Costs in Arbitration
5th PreMoot Conference – “The Discovery of Arbitration, CISG and Wine”
Hanover, 11 February 2016
Dr. Anke Sessler
Beijing / Boston / Brussels / Chicago / Frankfurt / Hong Kong / Houston / London
Los Angeles / Moscow / Munich / New York / Palo Alto / Paris / São Paulo / Seoul
Shanghai / Singapore / Sydney / Tokyo / Toronto / Washington, D.C. / Wilmington
Costs in Arbitration
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Costs in Arbitration
“There is no such thing as a free lunch.”
(American proverb)
Costs in Arbitration
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I.
II.
III.
IV.
Costs in Arbitration
Introduction – Costs and Advances on Costs
What kinds of costs arise in arbitration?
Practical Implications and Tactical Considerations
How do cost issues affect arbitration?
How do parties use rules on costs to their advantage?
Determination and Allocation of Costs
Who decides upon costs and how is the decision made?
Who has to bear the costs? In particular, may legal costs be recovered from the other side?
Measures and Techniques to Control Costs
How can costs be reduced or saved?
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I. Introduction – Costs and
Advances on Costs
Costs in Arbitration
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I. Introduction – Costs and Advances on Costs
Arbitration Costs (Common Costs)
Parties’ Costs (Legal Costs)
Common costs not attributable to a particular party
Any costs incurred by an individual party in respect
of the arbitration
•
Arbitrators’ fees (!)
•
Arbitrators’ expenses
−
Travelling expenses and accommodation expenses
−
Per diem (possibly)
−
Costs for meetings, mail services, telecommunication
services and photocopies
•
•
Costs of a party’s legal representation (!)
−
Lawyers’ fees
−
Lawyers’ expenses
−
In-house lawyers’ costs (?)
Costs of party-appointed experts
•
Fees and expenses of the arbitration institution
−
Fees
•
Ancillary common expenses relating to the arbitration
−
Expenses
−
Hearing room charges
•
Travel and accommodation costs of any witnesses
−
Costs of court reporters or interpreters
•
Translation costs incurred by each individual party
−
Fees and expenses of a secretary to the arbitral
tribunal
−
Fees and expenses of a tribunal-appointed expert
Note that the terminology is not always precise: Sometimes, the term “arbitration costs” covers both the arbitration
costs (common costs) and the parties’ costs (legal costs) within the meaning above
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I. Introduction – Costs and Advances on Costs
Advances on Costs
Institutional arbitration rules generally provide that parties are required to make advance payments
(deposits) to cover the fees and expenses of the arbitration institution and the fees and expenses of
the arbitrators
•
•
•
The advance payments are fixed by
−
the arbitration institution (e.g. Art. 36 ICC Rules, Art. 24.1 LCIA Rules) or
−
the arbitral tribunal (e.g. Sec. 25 DIS Rules)
There are different kinds of advance payments which cover different stages of the arbitration; for
example, in an ICC arbitration, the advances are called:
−
Filing fee
−
Provisional advance
−
(Further) advance(s) on Costs
see next slide for details
Advances in excess are returned to the parties at the end of the arbitration (except for advances
which are non-refundable, e.g. the filing fee)
Costs in Arbitration
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I. Introduction – Costs and Advances on Costs
Advances on Costs (ICC)
Filing fee
To cover initial expenses of
the ICC Secretariat
(Art. 4(4) ICC Rules)
Provisional advance
To cover initial stages of
the proceedings
(Art. 36(1) ICC Rules)
Advance on costs
To cover all costs of the
arbitration to be fixed by the
ICC Court
(Art. 36(2)-(5) ICC Rules)
Fixing of the costs of the
arbitration by the ICC Court
(ICC Secretariat)
Arbitrators’ fees and expenses
and ICC administrative
expenses
(Art. 37(1), (2) and (6) ICC
Rules)
To be paid by
claimant
To be paid by
claimant
To be paid by claimant and
respondent in equal shares
No payment to ICC due /
Possible reimbursement
Upon submission of the
request for arbitration
Following notification of the
request for arbitration
Following constitution of
the arbitral tribunal and
transmission of the case
file to it
Upon approval of the final
award, withdrawal or
termination
Source: Jason Fry / Simon Greenberg / Francesca Mazza, The Secretariat’s Guide to ICC Arbitration, 2012
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II. Practical Implications and
Tactical Considerations
Costs in Arbitration
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II. Practical Implications and Tactical Considerations
•
As a lawyer, you are expected to avoid pitfalls and make the law work to the advantage of your
client
•
Nothing else applies to the rules on costs in arbitration
Example – Advance Payments in Equal Shares
•
As indicated on the chart on advances on costs, in principle, both claimant and respondent are
requested to pay one half of the advance on costs (Art. 36(2) sent. 2 ICC Rules, Sec. 25 sent. 2
DIS Rules), i.e.
−
Respondent has to pay one half of the advance on costs for claims filed by claimant irrespective of
how frivolous the claims may be
−
After winning the arbitration, respondent may have to go through lengthy (and maybe unsuccessful)
enforcement proceedings to get the advance (and other costs, e.g. legal costs) back
»
•
Never underestimate the (practical and legal) difficulties of enforcing an arbitral award (!)
Consequence: Claimant may use, not to say abuse, the provisions on costs by filing a frivolous
claim, intending to force respondent into a settlement (merely to avoid a costly dispute)
What can respondent do?
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II. Practical Implications and Tactical Considerations
Option 1: Request security for costs
•
Problem: It lies within the discretion of the arbitral tribunal to order a party to pay security for costs; in general,
arbitral tribunals are reluctant to grant security for costs
•
Solution: When concluding the arbitration clause, make sure that the arbitration clause provides that the arbitral
tribunal is required to award security for costs upon application
Option 2: “Play hardball” – do not pay your share of the advance (and see what happens)
•
If claimant pays its share on the advance on costs while respondent refuses to pay, the arbitration institution
usually invites claimant to pay respondent’s share, too
−
•
•
If advances on costs are not paid in full, the arbitration institution may direct the arbitral tribunal to suspend its work,
i.e. the arbitration will not continue (Art. 36(6) ICC Rules)
In such a situation, claimant may
−
terminate the arbitration agreement (since respondent’s non-payment of the advance constitutes a breach of the
arbitration agreement)
−
sue respondent for payment of its share on the advance on costs (in a state court)
−
pay respondent’s share, too (i.e. the advance in full)
»
In this case, the arbitration will continue immediately
»
It is an open question if, in this case, claimant can request the arbitral tribunal to issue an immediate interim award for
reimbursement of one half of the advance, or whether the cost issues can only be addressed in the final award
If everything goes well for respondent, claimant may become discouraged and give up the dispute
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II. Practical Implications and Tactical Considerations
In various regards, costs are an important means of controlling or influencing behavior
•
Examples
•
In general, arbitration is very expensive, i.e. parties will think twice before commencing arbitration
−
Parties may make use of this deterring effect, e.g. by agreeing on an expensive arbitration institution in order to avoid
legal disputes or incentivize the other party to settle disputes via negotiation (which is much less expensive)
•
Arbitral tribunals may sanction misconduct of parties / counsel (e.g. dilatory tactics) by considering the
misconduct in apportioning the costs of the arbitration (e.g. Art. 37(5) ICC Rules, Art. 28.4 LCIA Rules, Guideline
26(c) of the IBA Guidelines on Party Representation in International Arbitration)
•
Also, the ICC adopted a new policy in December 2015 setting out clear information as to the costs
consequences for arbitrators that derive from unjustified delays in submitting draft arbitration awards to the ICC
Court
−
Three-member arbitral tribunals are expected to submit draft awards within three months after the last substantive
hearing concerning matters to be decided in an award or, if later, the filing of the last written submissions (excluding
cost submissions)
−
If a draft award is submitted beyond that timeframe, the ICC Court, unless satisfied that the delay is justified by
factors beyond the arbitrators’ control or to exceptional circumstances, may lower the arbitrators’ fees
−
See for details: http://www.iccwbo.org/News/Articles/2016/ICC-Court-announces-new-policies-to-foster-transparencyand-ensure-greater-efficiency/
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III. Determination and
Allocation of Costs
Costs in Arbitration
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III. Determination and Allocation of Costs
Introduction
The distinction between arbitration costs (common costs) and parties’ costs (legal costs) is crucial as regards
the question which authority is competent to make decisions upon the amount and the allocation of these costs
Arbitration Costs (Common Costs)
•
Typically, the arbitration institution fixes the
amount of the arbitration costs (at the end of the
arbitration)
(Art. 37(1) ICC Rules, Art. 28.1 LCIA Rules)
•
The arbitral tribunal decides upon the allocation of
the arbitration costs, i.e. in which proportion the
parties shall bear these costs
(Art. 37(4) ICC Rules, Art. 28.2 LCIA Rules,
Sec. 35.1 DIS Rules)
Costs in Arbitration
Parties’ Costs (Legal Costs)
•
The arbitral tribunal decides upon the (recoverable)
legal costs in terms of amount and allocation
(Art. 37(1) and (4) ICC Rules, Art. 28.3 LCIA Rules,
Sec. 35.1 DIS Rules)
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III. Determination and Allocation of Costs
Arbitration Costs (Common Costs) – Comparison of Different Costs Systems (1/3)
Ad Valorem System (DIS, ICC)
The arbitrators’ and the arbitration institution’s fees are
calculated as a percentage of the amount in dispute
•
Advantages
−
−
•
The arbitrators’ and the arbitration institution’s fees are
based on hourly rates
•
High level of predictability (if amount in dispute is
clear)
Rather low costs if dispute is complex and the
amount in dispute is low
Disadvantages
−
Hourly Rate System (LCIA)
Advantages
−
•
Disadvantages
−
−
Rather high costs if dispute is uncomplicated and the
amount in dispute is high
Rather low costs if dispute is uncomplicated and the
amount in dispute is high
Lack of predictability
Rather high costs if dispute is complex and the amount
in dispute is low
In fact, both systems incorporate elements of each other
•
Both the DIS and the ICC provide for the increase or decrease of the arbitrators’ fees depending on how
complicated (time-consuming) the case is
•
Conversely, in LCIA’s costs system, the amount in dispute is one factor which influences the hourly rate
Costs in Arbitration
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III. Determination and Allocation of Costs
Arbitration Costs (Common Costs) – Comparison of Different Costs Systems (2/3)
DIS
Filing fee
•
Fees of the
institution
Based upon the amount in dispute
Arbitrators’
fees
No filing fee
ICC
•
USD 3,000
Based upon the amount in dispute (fixed amount)
LCIA
•
GBP 1,750
•
(Deputy) Registrar: GBP 250 per hour
•
Minimum amount: EUR 350
•
Minimum amount: USD 3,000
•
Counsel: GBP 225 per hour
•
Maximum amount: EUR 30,000
•
Maximum amount: USD 113,215
•
Case administrators: GBP 175 per hour
(Two parties, no counterclaims)
(Two parties, no counterclaims)
•
Accounting: GBP 150 per hour
Based on the amount in dispute
Based on the amount in dispute (but the costs
scales foresee a range)
•
Maximum amount: GBP 450 per hour
(per arbitrator)
•
•
Minimum amount for co-arbitrator:
EUR 1,050
Maximum amount for chairman:
EUR 525,785 (amount in dispute:
EUR 650 million or more)
•
Minimum amount: USD 3,000
•
No maximum amount
(Two parties, three-member tribunal, no
counterclaims)
(Two parties, three-member tribunal, no
counterclaims)
Arbitrators’
expenses
Per diem for a meeting: EUR 150 per day and
arbitrator (excluding expenses for
accommodation or travel)
The ICC Court fixes the arbitrators’ expenses (in
practice, the Secretariat determines the
reasonableness of the expenses)
Accommodation expenses: Flat rate of
EUR 200 per day and arbitrator (up to
EUR 350 upon submission of an invoice)
(Art. 37(2) ICC Rules, Art. 2(5) of Appendix III)
Expenses may be reimbursed if they are
reasonably incurred in connection with the
arbitration, are reasonable in amount, and
are supported by invoices or receipts
(Sec. 2(iv) Schedule of Costs)
(Guidelines for the Reimbursement of
Arbitrators Expenses 05)
“Official”
cost
calculator
Costs in Arbitration
http://www.dishttp://www.iccwbo.org/products-andarb.de/en/22/gebuehrenrechner2014/uebersic services/arbitration-and-adr/arbitration/cost-andht-id0
payment/cost-calculator/
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III. Determination and Allocation of Costs
Arbitration Costs (Common Costs) – Comparison of Different Costs Systems (3/3)
600.000 EUR
500.000 EUR
400.000 EUR
1 Arbitrator (DIS)
3 Arbitrators (DIS)
1 Arbitrator (ICC)
3 Arbitrators (ICC)
300.000 EUR
200.000 EUR
100.000 EUR
0 EUR
EUR 1
million
EUR 5
million
EUR 10
million
EUR 50
million
X-Axis: Amount in dispute
Y-Axis: Costs (without legal costs)
Source: Cost Calculators of DIS and ICC
Costs in Arbitration
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III. Determination and Allocation of Costs
Arbitration Costs (Common Costs) – Parties’ Joint and Several Liability
The parties are jointly and severally liable to the arbitration institution and the arbitral tribunal for the
arbitration costs (Sec. 40.1 and 40.4 DIS Rules, Art. 28.6 LCIA Rules)
•
In general, the funds which cover the arbitration costs are sufficient because of the advances on
costs the parties have paid
•
Shortfalls may nevertheless occur (e.g. a claim may be withdrawn pursuant to a settlement before
the payment of the initial advance on costs)
•
In such a situation, the arbitration institution / the arbitral tribunal is entitled to pursue a claim for
the outstanding amount of fees and expenses against any or all of the parties
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III. Determination and Allocation of Costs
Allocation of Costs
The arbitral tribunal must decide which of the parties shall bear the costs of the arbitration or in what
proportion the parties shall bear them
(Art. 37(1), (4) ICC Rules, Art. 28.4 LCIA Rules, Sec. 35.1 DIS Rules)
•
The term “costs” (within the meaning of the sentence above) refers to both the arbitration costs
(common costs) and the parties’ costs (legal costs), provided they are “reasonable”
•
This raises two questions:
(1)
Pursuant to which principle(s) shall the arbitral tribunal allocate the costs?
(2)
As regards the parties’ costs (legal costs), what does “reasonable” mean?
»
The DIS Rules do not contain the term “reasonable”; according to Sec. 35.1 DIS Rules, in order to be
reimbursable, costs must have been “necessary for the proper pursuit” of the claim or defense
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III. Determination and Allocation of Costs
Allocation of Costs – Guiding Principles
DIS
Principle
Loser pays
•
Sec. 35.2 DIS Rules provides that
“in principle, the unsuccessful party
shall bear the costs of the arbitral
proceedings”
Discretion to Yes
take into
• The formulation of Sec. 35.2 DIS
account
Rules (“in principle, the
other
unsuccessful party shall bear the
factors?
costs (…)”) indicates that the
outcome of the case is not the only
criterion for the arbitral tribunal to
consider
Application in
practice
Costs in Arbitration
ICC
Loser pays or “American rule” (i.e. each
party is responsible for paying its own
attorneys’ fees)
•
Art. 37(4) ICC Rules merely states that
the final award shall decide which of the
parties shall bear the costs of the
arbitration (including legal costs) or in
what proportion the costs shall be borne
by the parties
Yes
•
Art. 37(5) ICC Rules states that 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
LCIA
Loser pays
•
Pursuant to Art. 28.4 LCIA Rules,
“costs should reflect the parties’
relative success and failure”
Yes
•
Under Art. 28.4 LCIA Rules, the
arbitral tribunal may take into
account the parties’ conduct in the
arbitration, including whether
parties’ caused unnecessary
delays or generated unnecessary
costs
•
In practice, the application of the principles on how to allocate costs varies from case to case
•
A lot of arbitral tribunals refrain from a detailed analysis of the level of success and failure; they tend to assess the costs
by rule of thumb
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III. Determination and Allocation of Costs
Reasonableness of Parties’ Costs (Legal Costs)
The term “reasonable” is not defined in the arbitration rules
•
Arbitral tribunals have wide discretion in determining what is reasonable
•
In practice, arbitral tribunals usually request the parties to submit their cost applications and
calculations and usually give each party an opportunity to comment
•
In general, arbitral tribunals are not required to apply the rates or procedures for assessing legal
costs practiced by any state court or other legal authority (Art. 28.3 LCIA Rules)
−
•
In contrast, in German state court proceedings, winning parties are entitled to reimbursement of their lawyers’
fees only on the basis of the (rather strict) cost schedule of the German Lawyers’ Fees Act
(Rechtsanwaltsvergütungsgesetz)
There is an ongoing discussion whether costs for in-house lawyers are recoverable
−
Sometimes, it is argued that in-house lawyers’ costs are not reimbursable since the parties would have incurred
these costs anyway (because of the in-house lawyers‘ permanent employment)
−
However, if a party decides to use its in-house lawyers for tasks which would otherwise be performed by (more
expensive) external lawyers (whose fees could be reimbursed), it seems somewhat „unfair“ if such party is not
entitled to recover the in-house lawyers’ costs
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III. Determination and Allocation of Costs
Costs of ICC Arbitration Proceedings
Administrative expenses of ICC
2%
Arbitrators’ fees
and expenses
16%
Parties’ costs
•
•
82%
•
Lawyers’ fees and
expenses
Expenses related to
witness and expert
evidence
Other costs incurred by
the parties
Source: ICC Publication 843 – Techniques for Controlling Time and Costs in Arbitration, Introduction
Costs in Arbitration
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IV. Measures and Techniques
to Control Costs
Costs in Arbitration
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IV. Measures and Techniques to Control Costs
There are countless measures and techniques to save or reduce costs in arbitration
•
Think about other means of dispute resolution (negotiation, ADR)
•
Use one arbitrator instead of three
•
Save translation costs
−
Stipulate in the arbitration clause that the language of the arbitration is LANGUAGE A, provided, however,
that written evidence may be submitted in LANGUAGE A and LANGUAGE B
•
Limit document production (e.g. by referring to the IBA Rules on the Taking of Evidence in
International Arbitration)
•
Make sure to select arbitrators who are available and who can manage a case efficiently
•
Limit the scope of the arbitration
−
If possible, work together with opposing counsel to identify the crucial issues in dispute
−
Make sure that party-appointed experts work together as closely as possible
For further techniques to control costs, see ICC Publication 843 – Techniques for Controlling Time and Costs in
Arbitration, available at:
https://www.international-arbitration-attorney.com/wp-content/uploads/techniques-for-controlling-time-and-costs-inicc-arbitrations.pdf
Costs in Arbitration
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Thank you
for
your attention!
Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
Costs in Arbitration
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