the arbitration ‘shall include the fees and expenses of the arbitrators . . . and the reasonable legal and other costs incurred by the parties for the arbitration’.^[26]
• ICSID Arbitration Rules: The International Centre for Settlement of Investment Disputes Convention Arbitration Rules authorise tribunals to allocate costs between the parties but do not delineate any specific criteria for that allocation.^[27] As one ICSID tribunal has noted, there is a ‘considerable degree of discretion that ICSID tribunals enjoy under Article 61(2) of the Convention, which does not prescribe any particular approach, in making costs awards’.^[28]
• ICDR Rules: The American Arbitration Association’s International Centre for Dispute Resolution Rules also grant tribunals broad discretion to determine and allocate recoverable costs, but in deference to the American Rule, ‘do not include a presumption that the losing party should [necessarily] pay the costs of the successful party’.^[29]
• HKIAC Rules: The Hong Kong International Arbitration Centre Rules enumerate six categories of fees and expenses comprising the ‘costs of the arbitration’.^[30] Despite that specificity as to the categories of recoverable costs, the HKIAC Rules instruct tribunals only vaguely to ‘apportion all or part of the costs of the arbitration . . . between the parties if it determines that apportionment is reasonable, taking into account the circumstances of the case’.^[31]

Parties’ arbitration agreement

As the arbitral process is a by-product of mutual consent, parties should consider altering the default parameters governing cost that are set forth in the applicable arbitration rules and the lex arbitri.^[32] Although parties often ignore this important principle in practice, they are well advised to consider and address cost and fee mitigation, allocation and recovery mechanisms, prophylactically, when drafting and negotiating their arbitration agreements.^[33]

Drafting considerations to address cost allocation

Especially in those instances in which the parties’ commercial relationship could engender an expensive legal dispute, parties should carefully consider including provisions addressing the allocation of costs to mitigate any ambiguity or silence in the agreed arbitration rules or applicable national arbitration law.^[34] In the alternative, parties may decide to disclaim entirely any cost allocation framework and instead choose to bear their own fees and expenses. In any event, by defining the parameters and likelihood of recovering costs on the front end, parties will be able to make better-informed cost-benefit analyses regarding the merits of pursuing arbitration, if and when a dispute arises.^[35] This purposeful ‘hope for the best, plan for the worst’ approach will best reflect the parties’ expectations regarding cost recovery (if any) and provide a specific framework for the tribunal’s future cost award (if desired).

Assuming the parties do agree to authorise the tribunal to allocate costs, the parties should consider, inter alia, (1) the substantive standards under which the tribunal will allocate costs, (2) the categories of recoverable and non-recoverable costs, and (3) any minimum or maximum recovery amount.^[36] To that end, the International Bar Association (IBA) has published guidelines and recommended clauses to account for the reality that ‘it is rarely possible to predict how the arbitral tribunal will allocate these costs, if at all, at the end of the proceedings’.^[37] If the parties do opt for a success-based approach, the IBA advises against using ‘absolute language (“shall”) in drafting such a clause, as the identification of the “winner” or the “prevailing party” may be difficult and the clause may needlessly constrain the arbitrators in their allocation of costs and fees’.^[38]

Drafting considerations to address saving of costs

In addition to increasing the predictability of a future costs award, negotiating specific language addressing cost allocation and recovery is also a useful strategy for parties to mitigate the overall costs of an arbitration.^[39] Although parties may wish to incorporate an expansive fee-shifting provision to discourage future disputes, that approach may also have drawbacks. A particularly confident claimant or respondent may see the potential for cost-shifting as an incentive to avoid early settlement and treat the agreed cost recovery framework as a blank cheque. Moreover, as discussed below, one of the key criteria that tribunals often consider when deciding costs is the degree to which parties might create unneeded inefficiencies or abuse the arbitral process.^[40]

Because longer arbitration proceedings usually result in higher overall costs, parties that share a mutual concern regarding excess costs should seek mechanisms to reduce the overall duration of an arbitration when they are drafting the arbitration agreement. For example, parties should consider whether to (1) require that the final award be issued within a finite period after the arbitration is initiated or the tribunal is constituted, (2) agree to limit the length and number of submissions, (3) agree to limit or forego document disclosure, or (4) require that each tribunal member expressly confirm that he or she will have sufficient time to devote to the dispute to ensure its efficient resolution within a certain established amount of time.^[41]

Cost allocation considerations in practice

International arbitration cost allocation standards

As discussed above, subject to the parties’ agreement, arbitration rules and national arbitration laws typically give tribunals broad discretion to allocate and award the parties’ costs.^[42] In practice, arbitral tribunals generally use this discretion to follow one of two generally accepted international standards governing cost allocation:^[43] (1) the ‘costs follow the event’ or ‘loser pays’ rule, and (2) the American Rule.

Default rule: ‘costs follow the event’ or ‘loser pays’

The costs-follow-the-event approach is almost universally recognised in both common and civil law jurisdictions and has become the prevailing approach in international arbitrations in recent years.^[44] The rationale behind allocating costs to the successful party is that the party ‘should not be out of pocket as a result of having to seek adjudication to enforce or vindicate its legal rights’.^[45] The rule also has an economic rationale. By requiring the losing party to pay further costs in an unsuccessful legal action, the rule serves as a deterrent against meritless claims and defences.

Although some tribunals have allocated costs on a winner-take-all basis, more frequently tribunals adopt a more nuanced approach whereby the allocation is based on the relative successes and failures of the parties’ claims, defences and damages.^[46] Making that determination, however, can be challenging in complex cases with numerous, interrelated claims and defences involving both monetary and non-monetary considerations and a wide range of potential damages.^[47]

For example, it is not uncommon for the winner to have succeeded on only a slim majority of the multiple issues in dispute or for the loser to have succeeded on most of the specific issues, with the exception of those that render it the net financial loser.^[48] Thus, in practice, a tribunal’s decision to adopt the costs-follow-the-event rule is only the starting point; how that rule is applied to reach the correct result in a particular case varies significantly depending on the calculus of claims, defences and damages.^[49]

American Rule

Although called the American Rule, the cost recovery approach requiring each party to bear its own legal fees and half of the procedural and administrative costs of an arbitration is not unique to US litigation; it is also applied in China, Japan, Indonesia and the Philippines.^[50] The American Rule is generally justified as a way to lower aggrieved parties’ barriers to justice; as a corollary, the rule incentivises parties to advance only the most meritorious claims and defences.^[51] Awards applying the American Rule are less common in international commercial arbitration but remain frequent in investor-state arbitrations.^[52]

Other relevant cost allocation factors

In addition to considering the parties’ ultimate success, tribunals regularly invoke a number of other factors in rendering cost awards.^[53] Most arbitration rules encourage tribunals to consider all ‘relevant circumstances’ before allocating costs between the parties.^[54]

Pre-arbitration conduct

Arbitral tribunals may also look to the parties’ conduct that gave rise to the dispute, including whether the arbitration could have been avoided if one party had acted differently or whether the prevailing party shares responsibility for the escalation of the conflict or the root cause of the dispute.^[55] For instance, one ICC tribunal, perturbed by the manner in which the arbitration arose, ruled against the prevailing party as to costs, finding that ‘only the strength of the contract has caused [its] success’.^[56] Another ICC tribunal refused to award costs to the prevailing respondent because it determined that the claimant’s claim was ‘far from being reckless’ and partly arose out of confusion created by the respondent’s conduct.^[57] In another ICC arbitration, the tribunal concluded that because the dispute arose out of the unclear terms of the parties’ contract, each party should ‘bear a share of the responsibility for this uncertainty and the resulting costs’.^[58] If a tribunal finds that the prevailing claimant acted reasonably in pursuing its claim and was left with no choice but to initiate the arbitration, the claimant will usually be awarded its costs.^[59]

Conduct during arbitration

Arbitral tribunals routinely take into account the conduct of parties (and their counsel) during the proceedings and may compensate for dilatory, unreasonable, abusive or otherwise improper behaviour aimed at undermining or delaying the arbitration.^[60] In a deliberate effort to curtail the rising cost of arbitration under the ICC Rules, beginning in 2012, the ICC Rules introduced a provision that instructs tribunals to consider when allocating costs ‘the extent to which each party has conducted the arbitration in an expeditious and cost effective manner’.^[61] Shifting costs to dilatory or obstructive parties can be a useful tool to encourage efficient conduct, improve the overall economy of the arbitration, and reduce counsel’s desire to ‘over-lawyer’ the proceedings.^[62] Events that may lead to unfavourable partial or final cost awards include:

• filing grossly exaggerated or spurious claims, defences or demands for damages;
• unreasonable procedural applications;
• unnecessarily lengthy applications or submissions;
• abusive document production requests or failure to comply with production orders; and
• other ‘guerrilla tactics’ that threaten to undermine the integrity of the arbitral process or the expeditious enforcement of the award.^[63]

In practice, however, arbitrators are frequently reluctant to sanction parties’ improper conduct because of a phenomenon termed ‘due process paranoia’, whereby arbitrators are unwilling to penalise parties out of fear that the award may be challenged on due process grounds.^[64] Instances of ‘due process paranoia’ include arbitrators recurrently extending deadlines, admitting new evidence at a late stage of the proceeding without a sufficient showing of need, and indulging meritless procedural requests under the pretence of procedural inequality.^[65] Even arbitrators have identified this phenomenon as commonplace and problematic.^[66]

Despite this reluctance, tribunals will award costs if they find a party’s conduct to warrant it. The Bernhard von Pezofd v. Zimbabwe ICSID arbitration is indicative of how party conduct can affect a tribunal’s decision on costs.^[67] In that arbitration, the Republic of Zimbabwe presented convoluted and repetitive pleadings, included voluminous irrelevant material into the record, and raised objections to jurisdiction and admissibility at very late stages in the proceedings. Zimbabwe also included plainly inadmissible material in the hearing transcripts and its post-hearing briefs. In ordering Zimbabwe to reimburse the claimants for all their costs, the tribunal cited the egregious nature of Zimbabwe’s bad-faith conduct, which it determined ‘resulted in an unnecessary escalation of the costs of the proceedings’.^[68]

Issue-based allocation and other mitigating considerations

Arbitral tribunals also consider other factors to refine the application of the ‘loser pays’ principle when warranted by the entirety of the circumstances. For example, tribunals may analyse whether an ultimately unsuccessful party prevailed on preliminary issues or whether the claimant succeeded on liability, but lost on quantum.^[69] Tribunals historically have been inclined to invoke a wide range of equitable considerations that may potentially mitigate the scope and effect of a cost-shifting award. For example, in tailoring an appropriate cost award, tribunals have cited (1) a party’s justifiable difficulty in providing sufficient evidence of costs,^[70] (2) the sheer complexity of a case and novelty of issues to be decided,^[71] and (3) general fairness principles that encourage leniency towards a losing party that is suffering economic hardship.^[72]

Calderbank settlement offers

Another relevant consideration for tribunals is whether and to what extent the parties engaged in Calderbank settlement negotiations. Derived from the Court of Appeals of England and Wales case, Calderbank v. Calderbank,^[73] a Calderbank settlement offer is one marked ‘without prejudice save as to costs’ that is later admissible to the tribunal for the purpose of determining costs. If the prevailing party’s award of damages is less than the earlier, rejected settlement offer, then the losing party may be awarded its costs from the prevailing party from the time after the offer was made. The justification for shifting costs in this manner is that even though the prevailing party succeeded in the arbitration, had it accepted the ‘better’, earlier offer, then both parties’ costs incurred after that date would have been avoided.^[74]

The practical utility of Calderbank offers is that they encourage the parties to consider settlement more robustly, probably at the early stages of the dispute.^[75] This is true regardless of whether one or both parties submit such a Calderbank offer. Calderbank offers also forces each party to consider carefully the economic risks that even if it ‘wins’ the arbitration and is awarded damages, it may have to pay the losing party’s costs for having rejected what turns out to have been a reasonable offer to settle in light of the actual damages in the case.

The Calderbank procedure is inapposite in certain cases, however, including when there are numerous non-monetary factors affecting final resolution of the dispute or when the parties are incapable of analysing their claims and defences adequately at an early stage of the dispute and, therefore, are not in a position to offer or consider a settlement offer.

Determining recoverable costs

Standards for recovering costs

Although a party’s actual costs are the starting point for that party’s potential cost recovery, tribunals regularly impose parameters and limits to ensure that the costs awarded are (1) reasonable and proportionate in the circumstances and (2) specifically incurred for the arbitration.

Reasonable and proportionate

Although it is generally accepted that the touchstone for cost recovery is reasonableness, there is no generally accepted framework for determining whether or not costs are reasonable.^[76] The ICC Report on Decisions on Costs in International Arbitration proposed four factors that tribunals could consider in adopting a common-sense approach to analyse ‘whether the costs are reasonable and proportionate to the amount in dispute’:

(i) the reasonableness of the rates and number and level of fee-earners when evaluating whether the amount of work charged was reasonable; (ii) the reasonableness of the level of specialist knowledge and responsibility retained for the dispute, including the legal qualification of representatives, involvement of specialist teams or team members and level of seniority; (iii) the reasonableness of the amount of time spent, at various levels and rates, on the various phases of the arbitration; and (iv) any disparity between the costs incurred by the parties as a general indicator of reasonableness as opposed to a separate factor in itself.^[77]

In practice, tribunals typically exercise restraint in reducing or rejecting costs as disproportionate and unreasonable.^[78] There is an underlying presumption that parties incur arbitration costs without knowing, ex ante, whether those costs will be reimbursed. This fact, in itself, is ‘a strong indication that the amount billed was considered reasonable by a reasonable man spending his own money, or the money of the corporation he serves’.^[79]

In a complex arbitration, a common, practical metric that tribunals employ to determine reasonableness is comparing the parties’ costs.^[80] If those costs are quantitatively similar, a tribunal will generally intervene only if the costs claimed by one side are manifestly excessive.^[81] Generally, claimants will spend more pursuing their claims than respondents, but there are extreme cases where the opposite is true. For example, in Jan Oostergetel and Theodora Larentius v. Slovakia,^[82] the tribunal ordered the claimants to pay US$3,191,481 of the respondents’ total costs of US$16,330,000, whereas the claimants incurred a total of only US$2,231,000. Likewise, in Libananco v. Turkey, the tribunal ordered the claimants to pay US$15,602,500 of the respondent’s total costs of US$35,702,417.76, whereas the claimants incurred a total of only US$24,382,000.^[83]

Although rare, tribunals will, on occasion, question and criticise a party’s internal case management decisions in rendering a cost award. For example, in ICC Case No. 5726, although the prevailing party had engaged three law firms, the tribunal awarded legal costs as if the prevailing party had instructed only two individual lawyers.^[84] Similarly, in ICC Case No. 5008, because the prevailing party’s legal fees were four times those of the counterparty, the tribunal averaged the fees between the two parties when awarding costs to that prevailing party.^[85]

Incurred for arbitration

Invariably, tribunals require that only those costs directly incurred for or in connection with the proceeding will be recoverable.^[86] Fees and expenses incurred prior to the initiation of the arbitration are generally not recoverable, even if those costs may involve work that is later used during the course of the proceedings.^[87] Likewise, costs incurred following the arbitration or to enforce the tribunal’s award are generally not recoverable (although they may be recoverable in enforcement proceedings before a domestic court). Costs for collateral harms resulting indirectly or consequentially from the arbitration are also generally not recoverable.^[88]

Categories of recoverable costs

As discussed above, although parties should consider and negotiate the specific categories of recoverable costs in their arbitration agreement, they rarely do.^[89] Most major sets of arbitration rules now contemplate that, in principle, all costs a party incurs in prosecuting an arbitration are recoverable, including (1) party costs (e.g., legal and professional advisers’ fees and expenses and the expenses relating to fact and expert witness evidence) and (2) arbitration costs (e.g., the tribunal members’ fees and expenses and related administrative fees charged by the governing arbitral institution).^[90]

Costs of external counsel, advisers and witnesses

External counsels’ legal fees are regularly the most substantial sums incurred by parties in international arbitrations. These legal fees will typically be recoverable so long as they are deemed reasonable and proportionate to the overall award. If the parties’ claimed legal fees are quantitatively similar, that is typically strong evidence in favour of reasonableness.^[91] For this reason, parties may undertake a game theory strategy in their cost submissions. Because those submissions are made before the parties know the substantive outcome of the dispute, one party may intentionally ‘low-ball’ its claimed fees in the hopes of creating a disparity in the respective claimed amounts, thereby making an adversary’s fees appear unreasonable or disproportionate. This tactic has the obvious disadvantage, however, of effectively ensuring that the party will not recover the full amount of its incurred costs in the event that it were to prevail.

In analysing external counsels’ legal fees, tribunals will also consider other context-specific factors, including:

• the relative market billing rates of counsel;
• the number of hours billed by counsel relative to the complexity of the case;
• the number of attorneys engaged for the matter;
• counsel’s transparency regarding its own fees; and
• the size and complexity of the dispute.^[92]

Because parties have a fundamental right to choose their own counsel and dictate their own engagement, tribunals will rightfully engage in some deference to the parties’ choice of counsel.

Similar to the fees spent on legal representation itself, the costs for fact and expert witnesses (including ancillary costs such as transport and lodging) are generally recoverable, as they are considered reasonably necessary to the prosecution of the arbitration.^[93] These costs, however, can also be determined to be unreasonable or disproportionate and, therefore, not subject to reimbursement if the tribunal concludes that the witness provided false evidence, or if the presentation of witness evidence amounts to an abuse of the arbitral process.^[94]

Costs of in-house counsel

It is much more controversial whether the costs of in-house counsel and other party employees are recoverable. Traditionally, these costs were not recoverable because they were considered part of the ordinary costs of running a company and not unique to a particular dispute.^[95] In recent years, however, the pendulum has swung. As the tribunal in ICC Case No. 6564^[96] articulated:

There is no justification to privilege a party in terms of costs for the sole reason that it retained outside rather than in-house counsel. . . . A party must be free in allocating the work between outside counsel and its own services. A party which decides to perform most of the preparatory work for the case by its own legal and technical departments should not be placed at a disadvantage compared to one which confers all work to outside counsel and experts.^[97]

Although still subject to debate, it is now generally accepted that in-house counsel costs may be recoverable to the extent that they are capable of being substantiated and are justified.^[98]In contrast to in-house counsel, it is well established that ‘the lay client’s time in instructing those who conduct the proceedings is not allowable’.^[99]

Contingency fees and third-party funding

Contingency fee or success fee arrangements pose particular issues for tribunals. The default rule is that the costs awarded against a losing party should not be increased based on the winning party’s choice of fee structure with its counsel.^[100] Policy considerations may also militate against shifting the payment of success fee arrangements. If permitted, success fee arrangements can create a perverse incentive whereby parties to an arbitration would never have to pay for their own counsel: either the burden would be borne by the losing party (if the party with the contingency fee arrangement wins the arbitration) or the burden would be borne by counsel (if the party with the contingency fee arrangement loses the arbitration).

Tribunals generally treat third-party funding arrangements differently from contingency fee arrangements. Third-party funding arrangements may function like success fee arrangements in that the party’s incurred costs will vary based on the party’s success.^[101] Tribunals, however, are generally more receptive to shifting the costs owed under a third-party funded arrangement, because tribunals assume that the party has an obligation to reimburse the third-party funder’s costs.^[102] Thus, it may be viewed as irrelevant that a third party advanced the costs of the arbitration when evaluating whether those advanced costs can be shifted to the losing party.^[103]

Costs due to ancillary judicial proceedings

Although the costs due to ancillary or parallel judicial proceedings are generally viewed as insufficiently connected to the arbitration to be recoverable as arbitration costs,^[104] those costs can sometimes be awarded as damages, to the extent that a separate proceeding is the subject of a claim in the arbitration.^[105] Tribunals will often be more willing to award the costs of prosecuting the judicial action as damages when both parties have claimed those costs reciprocally.^[106] That being said, the prevailing preference among tribunals is for parties to seek the costs of parallel proceedings exclusively in that separate forum, so as to avoid issues of double recovery and jurisdictional overreaching.^[107]

Procedure for claiming costs awards

Cost submissions and evidentiary requirements

It is axiomatic that a tribunal may not award costs without first receiving a claim for costs from the requesting party, also known as a cost submission. These cost submissions – which typically comprise (1) a brief legal argument, (2) an accounting of the costs incurred, and (3) supporting evidence – are frequently complicated by several factors.^[108]

First, because the parties’ cost submissions are typically submitted before the tribunal has rendered its substantive award and declared a final winner and loser, the parties’ assessment of their relative success is necessarily both subjective and speculative. Thus, to cover all potential avenues of recovery, parties will frequently focus on the other party’s conduct, alleging that the other side’s behaviour was improper and created inefficiencies and delay.

Second, because tribunals rarely specify in advance what costs are recoverable and what corroborating evidence will be required to support that recovery, the parties are often left without clear or uniform guidance ex ante as to what the tribunal expects to evaluate. As a result, it is not uncommon for the parties to submit cost submissions that are entirely different in terms of their form, scope and detail.

Third, although the tribunal must generally have sufficient information to verify that the costs requested are legitimate and actually incurred, detailed supporting documents are usually not required given the undue burden that would place on the parties and their counsel.^[109] Tribunals also do not typically require specific invoices for legal fees because they are likely to contain privileged and confidential information.^[110] Instead, tribunals generally expect itemised lists of legal fees and more general summaries of the work performed, often accompanied by a short affidavit from a party representative or counsel.^[111] It is typically up to the parties to decide how much information they want to disclose affirmatively, including identifying the individual members of the legal team and their hourly billing rates.^[112]

Fourth, absent party agreement to the contrary, tribunals generally require parties to submit their cost submissions simultaneously.^[113] The advantage of this approach is that it prevents either party from falsifying or manipulating its requested legal fees and expenses in response to the other party’s claimed fees and expenses. The disadvantage of simultaneous submissions is that it does not allow an automatic right to address any errors or omissions in the other party’s submission, barring some exceptional circumstances.

Timing and contents of costs awards

A tribunal’s mandate and authority terminate when it issues its final award and thereby becomes functus officio. Accordingly, all major arbitration rules expressly require that the tribunal’s final award include a determination as to costs.^[114] The award must include the parties’ cost claims, the scope of recoverable items and the amounts ultimately owed, as well as the tribunal’s rationale for allocating and awarding costs, or else the cost award risks being unenforceable.^[115]

The notable exception to this practice occurs where there are substantial preliminary issues (e.g., jurisdiction) or preliminary procedural applications, in which case a tribunal may render a partial cost award.^[116] Partial cost awards are generally reserved either for issues on which the parties spent a substantial amount of time or to penalise parties for unsuccessful interim applications.^[117] It is important for tribunals to render a partial cost award only if it is definitive and intended to be immediately enforceable, because partial cost awards are immediately enforceable once rendered.^[118]

Cost considerations in the covid-19 era

Within the space of just a few months, the covid-19 pandemic dramatically – and perhaps permanently – altered the way in which international arbitration proceedings and hearings were conducted. Since the initial effects of the pandemic rippled across the international arbitration landscape in February and March 2020, much has already been written about its procedural and its substantive consequences. Some institutions, such as the ICC, have taken the initiative to publish detailed guidelines and recommendations to aid parties and tribunals in conducting covid-affected proceedings as efficiently and effectively as possible.^[119] Not surprisingly, these guidelines reflect a strong reliance on virtual communication platforms to allow cases to proceed on a partially or fully remote basis.^[120] Most practitioners and arbitrators would agree that conducting an international arbitration hearing via Webex or Zoom is substantively less captivating than an in-person hearing and may pose technological and other logistical challenges. As the international arbitration community has grown accustomed to the new reality, however, it has become increasingly evident that remote proceedings are not only feasible but potentially advantageous in certain respects, especially costs, so long as care and fair treatment to all parties remain the lodestar of the process.

For example, many practitioners would agree that conducting a remote hearing can avoid the substantial sums that otherwise would be spent on the use of a physical venue and travel-related costs for the parties, their representatives and the tribunal members. Conducting a remote hearing, in which exhibits and documents are circulated and displayed electronically, can also avoid the considerable expense of printing multiple copies of a voluminous evidentiary record. The same principles hold true for other party-specific, pre-hearing expenses and fees, such as document collection visits, witness interviews and client meetings. All these necessary milestones, if organised and well prepared, may be good candidates for a virtual, rather than in-person, format, thereby leading to substantial cost savings.

Ironically, the necessity of adapting to covid-19’s challenges may produce the needed response to the chorus of complaints regarding the rising costs of international arbitration.

Strategic cost-saving considerations for parties and tribunal

Notes