by：James Wang Alexandra Pieniazek BellaSkuthorp King & Wood Mallesons
While there is no universal approach to costs awards in international arbitration, “costs follow the event” is the starting point for most tribunals. As demonstrated by two studies discussed in this article, an emerging trend is to couple this approach with “adjusted” costs orders which reflect the relative success of the parties in the arbitration and the parties’ conduct in the arbitration. This trend makes costs allocation a potentially powerful tool in ensuring the efficiency of proceedings.
Types of costs incurred in international arbitration
Costs incurred in an arbitration can usually be divided into the following two categories:
- costs of the arbitration, being administrative costs such as the arbitrators’ fees and expenses, filing fees and other charges associated with the relevant arbitral institution; and
- party costs, being the costs individually incurred by each party in the course of the arbitration, including legal fees, counsel fees, expenses relating to lay witnesses, fees and expenses related to party-appointed experts, translation costs, document production and travel and accommodation costs.
Allocation of costs
In any arbitration, the parties have a discretion to agree on how to allocate the costs during the arbitral process. Agreement may be recorded in the arbitration agreement or the operative provisions of the contract between the parties. Tribunals will generally apply the parties’ agreements on costs allocation, unless the national law provides otherwise.[1]
In the absence of an express agreement between the parties, many tribunals tend to look at the national law and the applicable arbitration rules.[2] Different arbitral institutions have adopted different approaches to costs allocation.
Some rules include a rebuttable presumption that the successful party in the arbitration will be entitled to recover costs.[3] Other rules are silent on costs allocation and afford a broad discretion to the tribunal in deciding how costs should be apportioned between the parties.[4] As noted below, however, where the rules are silent, the majority of arbitral tribunals appear to broadly adopt the “costs follow the event” principle which favours the recovery of costs by the successful party as a starting point, thereafter adjusting the allocation of costs as considered appropriate.[5] Another approach is for each party to bear its own legal costs and split the costs of the arbitration equally, regardless of the outcome of the case.[6]
ICC report on costs in international commercial Arbitration
In 2015, the International Chamber of Commerce (ICC) Commission published its Report on “Decisions on Costs in International Arbitration” (ICC Report).[7] The ICC Report reviewed and considered costs decisions in ICC awards from 2008 to December 2014 and drew on contributions from eight other arbitral institutions.
According to the ICC Report, a majority of tribunals adopt the recovery of costs by the successful party approach, adjusting the allocation as appropriate, depending on a range of factors. This was the approach adopted by tribunals in the majority of ICC awards examined, in 91% of HKIAC awards, in the majority of ICDR awards, in 90% of SIAC awards and in more than half of the SCC awards. This was also the case in most LCIA and PCA awards.[8]
In adjusting the allocation of costs, the following factors, amongst others, have been considered alongside the relative success of the parties:[9]
- whether the parties could have avoided arbitration;
- prevailing costs allocation principles in the applicable law;
- agreements between the parties with regard to costs;
- procedural conduct of the parties;
- the reasonableness of the parties legal fees and expenses;
- legal and factual complexity of the case;
- disparities between the costs claimed by each party; and
- whether different types of costs are recoverable.
An interesting area to watch, which the ICC Commission was unable to conclude upon trends-wise in the ICC Report, is the issue of “success fees”, and whether such amounts are recoverable.[10] A related issue is the recovery of funding costs.[11]
As to fee arrangements more generally, however, in most jurisdictions, these are generally acceptable and some form of costs shifting was broadly accepted in arbitration proceedings.[12] The reasonableness of such fee arrangements could be taken into account when allocating costs in arbitration.[13] Certain jurisdictions, however, specifically prohibit contingency and uplift fees. In Singapore, for example, contingency and uplift fees are prohibited for Singapore lawyers (and are prohibited under the ethical rules). On the other hand, they appear to be permitted for foreign lawyers / law firm so long as they do not engage in the practice of Singapore law. An arbitration seated in Singapore or governed by Singapore law, however, is likely to amount to the practice of Singapore law, and therefore would prohibit contingency and uplift fees.[14]
Costs in investment treaty arbitration
Previously, it was considered general practice in investment treaty arbitration to disfavour the shifting of arbitration costs against the losing party. While it was not a universal approach applied by tribunals in investment treaty arbitration, an earlier edition of the same study showed it was the approach favoured by the majority of tribunals.[15]
Another recent study specifically focused on the costs of investment treaty arbitration, however, reveals that there has been a significant increase in the number of tribunals making adjusted costs orders, with only a third of tribunals requiring each party to bear their own costs.[16]
Case study – Apportionment of costs in investment treaty arbitration
In 2017, an award was delivered in Ansung Housing Co., Ltd. v. People’s Republic of China. The dispute arose out of the Claimant’s investment in a golf course and condominium development project in Shenyang-Xian, China. The arbitration was submitted to the International Centre for Settlement of Investment Disputes (ICSID) on the basis of an agreement between the Government of the Republic of Korea and the Government of the People’s Republic of China on the Promotion and Protection ofInvestments (China-Korea BIT) and the ICSID Convention, Regulations and Rules.
The award rendered by the tribunal was ultimately in favour of China and the tribunal held that Ansung’s claim manifestly lacked legal merit as it was time-barred, and that the claim should not have been brought.
While the tribunal was quick to indicate that this was a decision that turned on its facts and that it “need not venture into the discussion about whether there is a general trend in ICSID practice favouring the ‘costs follow the event’ approach or ‘pay-your-own-way’ approach” to costs allocation, it awarded the Respondent its share of the direct costs of the arbitration proceedings plus 75 percent of its legal fees and expenses.[17]
[1] International Chamber of Commerce (ICC) Commission, Decisions on Costs in International Arbitration (2015) [23] https://iccwbo.org/publication/decisions-on-costs-in-international-arbitration-icc-arbitration-and-adrcommission-report/ (‘ICC Report’).
[2] The applicable law can raise difficulties. Some legal scholars suggest that the law of the contract should be applicable to costs decisions. The majority favour the view that the law of the seat will apply to the tribunal’s award of costs.
[3] See LCIA Arbitration Rules 2014 art 28; CIETAC Arbitration Rules 2015 art 52; PCA Arbitration Rules 2012 arts 40-42; UNCITRAL Arbitration Rules 2010 arts 40-42.
[4] See ICC Arbitration Rules 2017 art 38, app III; ICC Arbitration Rules 2012 art 37; ICSID Rules of Procedure for Arbitration Proceedings 2006 r 28; HKIAC Administered Arbitration Rules 2013 art 33; SCC Arbitration Rules 2017 arts 49-50; SIAC Arbitration Rules 2016 rr 35-37.
[5] ICC Report, above n 1, [13]; Matthew Hodgson and Alastair Campbell, ’Damages and costs in investment treaty arbitration revisited’ (2017) Global Arbitration Review https://globalarbitrationreview.com/article/1151755/damages-and-costs-in-investment-treaty-arbitration-revisited .
[6] Also referred to as the ‘American approach’; ICC Report, above n 1, [14].
[7] ICC Report, above n 1, [23].
[8] Ibid [13].
[9] Ibid [21]-[27].
[10] Ibid [17].
[11] See, eg, Essar Oilfields Services Ltd v Norscot Rig Management PVT Ltd [2016] Lloyd’s Rep. Plus 72.
[12] ICC Report, above n 1, [43].
[13] Ibid [21].
[14] Ibid [44].
[15] Matthew Hodgson, ’Counting the costs of investment treaty arbitration’ (2014) Global Arbitration Review https://globalarbitrationreview.com/article/1033259/counting-the-costs-of-investment-treaty-arbitration .
[16] Matthew Hodgson and Alastair Campbell, ’Damages and costs in investment treaty arbitration revisited’ (2017) Global Arbitration Review
[17] Ansung Housing Co., Ltd. v. People’s Republic of China (Award) (ICSID Arbitral Tribunal, Case No ARB/14/25, 9 March 2017) [159].