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Faculty of Law and Criminology
Academic Year 2019-20
Exam Session [1]
‘Costs in International Arbitration’
LLM Paper
by Bisera Karanakova
Student number : 01900096
2 ‘Costs in International Arbitration’
TABLE OF CONTENTS
Introduction
Chapter 1: Definition of costs and types of costs in International Arbitration
1.1. What are costs in international arbitration? 1.2. Categories of costs
1.2.1 The costs of the procedure 1.2.2 The costs of the parties
1.2.3 Specific types of costs
1.3. The costs dilemma: Ad hoc or institutional arbitration?
Chapter 2: Allocation of costs in International Arbitration
2.1. Allocation of costs when there is a provision in the agreement of the parties 2.1.1 Ad hoc arbitration
2.1.2 Institutional arbitration 2.1.3 Methods of assessing fees
2.2. Methods of cost allocation when there is no provision in the agreement of the parties
1.2.4 Costs follow the event-„The English Rule‟ 1.2.5 The American Rule‟
2.3. National Law, Arbitral Rules & Fairness and Reasonableness 2.3.1 National Law
2.3.2 Arbitral Rules
2.3.3 Fairness and Reasonableness
2.4. Factors the arbitrators take into account when deciding on cost allocation 2.4.1 Relative success of the parties
2.4.2 Conduct of the parties 2.4.3 Settlement offers 2.4.4 Other factors
Chapter 3: Third party funded costs
3 Introduction
Arbitration is a private dispute settlement system, where the parties by agreement give powers to private arbitrators to settle the dispute with a final and binding decision. The parties are given the power and control to determine the procedure for resolving their dispute themselves, thus relieving themselves of the pressure to settle it through the national procedural law of one of the parties.
The main advantage of international commercial arbitration stems from its ability to adapt to different situations. The parties to the arbitration shall have almost complete freedom in drawing up the proceedings to their liking. They can arrange a procedure specific to a particular legal tradition or practice that they are familiar with or that can, under certain circumstances, lead to the best outcome.
As in litigation, in international commercial arbitration the parties bear the costs. The allocation of these costs is a very important issue for the parties to the proceedings, since their amounts are not insignificant at the end. In allocating the costs incurred during the proceedings, the arbitral tribunals have the opportunity to apply different principles of allocation and decide: either each party bears its own costs, or the losing party bears the costs of the proceedings, including the costs of the winning party, or, the costs may be allocated proportionally, in different proportions, depending on the relative success of each of the parties to the dispute. The allocation of the costs also significantly depends on whether the parties have concluded an arbitration agreement or not. There are many different factors and legal circumstances from which the final award for the costs will vary and sometimes if not often, the cost and financial aspect of the arbitrational procedure is a deciding factor for the parties in their decision to pursue with arbitration or to proceed with litigation in solving their dispute.
Thus, the main focus of this LLM thesis will be the issue of cost allocation in international commercial arbitration. At the beginning of this book, only a short overview of the different types of costs that occur during the proceedings will be given. Furthermore, the different ways of deciding and factors which influence the decision of the tribunal will be discussed, as well as a comparative overview on the cost allocation will be included. At the end of the thesis the issue of third party funded costs will be studied, as that area is still not completely researched and there is scarce practice in that regard. From academic aspect this thesis focuses more on a technical and doctrinal research, rather than it focuses on case law research, because of the nature of the issues in the main focus of the work.
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In order to achieve the aforementioned goals and while the master's thesis has the desired scientific value, basic and specific scientific and research methods will be applied during the research.
The specific methods that will be used are the following:
The derivative method:
The application of this method will give an overview of the solutions adopted in the national laws of international commercial arbitration of England, USA, France, Switzerland and the North Macedonia, as well as in the institutional rules of the International Chamber of Commerce (ICC), the Swiss Commerce Rules Arbitration and Mediation (SWISS Rules), London Court of International Arbitration (LCIA) and United Nations Commission on International Trade Law (UNCITRAL Arbitration Rules)
Comparative method
This method will be applied in investigating the similarities and differences between the processed legal orders in relation to issues that arise as a matter of concern.
Analytical method:
Applying the analytical method, the accepted solutions in contemporary international arbitration law will be interpreted and analyzed.
Case study method:
This method will be used in the study of arbitration and case law which resolved this type of dispute.
5 CHAPTER I –DEFINITION AND TYPES OF COSTS IN INTERNATIONAL ARBITRATION
1.1. Definition of Costs
Just as in litigation, in arbitration the parties bear the costs. Having in mind that arbitral proceedings can be very efficient for the parties-yet often lengthy, and the arbitrators are the greatest experts in their area of work, not rarely the costs incurred during the arbitral proceedings can be significant for the parties. Because of that the parties must be aware of the types of the costs that might take place during the solving of their dispute, so that they are financially prepared to proceed with the arbitration. Before going further with explaining the types of costs that can occur in the arbitral proceedings, one essential issue must be discussed: What are costs of arbitration?
In ordinary parlance, cost is the amount of money required to be paid for something. In a more technical sense such as in law, it is the amount of money spent in pursuing a legal action. In arbitration, the issue of cost is crucial as parties in disputes would have to bear not only their own cost but sometimes also that of their opponent‘s legal and other costs. The arbitral tribunal fixes the cost of arbitration.1 Thus, very broadly, costs in arbitration are the expenses that the parties need to pay in order to be able to set their dispute to arbitration. The costs are a material compensation for which the parties to the dispute are responsible to cover, and in return they get to appoint experts to help them solve their dispute, as well as they get a fair level of flexibility to choose for the way they want their arbitration proceedings to be conducted.
Costs are particularly relevant in the resolution of commercial disputes because some degree of proportionality might be expected between the value of the dispute and the cost of resolving it.2 When compared to litigation, the costs incurred in arbitral proceedings are higher. International Chamber of Commerce studies suggest that legal fees are the main factor in raising the cost of arbitration. The power to award costs lies with the arbitral tribunal but may be subject to the arbitration clause, the applicable procedural rules or the lex arbitri. 3
As to the definition of costs, national laws as well as arbitration rules provide for their own notions under which they address different types of costs. The ‗costs of the proceedings‘, ‗costs of the arbitration‘, or ‗costs of the arbitration proceedings‘, might all look the same at first sight. However, the differences are revealed after examining what they refer to, and more often than it seems these notions are used for different groups of costs. To demonstrate such a difference we can refer to definitions of the costs provided in the ICC Rules, the LCIA Rules and the SCC Rules. All these use the same term ‗costs of the arbitration‘. However, this term in the ICC Rules
1 Bello Adesina Temitayo, Costs Follows The Event in Arbitration: Its Paradigm and Relevance, 2014, p.2
2
Greenberg, Kee & Weeramantry, International Commercial Arbitration, p.403
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refers both to the costs required for the proceedings itself, such as arbitratos‘ fees and institution fees, as well as to the costs incurred by the parties. On the other hand, LCIA Rules and SCC Rules use this term only to address the first type of the costs, while the costs of the parties are not covered by this term. 4
National arbitration laws have typically adopted at least rudimentary provisions on costs. For example, the German Arbitration Act in Section 1057 ‗Decision on costs‘ only explains the allocation of costs, without explicitly giving a definition on what those costs particularly are consist of. The national laws are not homogenous in defining the arbitration costs, however, some national jurisdictions, for example Republic of North Macedonia, use as a lead the definition of costs given in Article 40 of the UNCITRAL Arbitration Rules:5
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 39;
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.6
The definition set out by UNCITRAL is followed not only by national jurisdictions, but also by some other institutional arbitrations, such as the Swiss Rules of International Arbitration and the ICDR Rules.
In the ICC Rules under Article 37 (2), the term costs refers both to the costs required for the proceedings, such as arbitrators‘ fees and institutional fees, as well as to the costs incurred by the parties, i.e. their legal fees and other expenses. 7
4 Patricia Zivkovic, Determination, Payment and Allocation of Costs in International Commercial Arbitration, 2016,
p.242-243
5
Mika Savola, Awarding Costs in International Commercial Arbitration, 2017, p. 277
6 UNCITRAL Arbitration Rules, 2013, Article 38-39 7
Patricia Zivkovic, Determination, Payment and Allocation of Costs in International Commercial Arbitration, 2016, p. 27
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Thus, there is not one universally accepted definition applicable both in the national legislations and arbitration institutions of what costs are. Instead of trying to come up with a generally acceptable definition, it might be better to look at the types of cost that occur in the arbitral proceedings and that are universally recognized as such,
1.2. Types of Costs
Generally costs in arbitral proceedings can be divided into two main categories: procedural costs and party costs. Addition to these two, there is a third category, namely, specific types of costs. The first two categories are characteristic for every arbitrational procedure, while the third one is exceptional. The amount of costs to be payed also differs depending on whether arbitration is ad hoc or institutional.
The costs of the procedure
The costs of the procedure, also known as ‗arbitration costs‘ are regular costs which the parties face in the first place and which are required in every arbitral procedure. These costs do not occur due to the behavior of one party, but they are common to and concern all of the parties. These costs include: arbitrators‘ fees, administrative charges (institutional arbitration) and logistical expenses of the proceedings.
International arbitration can be expensive, in large part because of the fees of the parties‘ legal representatives. International arbitral tribunals generally possess (and exercise) the authority to award the costs of the arbitral proceedings.8 Upon his appointment, the arbitrator enters into the arbitration agreements, which becomes a tripartite agreement between the arbitrator and the parties. Since the arbitrator is a party to the arbitration agreement, his entitlement to fees and expenses derives principally from the terms of the arbitration agreement.9 Arbitrators‟ fees are costs which are payed as a financial compensation to the arbitrators for their professionalism and work on the dispute in question. These costs can be differently set depending on whether the arbitration proceeding is ad hoc or institutional. When the parties agree on ad hoc arbitration (arbitration which is not governed by any institution) national laws and lex arbitri play a crucial role as to the determination of the amount of costs of arbitration, as well as the party autonomy (only in ad hoc) which allows the parties to agree between them but also with the arbitrators about the amount to be payed. When deciding for the costs in their agreement, the parties must be careful that any arrangement regarding the costs is not contrary to a potentially existing mandatory provision of the lex arbitri. The autonomy of the parties‘ will can also often be
8
Gary B.Born, International Commercial Arbitration, 2009, p. 2488
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expressed in them choosing to apply the cost schedule from the 2013 UNCITRAL Rules.10 The methods for the calculation of the arbitrators‘ fees can either be set explicitly in the agreement between the parties and the arbitrators, or by agreeing on specific arbitration rules. 11 The costs of the tribunal usually include not only the fees, and the travel-related and other expenses, payable to the individual member of the arbitral tribunal itself, but also any directly related expenses, such as the fees and expenses of any experts appointed by the tribunal.12
On the other hand, when the parties agree to solve their dispute with institutional arbitration, they carry a lesser burden because the arbitral institutions already have rules on determination of the costs. By setting the dispute under institutional arbitration, the parties subsequently agree with the rules of that institution. Of course, lex arbitri also in this case is going to play a crucial role, in the sense that if there is a mandatory rule existing in the national law regarding the cost allocation, that rule will be followed, and the institutional rule could be only applied where such mandatory national rule does not exist. What is characteristic for institutional arbitral proceedings is the payment of the administrative charges. There are two types of fees that parties need to pay to the institution: filing fee and administrative fee. The filing fee is payed at the beginning of the proceedings. The filing fee covers the initial costs of processing the request for arbitration, until the constitution of the tribunal. 13 For example, if a parties wish to start arbitration proceedings in front of the ICC, they Claimant must pay a US$5,000O non-refundable filing fee to the institution. Another example is the non-non-refundable filing fee requested by the LCIA institutional arbitration, which is slightly lower than the ICC fee, and amounts to £1750. Thus, different institutions have different filing fees. On the other hand, the administrative fee should cover all the costs that incur for the institution until the end of the proceedings. Both of these are payed from the parties at the beginning of the proceedings and their amounts are fixed from the institution.
In international arbitration, all costs incurred in relation to the arbitral proceedings are in principle regarded as recoverable provided they have been proportionally and reasonably incurred, recovery has been claimed by the parties and unless otherwise agreed by the parties. 14 In institutional arbitration, reasonableness needs to be demonstrated only in relation to party costs, in order for those to be regarded as recoverable.
1.2.2. The costs of the parties
The costs of the parties are the second main category of costs in arbitration procedures. These costs are individually incurred by each of the parties in connection to the proceedings. These
10
Patricia Zivkovic, Determination, Payment and Allocation of Costs in International Commercial Arbitration, 2016,
p. 17
11
Lew, Mistelis, and Kroll, Comparative International Commercial Arbitration, 2003, p.285
12
Nigel Blackaby and Constantine Partasides QC with Alan Redfern and Martin Hunter, Redfern and Hunter on
International Arbitration, Sixth Edition, 2015, p.533
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Fry, Greenberg and Mazza, The Secretariat’s Guide to ICC Arbitration, 2012, p.362
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include not only the fees and expenses of the legal representatives engaged to represent the parties at the arbitration hearing, but also the costs incurred in the preparation of the case. There will also be other professional fees and expenses, such as those of accountants or expert witnesses, as well as the hotel and travelling expenses of the lawyers, witnesses and others concerned. All of these costs are likely to be substantial in a major case.15
Counsel fees occur when for example, a party wishes to consult a lawyer regarding its case and to seek legal advice which may be useful in that regard. The parties‘ costs consist for the most part of the legal fees of their counsel. These can be clearly identified, especially where lawyers bill their clients on an hourly basis and issue monthly invoices. The more applications counsel has to deal with in an arbitration, the higher will be the cost for the client. 16This counsel may also represent the party in a case the party seeks an injunction for interim measures in front of the national court.
Parties may also appoint an expert in certain area which is characteristic for their dispute. In commercial proceedings it is often convenient for in-house experts to be instructed to undertake tests, perform experiments make calculations and even to present expert evidence. The actual and direct costs of in-house experts are allowed; but no sum for general overheads is normally allowable.17 However, where tribunals decide not to give any weight to an expert‘s report and testimony because of lack of credibility of the expert evidence, they will usually also dismiss any claim for reimbursement of the costs incurred for such expert. 18
There are situations when the parties cannot communicate between each other with a common language, which may present an obstacle in the efficient solving of their dispute. Thus, often they arrange a translator, who, of course seeks financial compensation. Presenting documentary evidence written in another language is a costly and time-consuming endeavor. Presenting the judge or arbitrator with "dueling" translations is costly and often can represent a problem - if there is a discrepancy, how will it be chosen which one is correct? Moreover, translating documents is a costly and time-consuming process. However, there are certain suggestions by which the issue of costly translations can be solved: Parties can agree that each side will present whatever documents they want with a certified or uncertified translation - however, if a party is not satisfied or disagrees with the translation, the translation can be challenged, with the "loser" of the challenge to pay the costs of the challenge. This incentivizes parties to (1) produce accurate translations and (2) only challenge the translations that are worth challenging, either for their importance or because they are clearly inaccurate.19
Last but not least, arbitrational proceedings can rise between parties who do not live or work close to one another. In other cases, also arbitrators need to travel in order to attend the hearings. For example, the ICC in its ‗Note on personal and arbitral tribunal expenses‘ from 2013 states
15 Nigel Blackaby and Constantine Partasides QC with Alan Redfern and Martin Hunter, Redfern and Hunter on
International Arbitration, Sixth Edition, 2015, p.534
16
Michael W.Buhler, Costs of Arbitration: Some Further Considerations, 2005
17 Michael O’Reilly, Costs in Arbitration Proceedings, 1995, p.9-10 18
Micha Buhler, Globar Arbitration Review, Article on Costs, 2018
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that: ‗If required to travel for the purpose of an ICC arbitration, an arbitrator will be reimbursed for the actual travel expenses he or she incurs travelling from and returning to his or her usual place of business…‘ and ‗A request for reimbursement of travel expenses must be accompanied by the originals of all receipts claimed or other proper substantiation if receipts are unavailable. Travel expenses that are not fully and comprehensively justified will not be reimbursed.‘20
Thus, when a party seeks for reimbursement of travel expenses, they must justify it, as well as to follow the strict limits imposed in the ICC‘s Note.
All of these are party costs which usually occur in the arbitral proceedings. A review of 221 ICC awards rendered in the year 2012 revealed that party costs made up no less than 83% of the total costs of the proceedings, while arbitrators‘ fees/expenses and the ICC administrative charges accounted for a much smaller proportion (15% and 2%, respectively)21.
In principle, the arbitral tribunal will accept the recoverability of the party costs, as long as the amount of those is reasonable. It is quite important for the tribunal to be careful when assessing whether the costs incurred are truly reasonably made, if those were necessary and proportional to the object pursued.
1.2.3. Specific types of costs
This category of costs is not characteristic for every arbitration procedure and they do not occur regularly, but rather exceptionally. Because of their nature, some scholars, such as Mika Savola, regard this category of costs as ‗specific‘ or ‗controversial‘ type. Few of those are going to be only briefly regarded to in this Chapter, while the success fees and third party funded costs as specific type of costs are going to be discussed in greater detail in Chapter lll.
a) In-house counsel costs
When a party to arbitration is a company, they almost always have an in-house counsel to handle and help them with different kind of legal issues arising from the dispute which may affect the outcome of the arbitration proceedings. The in house counsel has sort of a monitoring and advisory role for the party that has appointed him. His role is important for the party that appointed him, because he can sometimes notice some issues in connection to the dispute even before they arise. Arbitral tribunals are increasingly recognizing that the cost of in-house legal advice is, in principle, recoverable provided the use of in-house lawyers leads to a reduction of work otherwise done by external legal resources, and goes beyond mere management involvement. 22 In the ICC Report on ‗Decision on Costs in International Arbitration‘, (32)(i), it is stated that the tribunal may discuss with the parties at the outset of the proceedings, during
20 ICC, Note on personal and arbitral tribunal expenses, 2013 21
Mika Savola, Awarding Costs in International Commercial Arbitration, 2017, p.280
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them or in the final award if the existing in-house counseling costs are recoverable or not. Nevertheless, some tribunals seem to be reluctant to accept costs for in-house counsel as part of the costs of the arbitration. The arguments usually brought forward against recoverability are that costs for in-house counsel are part of the normal costs for running a business enterprise and that they would have arisen anyway, since the company had its own internal legal department installed permanently.23 Some scholars such as Michael O‘Reilly argue that a successful party who employs a in-house lawyers is entitles to recover their costs on the normal basis as if those lawyers were in independent private practice. The rationale for that is that it is a reasonable presumption that a party makes no savings by keeping in-house lawyers and that the party should not be required to show a detailed breakdown of its internal costs in order to prove what sum will indemnify costs. 24
b) Ancillary proceedings costs
It happens for a party to handle costs which occur outside the arbitration proceedings, but are in some kind of connection to it. An often given example for these costs is the one that they can occur when a party orders some interim measure of the court before the start of the arbitration in order to secure the object. Costs incurred for ancillary judicial proceedings are generally considered to lack a sufficiently close nexus to the arbitration and, hence, not form part of the costs of the arbitration.Exceptionally, costs incurred in ancillary proceedings might be regarded as recoverable if they have not been brought in breach of the arbitration agreement (but rather before the ‗juge d‟appui‘) and no cost decision was made in such ancillary proceedings
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25 For example, according to the national law of Republic of North Macedonia everything that is connected to the arbitration proceedings is in principle recoverable. However, a problem which may occur is in a situation similar as the one to be explained. A party starts a proceeding in front of a national court in Republic of North Macedonia and with that the arbitration agreement is infringed, because an arbitration was agreed upon in the first place in a case a dispute rises between the parties. The defendant in this situation is the other party from the arbitration agreement. Because a procedure has been filed against him in front of national court, he objects the competence of the court and also hires a lawyer. The disputed question is, if the judge from the proceedings does not decide that the costs incurred shall be recovered by the party that filed the case because they did not respect the arbitrational agreement, can the defendant from those proceedings claim the recoverability of those costs in the arbitration proceedings? In case there is cross border element and it is determined that the CISG is applicable to the relationships of the parties, then according to it, those ancillary costs will be deemed recoverable. However, if it is a purely internal situation, the recoverability of the costs is going to be dependent on the judge‘s will or the law that applies before the judge. That question is going to be left to be answered by the national procedural law.
23 Baker McKenzie, Recoverability of In-house Counsel Fees in International Arbitration, 2016 24
Michael O’Reilly, Costs in Arbitration Proceedings, 1995
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c) Costs for external witnesses
In order for a party to have better chances of succeeding in the arbitration proceedings, they might need a witness who can help them for evidence of certain events connected to the dispute. The appointed witness as a third party may seek financial compensation for participating in the proceedings because they need time to prepare for the witnessing, which may result in them losing potential profit in case they could have worked during that time. In other situations, the witness might also need accommodation and travelling in order to be present on the hearings. Expenses incurred for witness and other evidence are generally regarded as recoverable to the extent reasonably incurred. However, they should be mindful that such arrangement may need to be disclosed and that any such compensation should remain modest to avoid an appearance of undue influence on the witness.26
1.3. The cost dilemma: Ad hoc or Institutional Arbitration?
Often when the parties decide whether to proceed with ad hoc or institutional arbitration, they take into account the different costs that are characteristic for each of those and precisely the cost reduction and efficiency might be determining factors for their decision. As previously noted, institutional arbitration is governed by a specialized arbitration institution, such as for example ICC or LCIA. On the other hand, ad hoc arbitration does not include the participation and governance of such institution. Because of this difference in structure of the proceedings, certain differences follow in regards to the costs that appear in each and the way those costs are allocated.
What is characteristic for institutional arbitration is that the parties shall pay an administrative fee to the institution itself for accepting their dispute. The administrative fee is fixed by the institution and is payed at the beginning of the proceedings. On the other hand, administrative fee is not required in ad hoc arbitration, because there is no institution involved in the solving of the dispute. Thus, from this perspective it may be said that ad hoc proceedings are less expensive compared to the institutional. However, it should be emphasized that there are many advantages with regard to institutional arbitrations, which justify the payment of these fees. Institutional arbitrations are conducted in accordance with pre-established rules and procedures, which facilitate the proceedings. Additionally, arbitral institutions provide assistance with regard to the different stages of the proceedings. Accordingly, the non-payment of administrative fees should not be decisive when choosing between ad hoc or institutional arbitration.27
26Global arbitration Review, The Guide to Damages in International Arbitration, 2018 27
Erdem&Erdem.com, Ezgi Babur von Schwander, Article on Costs and Redustion of Costs in Arbitration, 2017, Institutional vs.Ad hoc Arbitration, para.3
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Having considered this, it shall be borne on mind that since there is no institution in ad hoc proceedings, the parties along with the arbitrators make an arrangement on the costs that shall be payed. These decisions are advised to be discussed at the very beginning of the proceedings, so that the parties are aware of the often costly outcome, so that they make sure they are financially prepared. However, in these situations when the costs are to be determined by the parties and arbitrators, this may well have an impact on the overall conduct of the proceedings to the extent that the monetary interest of the individual arbitrator may temporarily detract his attention from the case and cause undesirable procedural delays.28
Thus, the primary disadvantages attending the institutional approach are: (i) administrative fees for services and use of facilities may be high in disputes over large amounts, especially where fees are related to the amount in dispute. For lesser amounts in dispute, institutional fees may be greater than the amount in controversy; (ii) the institution's bureaucracy may lead to added costs and delays and (iii) the disputants may be required to respond within unrealistic time frames.29 Even though ad hoc arbitration might come out as less expensive than institutional arbitration, and the parties have greater freedom not only in creating the rules of the proceedings, but also in determining the costs, this freedom might backfire at the parties. Problems can occur when the parties cannot strike an agreement on the costs, which is followed by delays of the proceedings and even cost increasing. Under other conditions, these issues might be avoided with institutional arbitration, since there are pre-fixed rules, greater certainty and less flexibility.
CHAPTER II – ALLOCATION OF COSTS IN INTERNATIONAL ARBITRATION
When compared to litigation, apart from the many advantages that arbitration offers, one of its main drawbacks is the cost of it. This is because, in addition to the usual expenses of litigation, it is necessary for the parties to pay the fees and expenses of the arbitral tribunal (including international travel) and the cost of hiring suitable accommodation for hearings. In addition, where the arbitration is administered by an arbitral institution, the fees and expenses of that institution must be paid.30 Thus, as opposed to litigation which is public procedure, the private element of arbitral proceedings leads to a different consequence. Unlike the judges in litigation who are payed by the state, the arbitrators are payed by the parties in the dispute.
It has been observed that costs are sometimes more fiercely contested than the substantive issues in dispute. Costs are particularly relevant in the resolution of commercial disputes because some
28
TurkishLawblog.com, Nihan Akkaş, Article on Advantages and Disadvantages of the Ad Hoc Arbitration, 2019
29 Vasudha Tamrakar and Garima Tiwari, Article on Ad Hoc and Institutional Arbitration 30
Nigel Blackaby and Constantine Partasides QC with Alan Redfern and Martin Hunter, Redfern and Hunter on
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degree of proportionality might be expected between the value of the dispute and the cost of resolving it.31 The power to award costs is designed to promote justice.32 Cost allocation means that the costs that occur during and in connection to the arbitration proceedings need to be determined by the arbitral tribunal on whether to be divided between the parties, how to be divided and in which proportion. The mechanism by which costs become payable in arbitration proceedings is the making of an award by the arbitrator. The award as to costs is that part of any award in which the arbitrator directs that the costs or any part of them are to be paid.33
When deciding on the cost allocation, there are different ways and methods in which the tribunal may make its decision. The greatest difference in those is whether the parties have concluded a provision in their arbitration agreement or arbitration clause on the cost allocation, or not. It is advised for the parties to have an arrangement on how the costs shall be divided between them for the sake of predictability and time efficiency of the procedure. In the cases that such a provision is not included in the agreement, the tribunal takes into account different factors and approaches to fairly allocate the incurred costs. Notwithstanding the existence of an agreement on the costs between the parties, it is crucially important that the party costs are allocated in a manner that deters unwarranted claims and defenses and unnecessary arbitral procedures. 34
2.1. Allocation of costs when there is a provision in the agreement of the parties
The first principle of arbitration law is that the arbitrator and the court should strive to give effect to the agreement made by the parties. This is often referred to as ‗party autonomy‘.35
The starting point for determining the right of the tribunal to payment for its fees is any contract between the tribunal and the parties, or any one of them and the terms thereof. This will primarily determine not only the incidence of costs, i.e. which party or parties accept liability for the costs of the tribunal, but also the proper amount of such costs as are agreed to be paid.36 Arbitral tribunals will generally honor party agreements on the allocation of costs, subject to any mandatory restrictions.37 For example, England and Australia have statutes that provide that "an agreement which has the effect that a party is to pay the whole or part of the costs of the arbitration in any event is only valid if made after the dispute in question has arisen.38 However, it is important to note that deference to the agreement of the parties is not absolute. Arbitrators are not bound by the parties' agreement if there is a compelling reason to disregard it. This exception typically "is
31 Greenberg, Kee & Weeramantry, International Commercial Arbitration, 2011, p.403
32
Michael O’Reilly, Costs in Arbitration Proceedings, 1995, p.2
33
Michael O’Reilly, Costs in Arbitration Proceedings, 1995, p.3
34 Robert H.Smir and Tyler Robinson, Article on Cost Awards in International Commercial Arbitration: Proposed
Guidelines For Promoting Time and Cost Efficiency, p. 7
35
Michael O’Reilly, Costs in Arbitration Proceedings, 1995, p.6
36 Paul Bugden, Costs in International Arbitration-Summaries of Cases, 2014, para.5 37
Mika Savola, Awarding Costs in International Commercial Arbitration, 2017, p.289
38
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narrowly limited to those situations where upholding the provision would violate some fundamental public policy, be clearly against the parties' true intentions, or manifest some extreme prejudice or injustice to one party.39
Differences will occur depending on whether the parties agree on ad hoc or on institutional arbitration. When they agree on ad hoc they will have greater degree of flexibility when determining the rules of the procedure, including the provision on cost allocation. When institutional arbitration is agreed upon, the allocation of costs will be governed by the applicable rules predetermined by the chosen institution.
2.1.1. Ad hoc arbitration
In ad hoc arbitration it is necessary for the parties to make their own arrangements with the arbitrators as to their fees. The arbitrators should do this at an early stage in the proceedings, in order to avoid misunderstanding later. 40 If express provision is made for the arbitrators‘ fees and expenses at the time of his appointment, or is freely made by all parties at a subsequent time, this express agreement will prevail over any inconsistent implied terms.41 In ad hoc proceedings, the parties themselves can stipulate how the costs will be divided between them in order to avoid uncertainties when the final award is to be brought. Another choice is possible, in ac hoc settings, by referring to the cost schedule of a preferred arbitration rules or by applying the 2013 UNCITRAL Rules.42 However, prevalently, arbitration agreements do not usually include any specific provisions as to costs; and none of the standard arbitration clauses of any of the major arbitral institutions suggests addressing cost issues. If sometimes parties do, it is usually to state in their arbitration clause either that each party shall bear its own costs, or that the successful party shall be awarded its costs.43
2.1.2. Institutional arbitration
Where an arbitration is conducted under the auspices of an arbitral institution, it is not necessary for the parties to engage in any direct negotiations with the tribunal concerning the basis of its fees. These are generally fixed by the institution, sometimes acting independently, sometimes
39
John Yukio Gotanda, Awarding Costs and Arrotneys’s Fees in International Commercial Arbitrations, 1999, p. 30
40 Nigel Blackaby and Constantine Partasides QC with Alan Redfern and Martin Hunter, Redfern and Hunter on
International Arbitration, Sixth Edition, 2015, p.296
41
Michael O’Reilly, Costs in Arbitration Proceedings, 1995, p.13
42 Patricia Zivkovic, Determination, Payment and Allocation of Costs in International Commercial Arbitration, 2016,
p. 17
43
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after consultation with the sole or presiding arbitrator. The parties have no say in the matter.44 Virtually all developed arbitration legislation gives effect to the provisions of institutional rules concerning the tribunal‘s power to make an award of legal costs and the amount of such award.45
Thus, when the parties decide to proceed with institutional arbitration, it would be convenient for them to first carefully study the rules that will apply for the allocation of costs in their dispute, because not all institutions have the same rules regarding costs.
For example, Article 38 of the ICC Rules provides that: ―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.‖46
In the ICC Rules it is also stated that the in the final award the costs of arbitration shall be fixed and it should be decided which of the parties shall bear those and in which proportion. Under the ICC Rules, the arbitrators‘ fees and expenses are fixed by the ICC Court (rather than the arbitrators), while the allocation of such fees and expenses between the parties is made by the arbitrators. 47
On the other hand, Article 28 of the LCIA Rules provides that: ―The Arbitral Tribunal shall make its decisions … 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 … The Arbitral Tribunal may also take into account the parties‘ conduct in the arbitration…‖48
Also, in comparison to the ICC Rules, the LCIA Rules provide that the tribunal shall make its orders on both arbitration and legal costs incurred in the proceedings. Lastly, the Swiss Rules in Article 40 provide that: ―…The costs of the arbitration shall in principle be borne by the unsuccessful party. However, the arbitral tribunal may apportion any of the costs of the arbitration among the parties if it determines that such apportionment is reasonable, taking into account the circumstances of the case.‖49 In these rules, the burden is primarily carried by the unsuccessful party in the proceedings.
It is apparent that the final award on the costs may vary in dependence with the chosen arbitral institution. Nevertheless, what is common for the institutions is that the tribunal will have a certain level of discretion when deciding on the cost allocation and will take into account different factors that affected the costliness of the proceedings, of course while being led by the general principles provided in the institutional rules.
44
Nigel Blackaby and Constantine Partasides QC with Alan Redfern and Martin Hunter, Redfern and Hunter on
International Arbitration, Sixth Edition, 2015, p.296
45
Gary B.Born, International Commercial Arbitration, 2009, p.2496
46
Article 38, ICC Rules, 2017
47 Gary B.Born, International Commercial Arbitration, 2009, p.2496 48
Article 28, LCIA Rules, 2014,
49
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2.1.3. Methods of assessing fees
Generally, two methods are most commonly used for assessing the value of the arbitrators‘ fees for taking part in international commercial arbitration: ad valorem method and hourly fee (time spent) method.
a) Ad valorem method is the method by which the fees to be payed are calculated in accordance with the percentage of the value of the dispute. Fees calculated on the amount in dispute have the advantage of predictability and proportionality. These fees can be estimated with reasonable certainty at the outset of the arbitration and will be proportionate to the value of the dispute. 50It has the merit of being easy to use and capable of uniform application. It is necessary to know only (a) the total amount in the dispute, and (b) the percentage figure to be applied. With this information, the parties can work out for themselves what fees they are likely to have to pay, if they take their dispute to arbitration. 51The ICC uses the ad valorem method. In their published guidance note regarding the internal practices regarding the calculation of fees, they have stated: ‗Although our system is based on an ad valorem schedule, time spent is often taken into account by the Court, amongst other factors, to assess whether the fees should be fixed on top or below the average. It is therefore necessary that arbitrators be transparent in their communications of time spent.‘52
Thus, it is apparent that even though the ad valorem method is primarily regarded to as a base for fees calculation, additional factors are taken into account when the ICC Court decides on the costs.
b) Hourly fee method, where the fees are calculated on hourly or daily rates promotes the principle that the amount in dispute does not reflect the actual complexity of the case and therefore it is fairer as it determines the fees based on the arbitrators‘ actual time spent on the case. 53 The amount to be payed includes the work that the arbitrators conduct during the hearings but also any work that is done outside the hearings. The hourly or daily rate is likely to vary according to the status of the arbitrator and the size, importance, and complexity of the arbitration. It is in this context that the amount in dispute will be taken into account when the time spent method is used. In contrast to the ad valorem method, this one has the advantage of certainty for the arbitrators since the value of a dispute does not necessarily provide a reliable indication of the amount of time required by the
50
Greenberg, Kee & Weeramantry, International Commercial Arbitration, 2011, p. 407
51
https://iccwbo.org/media-wall/news-speeches/icc-court-releases-practices-on-fees-and-administrative-expenses/, ICC Article on Practices on Fees and Administrative expenses, 2016
52
https://iccwbo.org/media-wall/news-speeches/icc-court-releases-practices-on-fees-and-administrative-expenses/, ICC Article on Practices on Fees and Administrative expenses, 2016
53
Patricia Zivkovic, Determination, Payment and Allocation of Costs in International Commercial Arbitration, 2016, p.45
18
arbitrators to dispose of a case. 54Most international arbitrators with recognized reputations are prepared to accept that smaller cases should be undertaken at a rate lower than their ‗normal‘ rate.55
The LCIA employs an hourly fee scale and, as the term suggests, ascertains costs on the basis of the time the LCIA secretariat, administrative staff, and arbitrators spend on the proceedings. The arbitrators‘ hourly fees are likewise based on a predefined scale and capped to a pre-determined maximum. As with ICC, LCIA's fees too are adjusted to account for the particularities of the case, such as special qualifications of arbitrators, the complexity of the dispute, etc.56
2.2. Methods of cost allocation when there is no provision in the agreement of the parties
The treatment of the aforementioned costs is usually divided between two main approaches for cost allocation when the parties have not agreed on the specific way on how to be divided between them: the ‗American Rule‘ (non-shifting rule) and the ‗Costs follow the event‘ rule, often also called the ‗loser pays‘ rule or the ‗English rule‘, despite the fact that England and Wales is not a representative of its strictest application. However, there is no uniform application in regard to the cost allocation, and different approaches occur from one jurisdiction to another.57 The ―loser pays‖ (or ―costs follow the event‖) method is adopted by many common and civil law jurisdictions, whereas the ―American rule‖ is applied in countries like the United States, Japan and China.58 Apart from these two basic principles of cost allocation, national legislations may contain binding rules in the lex arbitri from which the parties cannot deviate. When institutional arbitration is conducted, not all of the arbitral institutions govern the question of cost allocation in the same manner, which will be discussed in greater detail in this chapter.
2.2.1. Costs follow the event – „The English Rule‟
The practice of allocating costs and attorneys' fees between the parties to a dispute can be traced to Roman law, where the practice of requiring the losing party to pay the winning party's costs developed. Today, this practice is known as the principle that costs follow the event or the English rule.59 ‗Costs follow the event‘ is a term that refers to the practice whereby the overall
54
Greenberg, Kee & Weeramantry, International Commercial Arbitration, 2011, p. 407-408
55 Nigel Blackaby and Constantine Partasides QC with Alan Redfern and Martin Hunter, Redfern and Hunter on
International Arbitration, Sixth Edition, 2015, p.298
56
Claudia T.Salomon and Shreya Ramesh, Latham & Watkins, A primer on International Arbitration Costs, 2019, p.2-3, https://m.lw.com/thoughtLeadership/byline-primer-international-arbitration-costs
57
Patricia Zivkovic, Determination, Payment and Allocation of Costs in International Commercial Arbitration, 2016, p.248
58 Mika Savola, Awarding Costs in International Commercial Arbitration, 2017, p.292,
https://arbitration.fi/wp-content/uploads/sites/22/2017/06/awarding-costssavola.pdf
59
19
loser in the arbitration is required to pay the costs of the proceeding and the reasonable legal and other costs of the overall winner. Having its origins in English litigation and domestic arbitration this practice is also sometimes adopted in international arbitration.60 While the position in traditional investment treaty arbitration, in comparison to commercial arbitration has been for each party to bear its own costs of legal representation and related expenses, and to divide tribunal costs equally, costs follow the event is a more recent approach and it became a trend toward requiring the losing party to pay the costs and the legal fees of the prevailing party.61 There are few grounds on which this principle is founded and that justify it: (1) punishing the losing party, (2) indemnifying the winning party, and (3) deterring frivolous and bad faith litigation. Some commentators have speculated that the principle of costs follow the event was originally penal in nature. They argue that courts awarded costs and fees in order to punish an unsuccessful plaintiff for bringing a false claim or to fine a losing defendant for unjustly refusing the plaintiff's rights.
While the rationale for the practice of allocating costs and fees may originally have been to penalize the losing party, today the main reason for doing so is to indemnify the winning party. The modern justification for the principle that costs follow the event is founded on the concept that if and to the extent that a claimant is entitled in law and justice to obtain a sum of money from another party, a claimant should not have to suffer any expense (beyond the cost of addressing a simple demand) for being awarded it; conversely, if a respondent is exposed to a claim which at the end of the day is deemed not to be founded in law and justice, [a respondent] should not suffer any expense for defending the action.62 Today, the principle costs follow the event is a prevailing principle for cost allocation. It is interesting to mention that the ICC‘s 2015 Report revealed the prevailing practice was for tribunals to order ―costs follow the event‖. However, most arbitration statutes are silent on the point, and more than half of the major institutional arbitration rules create no presumption in favor of this position. Where it is included, it is included only as a rebuttable presumption, and naturally it is this rebuttable nature of the presumption that presents an opportunity for arbitrators to exercise on their discretion to control time and costs.63 Nevertheless, it is important to appreciate that a successful party is not ‗entitled‘ at law to his costs, but merely ‗prima facie entitled‘. It is the arbitrator‘s duty to consider, even when minded to apply this basic principle, whether it is applicable in the circumstances. 64
60
See Greenberg, Kee & Weeramantry, International Commercial Arbitration, 2011, p.406
61
See Nigel Blackaby and Constantine Partasides QC with Alan Redfern and Martin Hunter, Redfern and Hunter on
International Arbitration, Sixth Edition, 2015, p.499
62
See John Yukio Gotanda, Awarding Costs and Attorney’s Fees in International Commercial Arbitrations, 1999, p.4-5
63 See Doug Jones AO, Using Costs Orders to Control the Expense of International Commercial Arbitration, 2016,
p.296
64
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The English Rule certainly provides legal certainty for a party that might be unfairly or intentionally subjected to arbitral procedures. If the claims against them are disregarded, the claimant as unsuccessful party will bear the costs. However, on the other hand, there is also a downside to the rationale of the English Rule. Sometimes a situation may occur where the claimant is poor and does not have sufficient financial means to eventually cover the expenses of the both parties. The practical result of this may be that they might feel discouraged to even file a claim for the dispute to be set to arbitration, because in a case they do not succeed with their claims, they would have to cover all the costs with regard to the arbitration. Thus, there is also a ‗chilling‘ effect coming out of the application of the English Rule. In some jurisdiction, this principle may not be recognized. As an example, The Philippines Court of Appeals in Luzon Hydro Corporation v Baybay and Transfield Philippines Inc held that the principle was not accepted under Philippines law and that the arbitral tribunal in the case at issue ‗gravely abused its discretion‘ in applying the principle. Accordingly, the award at issue was set aside in respect of tis decision on costs. The relevant rationale of the Philippines law is that a litigant cannot be penalized for exercising its right to litigate. 65
Nevertheless, the principle of cost follows the event is indeed logical. In the course of arbitration proceedings costs are incurred. Since numerous fees must be paid in order to make the arbitral proceedings fast and efficient, the disputant paying for all the services required must be reimbursed, in the event that he wins. An arbitrator is permitted to depart from the general rule of cost following the event provided he exercises his/her discretion on justifiable grounds consideration the circumstances of the case before him/her.66
This principle was confirmed throughout a wide range of case law. An example of such is the Cost Award for the arbitral proceedings between Claimant, Cargo-Levant Schiffahrtsgesellschaft MBH and Defendant, PSL Ltd. conducted in the LMAA, England, 2012. The sole arbitrator corrected the initial award by issuing additional award only regarding the costs, since in the former an error was found. In this case the tribunal rendered its award in favor of the Claimant. Therefore, according to Section 61(2) of the Arbitration Act 1996: “…the tribunal shall award costs on the general principle that costs should follow the event…” 67 the sole arbitrator Mr.
Farrington ordered the Respondent to pay an amount of US$92,912.96 to the Claimant. This payment included the fees regarding the costs of arbitration, travel and accommodation expenses, counsel fees and solicitor fees. The arbitrator found all these to be reasonable, however he did not allow recoverability regarding the costs of the solicitor of the Claimant for time spent on documents and perusals. According to the arbitrator, these costs have always been a difficult area for assessment. Because of the lack of provided detail regarding the work performed by the solicitor and because no detailed explanation was given, the recoverability of these costs was
65 Greenberg, Kee & Weeramantry, International Commercial Arbitration, 2011, p.407
66 Bello Adesina Temitayo, Cost Follows the Event in Arbitration: Its Paradigm and Relevance, 2014 67
21
disallowed. Moreover, the arbitrator noted that claims for telephone charges, copying and other incidentals were not vouched. In assessing the party liability regarding the costs payment, Mr. Farrington pointed out that even though proportionality as a factor was not explicitly mentioned in the Section 63(5) of the English Arbitration Act 1996, it must be taken into account when considering whether costs were reasonably incurred.68 This award is one of the many that confirm that the principle ‗costs follow the event‘ is followed by arbitrators. Parties setting their disputes to arbitration in countries such as England where this rule applies, must therefore be aware and prepared in bearing often significant costs if losing the dispute.
2.2.2. The American Rule
The second principle which is the counterweight of the ‗costs follow the event‘ principle is the ‗American Rule‘. As it is obvious from the name of it, this principle applies in the U.S. legal system, but also in Japan and China. The U.S. is known for not proclaiming the loser pays rule, and that within this jurisdiction, the cost shifting is almost unknown. In other words, under the American Rule each party bears its own costs incurred during the arbitration.69 Each party will have to pay for the arbitration and attorney‘s fees, without taking into account the outcome of the proceedings. In general, the American rule does not amount to a fundamental United States public policy that would require an arbitrator sitting in the United States or applying American law to disregard a contractual provision on the payment of costs and fees.70 An arbitral tribunal is only considered to be empowered to shift party costs if so provided by the arbitration agreement, the applicable arbitration rules or the lex arbitri.71
The United States Supreme Court, which adopted the ‗American rule‘ in 1796, has set forth three reasons in support of it. First, in many cases the result of the litigation is uncertain and, as a result, it is unfair to penalize a losing party by assessing costs and fees for merely defending or prosecuting a lawsuit. Second, if losing parties were forced to bear their opponents' costs and fees, "the poor might be unjustly discouraged from instituting actions to vindicate their rights." Third, claims for costs and fees would likely increase "the time, expense and difficulties of proof" in any given case and "would pose substantial burdens for the administration of justice."72 In the field of arbitration, one further argument put forth in support of the ―American rule‖ is that ―both parties have agreed by contract to create a special forum which is privately
68 Cargo-Levant Schiffahrtsgesellschaft MBH v. PSL Ltd. (Costs Award), 21 December 2012,
http://www.kluwerarbitration.com/document/kli-ka-ai-awards2017-078-n?q=costs%20award
69
Patricia Zivkovic, Determination, Payment and Allocation of Costs in International Commercial Arbitration, p.234
70 John Yukio Gotanda, Awarding Costs and Attorney’s Fees in International Commercial Arbitrations, 1999, p.29 71
Micha Buhler & Walder Wyss Ltd, The Guide to Damages in International Arbitration
72
22
financed and that they should in fairness pay in equal measure the costs of setting in motion and operating such a consensual regime.‖73
Just as the parties agreement is not absolute and there might be limitations, the ‗American Rule‘ has exceptions that are applicable to itself. A rare possibility of partial or complete cost recovery by the victor may be found, or by the non-culpable loser, in the presence of abuse of process, manifest dilatoriness, etc. Thereby, abusive or bad-faith conduct even in relation to a meritorious/successful claim or defense is generally intended to be deterred. 74 Moreover, this principle is regarded to as an ‗outcome neutral‘ because the parties are responsible for their own party costs, whilst the procedural ones are shared.
Under the ‗American rule‘ parties might feel encouraged to set their claims and their dispute to arbitration, because they will face a lesser risk of cost bearing. Entry barriers to litigation are thereby lowered or removed, and each party bears the risk of its decision respecting the scope of investment in attorney‘s fees.75
In practice amongst many other cases, the application of the ‗American Rule‘ can be seen in ICC Case No. 20686/RD, 7 October 2015, Alstom Brasil Energia E Transporte LTDA v. Mitsui Sumitomo Seguros S.A. (Final Award). In this case New York, USA was determined as the place of arbitration and according to that, New York law was applicable to the arbitral proceedings. Under New York law the ‗American Rule‘ is taken as the predominant approach, according to which attorney‘s fees are normally not shifted onto a party and parties are responsible for their own costs in arbitration. Even though there are recognized exceptions to this principle, such as explicit authorization by the parties included in their agreement or bad faith conduct, in this case no such circumstances were existing. Thus, the tribunal did not grant either party fee shifting. The award that was rendered by the ICC tribunal was in favor of the Claimant. However, even though both the Claimant and Respondent were asking for costs reimbursement, in the final award the tribunal decided that parties bear their own legal costs as well as other costs in arbitration. Furthermore, the fees for the tribunal and ICC administrative expenses were also decided to be equally shared amongst the parties.76
2.3. National law, Arbitral Rules & Fairness and Reasonableness
2.3.1.National Law
73
Mika Savola, Awarding Costs in International Commercial Arbitration, 2017, p.293
74
Swiss Arbitration Association, Best Practices in International Arbitration, 2006, p.4
75 Swiss Arbitration Association, Best Practices in International Arbitration, 2006, p.4 76
Alstom Brasil Energia E Transporte LTDA v. Mitsui Sumitomo Seguros S.A. (Final Award), ICC Case No. 20686/RD, 7 October 2015, http://www.kluwerarbitration.com/document/kli-ka-aim-awards2019-265-n?q=american%20rule
23
Most national legislation is silent concerning awards of costs in international arbitrations. The Model Law also does not address this question. Some states that have adopted the Model Law have added provisions regarding awards of the costs of arbitration, but not many.77 National laws do not provide a uniform approach on the costs. The tribunal‘s power to allocate the costs is provided in most national arbitration laws, i.e. the procedural law of arbitration.78 National laws play a crucial role in determining the costs in the arbitration because of the obligation to comply with the lex arbitri and the mandatory rules it contains, otherwise there might be consequences on the validity of the arbitral award. However, it is not always the procedural law that will govern the power of the arbitrators the allocate the costs. Because of that, using national law to resolve a claim for costs and fees can be a complicated, time consuming, and expensive process. The arbitrator must determine whether substantive or procedural law governs the awarding of costs and fees. In many instances, the tribunal will apply the procedural law of the seat of the arbitration and select the substantive law through a choice-of-law analysis. Currently no consensus exists on which of these choice-of-law rules the arbitrator should apply in a given case. The lack of uniformity makes it problematic to specify and predict which country's law will be applied to the dispute.79
Many arbitration statutes, including those in the US, France and Switzerland are silent on the topic of award of legal costs. It is clear, however, that arbitral tribunals seated in most such jurisdictions, including France and Switzerland are fully authorized to make awards of legal costs. This reflects in the principle that absent contrary indication in the parties‘ agreement, arbitrators should be presumed to have the authority to make an award of the costs of legal representation.80
In England, the Arbitration Act, 1996, provides the tribunal with authority to award legal costs, as well as standards for exercising such authority, which is quite rare. Specifically, §61(2) of the Act provides that, absent contrary agreement, ―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.‖ Unusually for national law on the subject, this provision is binding on arbitral tribunals seated in England (absent contrary agreement). Arbitral tribunals are nonetheless able to vary the general principle that costs follow the event dependent on the facts of each arbitration and the conduct of the parties.81
77
Nigel Blackaby and Constantine Partasides QC with Alan Redfern and Martin Hunter, Redfern and Hunter on International Arbitration, Sixth Edition, 2015, p.536
78 See Patricia Zivkovic, Determination, Payment and Allocation of Costs in International Commercial Arbitration,
p.241
79
See John Yukio Gotanda, Awarding Costs and Attorney’s Fees in International Commercial Arbitrations, 1999,
p.14-15
80
Gary B.Born, International Commercial Arbitration, 2009, p.2491
81
24
In the Republic of North Macedonia according to the National Arbitration Act, the tribunal shall decide on the costs of the proceedings according to its free evaluation, taking into account all circumstances of the case and the outcome of the dispute. When deciding in the award, it should include which party and in which proportion has to reimburse the other party the costs of the parties, or that each party should bear its own costs. 82 Thus, in this national law it is completely up to the tribunal‘s discretion to decide on the allocation of the costs, and on the main principle that is to be followed when deciding. The tribunal will allocate the costs in a manner it deems fit, of course taking into account the outcome of the dispute. There is no definite predominance of either of the principles ‗costs follows the event‘ or the American Rule-If the claim was successful only in part, the tribunal shall allocate the costs on a pro rata basis. The parties may, however, depart from this general rule, and allow for the tribunal to allocate the costs in a manner it deems fit. 83 Secondly, in the German arbitration act, primarily the party autonomy is taken into account and the tribunal has the power to decide on the allocation of the costs only if the parties have not agreed on the exact way the costs shall be allocated. 84Same as in North Macedonia, when deciding the tribunal has to take into account the outcome of the proceedings and the different circumstances of the case. Last remark is on the Belgian law. It provides that the parties may recover the costs of the arbitration, which, unless otherwise agreed, include the fees and expenses of the arbitrators, the fees and expenses of the counsel and representatives of the parties, the administrative costs of the arbitral institution and all the other costs resulting from the arbitral proceedings. Regarding the shifting of costs, the general practice is to apply the principle that costs follow the outcome, though many arbitral tribunals also take into account the attitude of each party in the arbitration.85
Although the UNCITRAL Model Law is not a law per se in the sense of it being a national legislation of a certain country, many countries choose to translate the solutions from the Model Law in their own jurisdictions. Due process norms such as Article 18 of the UNCITRAL Model Law are mandatory. They impact directly on tribunal procedural discretions aiming to promote efficiency. It is at least arguable that they also indirectly impact upon efficiency-based cost determinations if a party could legitimately argue that it was induced to refrain from availing itself of due process rights based on a warning by the tribunal as to an adverse cost determination were it to do so.86
The complexity involved in selecting a law to apply to a claim for costs and fees may cause parties and arbitrators to spend considerable resources to resolve the issue. Further, the process may lead to arbitrary and unpredictable results. Thus, it is not surprising that, in light of these
82 Law on International Commercial Arbitration of The Republic of North Macedonia, 2013, Chapter VI, Article 34 83
Kristina Kragujevska, Article on International Arbitration 2019, North Macedonia, Global Legal Insights, 2019
84
German Arbitration Act, Section 1057 Decision on costs, 1988
85 Liederkerke Wolters Waelbroeck Kirkpatrick, Global Legal Group & Joe Tirado, International Arbitration, Second
Edition, p.45
86
