Allocation of Costs in International Arbitration
This lecture explains the basic concepts and mechanisms used by international arbitral tribunals when allocating costs. It provides a graphical decision tree which can be used to make decisions or submissions on allocation.
Welcome to this short lecture on costs in international arbitration proceedings seated in England. The lecture is presented by Vitaliy Kozachenko, Managing Director at Fortior Law S.A.
In this video, I will discuss how arbitrators allocate costs when the outcome of the arbitration is mixed, meaning that the overall winning party has won on some but not all of the issues. If you like this video, visit our website, www.fortiorlaw.com, or follow us on LinkedIn, Facebook or YouTube.
To start with, I would like to discuss some concepts and methods which arbitrators use when allocating costs. When allocating costs, arbitrators will look at whether or not the parties have reached an agreement on allocation in their contract, arbitration agreement or the applicable arbitration rules. If there is no such agreement, they will allocate costs on the basis that costs follow the event or on the basis that each party should have the costs of the issues upon which it won. It might be that the Tribunal wishes to allocate costs based on the parties' relative success or failure on different issues, but it may be impossible to do so, for example, because the parties' lawyers have not recorded their time for the different issues separately. Then, the Tribunal will generally award the overall winning party a proportion of its costs, applying a broad-brush discount to reflect the party's loss on some issues. Having decided who has to bear the costs liability in relation to a specific event or issue, the Tribunal will then consider whether to reduce the amount of the winning party's costs on account of its conduct or on the basis that the costs claimed are unreasonable or disproportionate. That costs follow the event means that the party who wins gets its costs.
The question is then, what is the relevant event for these purposes? The case law on this is relatively clear.
In Howell v Dering, the Court held that an event is "a finding that the plaintiff is or is not entitled to relief against the defendant".It may be practically difficult or impossible to allocate costs issue-by-issue or event-by-event. This is most often the case because the parties' lawyers do not record their time separately in relation to different issues or their claims and counterclaims. In Multiplex Construction v Cleveland Bridge, the Court held that judges should hesitate before making costs orders on the basis of issue-by-issue allocation where this is practically difficult. Instead, the Court opined in English v Emery Reimbold: "the judge should endeavour to form a view as to the percentage of costs to which the winning party is entitled". In Burchell v Bullard, the Court of Appeal said that an event is determined by "who writes a cheque at the end of the day".
There may be several events in one case, for example where there are a claim and a counterclaim. If the claimant wins on its claim and the defendant wins on its counterclaim, the Tribunal could, in theory, decide that the claimant should have its costs of the claim and the defendant should have its costs of the counterclaim. As opposed to events, there is no set definition for the word "issue", such that there is often confusion of what exactly the issue-by-issue allocation of costs involves. In Howell v Dering, the Court opined that an issue in this context is something which in itself, if decided in favour of the claimant, could give a right to relief or which, in itself, if decided for the defendant, will result in the defense succeeding.
Having decided who bears costs and whether a discount should be applied to the overall winner's costs to reflect its loss on some issues, the Tribunal will then consider whether to apply a further discount on account of the parties’ conduct or because the winner's costs are unreasonable or disproportionate. Insofar as conduct is concerned, the Tribunal will consider whether a party has grossly exaggerated its claim, whether too much time was spent on unnecessary evidence or an issue of fact on which the party lost, or whether a party's conduct in relation to an aspect of the case or a procedural issue was unreasonable. For example, a claimant might have won overall, but its witnesses may have been found to be lying on some issues, or the winning party may have made an unsuccessful procedural application in order to gain a strategic advantage.
Insofar as reasonableness and proportionality are concerned, the Tribunal is only entitled to award a reasonable amount in respect of costs which are reasonably incurred. In deciding whether or not a party's costs are reasonable and reasonably incurred, the Tribunal will compare the amount in issue to the amount of costs incurred, consider whether one party's costs substantially exceed the other's, whether the hourly rates charged are excessive and whether too much time was spent on specific issues.
In Fortior, we are working hard to streamline processes and create tools to increase efficiency and save the time necessary to complete client work. This is part of our strategy to reduce reliance on billing by the hour. One such tool is a costs decision tree and here is how it works.
When faced with an issue of costs, the first question one should ask is whether the parties have agreed on the way in which costs are to be allocated. The parties' agreement may be contained in their contract, arbitration agreement or arbitration rules. Agreements on the allocation of costs usually come in three forms. They provide either that parties are to bear their own costs, that the Tribunal may allocate costs as it considers appropriate, or that the winner gets its costs.
If there is no agreement, then the Tribunal will ask itself whether or not it is inappropriate to allocate costs on the basis that costs follow the event. The Tribunal's discretion on this is virtually unlimited. But some Tribunals consider that it is inappropriate to allocate costs on the basis that costs follow the event where the overall winner has lost on a large number of important issues. If it is not appropriate to apply the costs follow the event approach, the Tribunal will allocate costs on an issue-by-issue basis, provided that it is practically possible to do so. If it is not possible, for example, because the parties' lawyers did not record time issue-by-issue, the Tribunal will most likely apply a broad-brush discount to the winner's costs to reflect its loss on some issues.
If the Tribunal thinks that there are no good reasons to depart from the costs follow the event approach, then it will apply that approach. Turning back to the parties' agreements on costs, where the parties' agreement is that the Tribunal is to allocate costs as it considers appropriate, then effectively, there is no agreement, and we come back to the question of whether or not it is inappropriate to allocate costs on the basis that costs follow the event. If, on the other hand, the agreement that the winner gets its costs, then I would suggest that the Tribunal should allocate costs on the basis that costs follow the event, rather than delving into the different issues.
The concluding part of the analysis should in all cases be to consider whether the amount claimed by the overall winner or the winner on specific issues is reasonable and proportionate, and whether there should be any discount on account of conduct.
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