Part IX Costs, Funding, and Ideas for Optimization, 25 The Harmonization of Costs Practices in International Arbitration: The Search for the Holy Grail, C Discretion and Principles
From: Defining Issues in International Arbitration: Celebrating 100 Years of the Chartered Institute of Arbitrators
Edited By: Julio César Betancourt
25.15 Subject to any agreement and to the laws of the seat and procedural rules, the decision as to costs is in the discretion of the tribunal. However, with few exceptions, the provisions of the seat or procedural rules are largely permissive or provide outline guidance only, and hence, even in these cases, a wide discretion is preserved largely intact.
(p. 274) 25.16 The arbitration procedural laws of a number of jurisdictions expressly refer to the discretionary nature of costs.13 Published awards frequently include relevant comments which show that tribunals correctly apprehend the nature of the exercise: ‘As both Parties recognise in their written submissions, this Arbitral Tribunal enjoys a broad discretionary power in deciding the allocation of party (and other arbitration) costs between the Parties and (as regards party costs) assessing their recoverable amount.’14 ‘It is accepted that this rule gives the Arbitral Tribunal broad discretion in deciding on the costs of the arbitration.’15 ‘As pointed out by the prevailing doctrine “this wording is intended to permit the arbitrators the greatest possible discretion in fixing the costs of the arbitration pursuant to Art 31(3)”.’16 ‘Under Article 61(2), the Tribunal is granted discretion in making its determination with respect to the allocation of costs.’17 ‘Both the Convention and the Arbitration Rules give a tribunal broad discretion in the awarding of costs.’18
25.17 Although the discretion may be wide, the tribunal should make its decision on the basis of principle. In one investment arbitration, the ad hoc committee hearing annulment proceedings stated: ‘the Committee has broad discretion in determining costs. However discretion may not be capricious or arbitrary. It must be the result of rational consideration of relevant factors.’19 There is, further, clear national court authority for the desirability of exercising the discretion in a broadly predictable way.
25.18 Bingham LJ articulated this clearly: ‘While the exercise of any discretion necessarily means that there is an area within which the judge’s discretion is final and unchallengeable, it is highly desirable that the general lines on which a familiar discretion will be exercised should be generally known and broadly predictable.’20 This important point translates directly into arbitration practice because the same obligation of fairness to the parties applies both in litigation and arbitration.
25.19 Where a common practice may be identified, it is appropriate for the tribunal to have regard to that practice when exercising its discretion; thus where the expectation of all parties is, for instance, that costs should reflect the degree of success, it is important for the tribunal to have regard to that principle;21 and where it decides to depart from that principle, it must do so for a proper reason that it is able to justify.22
25.20 The state courts in many jurisdictions apply a success-based costs regime.23 International arbitration lawyers often commence their careers in state court litigation and this may influence their arbitration practice. There is frequently a presumption that similar principles apply in both forums. In the rare instances where an arbitrator’s decision on costs comes for review by the courts, it is generally taken as read that similar principles apply in arbitration as they do in court.24 Commentators on practice in a number of jurisdictions generally apply similar principles as apply in the state courts to arbitration practice.25
25.21 Some arbitration legislation specifically refers to success or outcome. The German legislation provides that ‘the arbitral tribunal shall allocate … the costs of the arbitration … it shall do so at its discretion and take into consideration the circumstances of the case, in particular the outcome of the proceedings’.26 The Austrian legislation uses similar wording.27 The Finnish Arbitration Act provides that ‘the arbitral tribunal may, in its award … order a party to compensate, in whole or in part, the other party for his normal legal costs, in accordance with the provisions of the Code of Judicial Procedure’. The Code provides that ‘[t]he party who loses the case is liable for all reasonable legal costs incurred by the necessary measures of the opposing party’, although there are exceptions to this principle.28
25.22 Mexican legislation stipulates that: ‘Except as provided in the following paragraph, the costs of arbitration shall be borne by the unsuccessful party. However, the arbitral tribunal may apportion each of such costs between the parties if it determines that apportionment is reasonable, taking into account the circumstances of the case. With respect to the costs of legal representation and assistance, the arbitral tribunal, taking into account the circumstances of the case, shall determine which party shall bear such costs or may apportion such (p. 276) costs between the parties if it determines that apportionment is reasonable.’29 The English legislation provides that ‘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’.30
25.23 Provisions in many leading arbitration rules expressly indicate a link between the exercise of the discretion as to costs award and the outcome of the case. The 2010 UNCITRAL Rules provide, for example: ‘The costs of the arbitration shall in principle be borne by the unsuccessful party or parties. However, the arbitral tribunal may apportion … taking into account the circumstances of the case.’31 Similar sentiments permitting the tribunal to exercise a success-based approach are expressed in most other rules, a selection of which includes the LCIA,32 TOMAC,33 WIPO,34 SCC,35 ACICA,36 Swiss,37 and CIETAC38 Rules.
(1) that where the claimant’s case was predominantly successful, so that one would say the claimant had prevailed in the case as a whole: (a) as to central costs, the tribunal apportioned these so that the unsuccessful respondent would pay all or high proportion in about 80% of cases. Where the tribunal did not do this, the tribunal in most cases (p. 277) explained its reason for not doing so, implying that it appreciated that this was against the trend; (b) as to party costs, the tribunal directed the unsuccessful respondent to pay the successful claimant’s reasonable costs or a significant proportion of them in about 50% of cases;
(2) where the claimant had some success but recovered approximately half the amount claimed or less, the most common outcome was to require both parties to pay central costs equally and to pay their own party costs although in some cases, the respondent was directed to pay a greater proportion of central costs and to meet some of the party costs of the claimant; and
(3) where the claimant’s claims were dismissed or the tribunal had no jurisdiction, the most common outcome was to order the claimant to pay the central costs and to pay the respondent’s reasonable party costs.39
25.25 This represents practice approximately a quarter of a century ago, but even then the principle of success-based awards as to costs was already becoming embedded. This trend had moved on further by 2009. In a review of 100 ICC awards published by Webster in 2009, he concluded that ‘the principle that the “costs follow the event” was generally applied’,40 although with considerable adaptation to the circumstances. In particular, central costs were awarded to the clearly successful party in 78 per cent of the awards and party costs awarded in 63 per cent. According to the survey, ‘tribunals consider various factors, such as procedural behaviour, when allocating costs’.
25.26 Webster notes that ‘One of the most striking aspects on review of these 100 cases is that, although parties are ordered to share costs on an equal basis on a number of occasions, there is not a single instance in which the tribunal expressly disagreed with the basic principle that costs should follow the event. The starting point for an ICC tribunal from whatever background is basically that costs should follow the event, subject to the exercise by the tribunal of its discretion’. The following excerpt from an ICC award illustrates the standard case—and more importantly the recognition that success is a primary factor: ‘In coming to its decision on which party should bear the costs or what proportion of the costs should be recoverable, the Tribunal follows the general principle that costs should normally follow the event, viz the party that prevails should normally be entitled to the costs incurred.’41
25.27 Finally, in a review published in Ong and O’Reilly, the authors carried out a review of 30 ICSID decisions42 and identified that even in these cases the majority of tribunals had regard to success when making their decision as to costs. A number of tribunals expressed the view strongly that this was essential where large claims were made with little merit.
25.28 Although success is the primary consideration, the tribunal may take account of any relevant factors or considerations. These will include, in particular, objectionable conduct. The rationale for this is obvious. When parties agree to arbitration, it by no means follows that they have consented to suffer their opponents’ delaying and diversionary tactics which prevent the matter being dealt with quickly, effectively, and fairly. While arbitration agreements may not explicitly refer to the requirement to act reasonably and in good faith during proceedings, in many cases it may be appropriate to imply such an obligation. This provides a suitable jurisprudential basis for sanctioning in costs a party which has conducted the proceedings other than reasonably and in good faith, even where that party has prevailed.
25.29 One important expression of the relevance of conduct in relation to costs is in the IBA Rules on the Taking of Evidence. Preamble 3 provides: ‘The taking of evidence shall be conducted on the principle that each Party shall act in good faith and be entitled to know, reasonably in advance of any Evidentiary Hearing or any fact or merits determination, the evidence on which the other Parties rely.’
25.30 Although restricted to matters of evidence, it expresses a wider principle. Article 9(7) provides: ‘If The Arbitral Tribunal determines that a Party has failed to conduct itself in good faith in the taking of evidence, the Arbitral Tribunal may, in addition to any other measures available under these Rules, take such failure into account in its assignment of the costs of the arbitration, including costs arising out of or in connection with the taking of evidence.’43 This provision has generally been welcomed by leading practitioners. Doug Jones, for instance, describes it as ‘a powerful disincentive for parties to refrain from dilatory tactics which ensures that the process will proceed in the most timely and cost effective manner’.44
25.31 In cases under the 1998 ICC Rules, conduct was a matter to which reference was frequently made. For example, in one award, the outcome and conduct were both referred to as the main factors: ‘A common method [ie principle by which liability for costs is allocated] is to award costs to the party having won the arbitration or, where there is no clear winner, to allocate costs in proportion to the outcome of the parties’ claims (“costs follow the event”). Another criterion adopted by arbitral tribunals under the 1998 ICC Rules is the general conduct of a party.’45
25.32 The 2012 version of the ICC Arbitration Rules now expressly includes reference to conduct. Article 40(5) provides: ‘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.’ Note that the rule refers specifically to: (i) conduct in the arbitration, not conduct in the performance of the underlying contractual obligations; and (ii) expedition and cost-effectiveness, so that what is being targeted is poor conduct that leads to impact on the opponent. We do not (p. 279) understand the draftsperson to suggest that the outcome—who won and who lost, etc—is of lesser importance than hitherto. The draftsperson must be assumed to have been aware of practice among ICC arbitrators and did not seek to realign it.
(1) the winning party did not act reasonably in the period leading up to commencement (eg a successful claimant may have commenced proceedings precipitately without offering a chance to consider settlement, or a successful respondent may have refused to discuss the matter, or, where appropriate, to engage in a reasonable form of mediation or conciliation);
(2) the respondent to a claim did not answer it appropriately;46
(3) objections were made inappropriately and/or were not withdrawn in a timely fashion;47
(4) the winning party may have drawn up its case in an unhelpful way, eg by failing to give proper particulars or alternatively by overloading the case with prolix pleadings with a myriad of irrelevant allegations;
(5) the winning party may have made unreasonable applications48 or excessive requests for disclosure/discovery or to strike out parts of the opponent’s case, etc;
(p. 280) (6) the winning party may have extended the hearing beyond what was required, eg by making prolix submissions, excessive examination of witnesses, calling inappropriate or irrelevant evidence, etc; and
25.35 Where the winning party’s conduct was unreasonable in some respect, the questions for the tribunal should be: (a) did that unreasonable conduct lead the opponent to incur additional costs; and (b) is the conduct worthy of censure independently of any impact it may have on the other party? It will be in the discretion of the tribunal to consider how it will take account of conduct.
25.36 A number of authors have identified emerging trends in the field of apportionment and allocation of costs. A leading text from 1999 states that: ‘It is increasingly common for the arbitral tribunal to order the party which is defeated on the merits of a dispute to pay all or a substantial part of the costs of the arbitration. That is traditionally the practice in some common law countries and now frequently occurs when the arbitral tribunal has its seat in continental jurisdictions, such as France or Switzerland. In reaching their decision on the allocation of costs between the parties, arbitrators may take into account the attitude of the parties during the arbitral proceedings.’49
25.37 The term ‘attitude’ appears to equate to ‘conduct’, in that conduct is the outward manifestation of the attitude. In a study from 2003, the same trends are identified: ‘An emerging trend can be recorded for the arbitration tribunal to order the losing party to pay all or the substantial part of the costs of the arbitration. This tradition is widely accepted and can be seen, for example, in England, in France and Switzerland. The other emerging trend in allocating costs between the parties is to take into account their attitude during the proceedings.’50 More recently, in 2011, an experienced practitioner reports: ‘Some arbitral decisions hold that the principle of “costs should follow the event” is becoming a governing principle in international arbitration. There is an emerging trend for arbitral tribunals to order the losing party to bear both the procedural costs and the legal costs of the other party unless the circumstances of the case warrant a departure from such rule.’51
25.1 The winning party ordinarily should be awarded all or a substantial portion of its reasonable costs. ‘Costs’ include court filing fees, fees paid to officials such as court stenographers, expenses such as expert-witness fees, and lawyers’ fees.
25.2 Exceptionally, the court may withhold or limit costs to the winning party when there is clear justification for doing so. The court may limit the award to a proportion that reflects expenditures for matters in genuine dispute and award costs against a winning party who has raised unnecessary issues or been otherwise unreasonably disputatious. The court in making cost decisions may take account of any party’s procedural misconduct in the proceeding.
25.39 The commentary supplied with the principles notes that ‘[a] fee-shifting rule is controversial in certain types of litigation but is generally considered appropriate in commercial litigation’.57
13 For example, British Columbia International Arbitration Act 1996, s 31(8): ‘Unless otherwise agreed by the parties, the costs of an arbitration are in the discretion of the arbitral tribunal …’; Australian International Arbitration Act 1974 (as amended in 2010), s 27(1): ‘The costs of an arbitration (including the fees and expenses of the arbitrator or arbitrators) shall be in the discretion of the arbitral tribunal.’
21 In The Erich Schroeder  1 Lloyd’s Rep 192, Mocatta J said: ‘In exercising his discretion judicially an umpire/arbitrator must have regard in the first place to the primary principle guiding courts and arbitral tribunals in the exercise of their discretion in relation to costs, namely, that costs follow the event’.
22 Reinhard Hans Unglaube and Marion Unglaube v Republic of Costa Rica, ICSID Case No ARB/09/20 and No ARB/08/1, Award (16 May 2012), fn 255 (‘While the Arbitration Rules (Art 44) suggest that these determinations are left to the discretion of the Tribunal, this discretion should be exercised in a justified manner’).
23 This includes Singapore, Malaysia, Hong Kong, Australia, New Zealand, Canada, and many of the European jurisdictions (see Sir Rupert Jackson, Interim Report, vol 2, which reviews a number of jurisdictions).
24 For example, in the Singapore case of VV v VW  2 SLR 929, Prakash J noted at : ‘The arbitrator’s decision was that the principle that costs should follow the event should apply’. This was not controversial; the complaint in that case was about whether the quantum was disproportionate and/or whether there was jurisdiction to award costs in respect of the counterclaim. In the Hong Kong case of Kin Shing (Leung’s) General Contractors Ltd v Chinese University of Hong Kong  HKEC 284, the question in issue was whether the arbitrator was entitled to take into account an offer of settlement when he awarded costs; this debate presupposed that costs will ordinarily be linked to the outcome, a point that was not controversial. Deputy Judge Chan stated at : ‘I regard the Arbitrator’s decision on costs as entirely fair and reasonable.’ See also Singapore Court of Appeal in Chin Yoke Choong Bobby v Hong Lam Marine Pte Ltd  1 SLR 137, which also confirmed that the Singapore courts follow the principle of ‘costs follows the event’.
25 Om Prakash Malhotra and Indu Malhotra, The Law and Practice of Arbitration and Conciliation (2nd edn, Lexis Nexis Butterworth 2006): ‘the practice which is sometimes followed in commercial arbitrations, of leaving each party to pay his own costs, possibly on the ground that any other order appears too “litigious” is not correct; unless the special circumstances of the case justify such an order’. See also Robert Merkin and Johanna Hjalmarsson, Singapore Arbitration Legislation Annotated (Informa Law 2009): ‘The position in Singapore, as in England, is that unless the parties agree to the contrary the arbitrators are entitled to award costs, and that costs follow the event … For the operation of the principle in judicial proceedings, see RC, Ord 59. There is nothing in the IAA or the Model Law which refers to the award of costs, other than s 21, which is concerned with their taxation.’
27 Austrian ZPO, s 609. See also Jenny W T Power and Christian W Konrad, ‘Costs in International Commercial Arbitration: A Comparative Overview of Civil and Common Law Doctrines’ in Christian Klausegger and others (eds), Austrian Yearbook on International Arbitration (CH Beck, Stämpfli & Manz 2007) 261–74.
31 2010 UNCITRAL Rules, Art 42.1: ‘The costs of the arbitration shall in principle be borne by the unsuccessful party or parties. However, the arbitral tribunal may apportion … taking into account the circumstances of the case.’
32 1998 LCIA Rules, Art 28.4: ‘the general principle that costs should reflect the parties’ relative success and failure in the award or arbitration, except where it appears to the Arbitral Tribunal that in the particular circumstances this general approach is inappropriate’.
33 TOMAC Rules, Art 44(2): ‘Upon application by a party for recovery from the other party of attorneys’ fees and other procedural costs of the arbitration, the Tribunal may in the arbitral award or by a separate order permit, to a reasonable extent and in consideration of the contents of the arbitral award, such recovery.’
34 2014 WIPO Rules, Art 73(c): ‘The Tribunal shall, subject to any agreement of the parties, apportion the costs of arbitration and the registration and administration fees of the Center between the parties in the light of all the circumstances and the outcome of the arbitration.’
35 2010 SCC Rules, Art 44: ‘Unless otherwise agreed by the parties, the Arbitral Tribunal may in the final award upon the request of a party, order one party to pay any reasonable costs incurred by another party, including costs for legal representation, having regard to the outcome of the case and other relevant circumstances.’
36 2011 ACICA Rules, Art 41.1: ‘Except as provided in Article 41.2, the costs of arbitration shall in principle be borne by the unsuccessful party. However, the Arbitral Tribunal may apportion each of such costs between the parties if it determines that apportionment is reasonable, taking into account the circumstances of the case.’ Art 41.2: ‘With respect to the costs referred to in Article 39(e) [the costs of the successful party], the Arbitral Tribunal, taking into account the circumstances of the case, shall be free to determine which party shall bear such costs or may apportion such costs between the parties if it determines that apportionment is reasonable.’
37 2012 Swiss Rules, Art 40(1): ‘Except as provided in Article 40(2), 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.’ Art 40(2): ‘With respect to the costs of legal representation and assistance referred to in Article 38(e), the arbitral tribunal, taking into account the circumstances of the case, shall be free to determine which party shall bear such costs or may apportion such costs among the parties if it determines that an apportionment is reasonable.’
38 2015 CIETAC Rules, Art 52(2): ‘The arbitral tribunal has the power to decide in the arbitral award, having regard to the circumstances of the case, that the losing party shall compensate the winning party for the expenses reasonably incurred by it in pursuing the case’.
40 Thomas H Webster, ‘Efficiency in Investment Arbitration: Recent Decisions on Preliminary and Costs Issues’ (2009) 25(4) Arb Int’l 469. The 100 ICC awards were being used as a control population: ‘Since one of the points of comparison on costs issues is the practice in international commercial arbitration in general, Table 2 is a summary of review of a random sample of 100 awards rendered in ICC international commercial arbitration between 2006 and 2008 with respect to costs, preliminary decisions on jurisdiction and bifurcation of proceedings.’
42 Ong and O’Reilly (n 2) ch 13.
46 For instance, in the Final Award in ICC Case No 14108 the tribunal remarked at : ‘It was not merely a question of the Joint Venture reasonably bringing its claims in these proceedings, but rather the reverse. It was only at the main hearing that the substance and strength of Respondent’s Defence to the claims emerged, for the first time, with the oral testimony of certain of Respondent’s factual witnesses. Until then, in the Arbitral Tribunal’s view, there was no sufficient answer clearly advanced by Respondent which could reasonably have led the Joint Venture to have concluded that its full claims were or might be unsustainable. By the time of the hearing, however, the course of these page proceedings was firmly set; and there could be no question of the Joint Venture changing that course then or after that hearing.’ At : ‘In these circumstances, for all these reasons, the Arbitral Tribunal considers that Respondent should bear all the legal costs incurred by the Joint Venture in regard to both the Counterclaims and the Claims.’ Reported in Albert Jan van den Berg (ed), Yearbook Commercial Arbitration, vol XXXVI (Kluwer Law International 2011) 135–201.
47 ICC Case No 14020, Final Award (2011) in Albert Jan van den Berg (ed), Yearbook Commercial Arbitration, vol XXXVI (Kluwer Law International 2011) 119–34. In setting out the reasons for its decision on costs, the tribunal included at  the fact that the ‘[b]uyer just days before the final hearing and after all written pleadings abandoned its objections to jurisdiction’.
48 ICC Case No 13507, Final Award (2010) in Albert Jan van den Berg (ed), Yearbook Commercial Arbitration, vol XXXV (Kluwer Law International 2010) 158–67. In this case, the claimant withdrew his claim and the tribunal decided that the central costs of the discontinued proceedings should be borne by the claimant. However, as to the party costs, the tribunal had regard to the conduct of the respondents, at : ‘However, the issue of general legal costs, fees and expenses should be viewed differently and in light of other fairness considerations. Claimant has succeeded in overcoming numerous and repeated applications by both Respondents to obtain a stay of these arbitral proceedings and to challenge the jurisdiction of the Sole Arbitrator to hear this case. Such applications—proven without merit—substantially slowed down the pace of these arbitral proceedings and unnecessarily delayed, among other things, the completion of the Terms of Reference and the general organization of this arbitration, including the timing for the submission of memorials, production of evidence and scheduling of a hearing on the merits. It is not to be excluded that had such disruptions not taken place, these arbitral proceedings would have ended by a final award on the merits before or shortly after the initiation of the liquidation of First Respondent. Under such circumstances, the Sole Arbitrator concludes that each Party shall support its own general legal costs, fees and expenses.’
49 Gaillard and Savage (n 3) 686.
54 ALI/UNIDROIT Principles of Transnational Civil Procedure, Scope and Implementation (n 52) 758.
55 ibid P–E, 759. See also the ALI website <http://www.ali.org> accessed 25 September 2015: ‘Principles of Transnational Civil Procedure can be used in judicial proceedings as well as in arbitration. The result is a work that significantly contributes to the promotion of a universal rule of procedural law.’
56 The principles are available on the UNIDROIT website in English, French, Chinese, German, Japanese, Persian, Spanish, and Turkish; a Russian version is also available. UNIDROIT website <http://www.unidroit.org> accessed 25 September 2015.
57 ALI/UNIDROIT Principles of Transnational Civil Procedure, Principle 25, Commentary P-25A <http://www.unidroit.org> accessed 25 September 2015.