Successful Party Recovers Full Amount of Legal Fees in Arbitration

A recent decision in British Columbia supports the proposition that, in commercial arbitration at least, the successful party may expect to fully recover their reasonable legal costs and expenses. Do recent changes in the B.C. Arbitration Act reinforce that principle?

In Allard v. The University of British Columbia, 2021 BCSC 60, Madam Justice Karen Douglas says that “the “normal rule” in arbitrations is that the successful party is entitled to “indemnification costs unless there are special circumstances that would warrant some other type of costs.” [Paragraph 78]

“Indemnification costs” are a party’s actual legal costs and expenses, and contrast with the partial costs normally awarded by courts in civil litigation, usually based on a percentage formula, fixed tariff or some other principle.

Justice Douglas said this “normal rule” is consistent with general policy behind arbitration, as well as the wording of the previous version of the B.C. Arbitration Act and the applicable Rules of the British Columbia International Commercial Arbitration Centre (BCICAC), which applied to the Allard case.

The Act and Rules were replaced in 2020. More on that later.

The dispute in Allard involved a disagreement over the interpretation of the terms of a large donation Peter Allard had made to the UBC law school. The dispute went to arbitration and the arbitrator decided in favour of the university. He also awarded “actual reasonable costs” to the university.

In appealing the arbitrator’s decision and the costs award, Allard argued that the Act and Rules merely authorise an arbitrator to award actual reasonable costs and the arbitrator was wrong to place the burden on the unsuccessful party to show why full costs should not be awarded. He argued that such “elevated costs” would have a “chilling effect” on domestic arbitration. The court did not agree.

As noted by Justice Douglas:

[71] The Arbitrator reviewed the statutory framework and the authorities cited by the parties before turning to his analysis. He described various factors as deserving of consideration in the exercise of his discretion and awarded indemnity costs in favour of UBC. He rejected the petitioners’ submission that indemnity costs are “elevated” costs in an arbitration setting, stating as follows:

[24] …the proper framework for the exercise of an Arbitrator’s discretion in awarding costs is to start with an examination of whether the party claiming costs is “successful” and then, to determine how the Arbitrator’s discretion should be exercised according to all of the factors involved, including any bad faith actions on the part of any party, or noncompliance with the BCICAC Rules, or the Arbitration Act.

[25] The Claimants have asserted forcefully that it is wrong for an Arbitrator to consider that the “default” position is that a successful party should receive actual reasonable costs. The authorities cited in fact support a conclusion that provided a party is determined to have been successful and that there is no reason to parse success, then the issue is whether considering all of the factors involved in the exercise of a discretion, there is any reason to award costs on a basis other than actual reasonable costs.

[72] The Arbitrator expressly noted that he did not base the Costs Award on a “default” position but rather on the factors he reviewed, the Arbitration Act, the BCICAC Rules, and the relevant authorities. He accepted that UBC’s actual costs were required to be reasonable and ordered UBC to provide a documentary basis for all amounts claimed, subject to solicitor-client privilege.

When a party is “wholly successful” on the “sole issue” in arbitration, the arbitrator isn’t required to make a finding of misconduct as a prerequisite to awarding the party its actual reasonable legal costs”, Justice Douglas said.

She also to referred to the comments made by the Attorney General when introducing the amendments to B.C.’s Commercial Arbitration Act in 1990, as recorded in Hansard:

“An amendment to the Commercial Arbitration Act will clarify an arbitrator’s authority to award costs for actual reasonable legal fees, disbursements, arbitrators’ fees, expert witness fees and expenses of the arbitration hearing. This is an interesting amendment. It will preserve a desirable feature of arbitration: namely, the ability of a party to recover its actual costs. The amendment will help to ensure that the Commercial Arbitration Act remains an attractive option for business people”. [at paragraph 80; Justice Douglas’s emphasis added]

The changes to the Arbitration Act and related rules which came into effect in 2020 are not much different from those earlier provisions, but have they moved away from the idea that the successful party should recover its full costs, absent reasons to the contrary?

Under the previous BCICAC Rules of Procedure for Domestic Commercial Arbitration, Section 41 said:

(1) The arbitration tribunal shall determine liability for costs and may apportion costs between the parties.

(2) In awarding costs, the arbitration tribunal shall take into account the principles set out in Rule 21(2), and the failure of any party to comply with these Rules or the orders of the tribunal. The tribunal shall provide reasons in the event it departs from the principle that costs follow the event.

(4) Costs include:

(c) the legal and other expenses reasonably incurred in relation to the arbitration by a party determined by the arbitration tribunal to be entitled to recover such costs;…

(my emphasis)

Section 21(2) said: “The arbitration tribunal shall strive to achieve a just, speedy and economical determination of the proceeding on its merits.”

The BCICAC is now known as the Vancouver International Arbitration Centre (VanIAC). It has been designated to perform certain appointment and administrative functions under the new Arbitration Act, which came into force in 2020.

One significant difference under the new statute is that VanIAC’s Domestic Arbitration Rules (also effective September 1, 2020) do not expressly refer to costs. They just deal with procedural matters. Substantive matters, including when and how to award costs, are left to the Act.

Section 50 of the Act has been changed from Section 11 of the previous Act. It still provides that costs are in the discretion of the tribunal, unless otherwise agreed by the parties. An award of costs may be made at any time during the arbitration and may include a partial award. A costs award may include:

(i) the fees and expenses of the arbitrators and expert witnesses;
(ii) legal fees and expenses;
(iii) any administration fees of an institution;
(iv) any other expenses incurred in connection with the arbitral proceedings.

The section goes on to say that the tribunal may determine which party must pay costs, the amount, and how they are to be paid. It also says the tribunal may determine costs by reference to “actual reasonable legal fees, expenses and witness fees.” The tribunal may also take any settlement offer into account when awarding costs.

These provisions are not substantially different from the principles adopted by the court in Allard. The main difference is that the previous provisions in the BCICAC Rules, expressly referring to the “principle that costs follow the event” no longer apply. However, “loser pays” remains the general rule, both in arbitration and litigation.

In Ontario, courts have said the Arbitration Act, does not limit an arbitrator to the factors which courts use to determine costs under the Rules of Procedure. In Azurix North America Engineering Corp v Deep River [2006] OJ No 2143 (SCJ)), the court said Section 54 of the Arbitration Act sets out its own “mini-costs-code”, which grants the arbitrator a broad discretion to award costs, consist of the parties’ legal expenses, tribunal fees and expenses and “any other expenses” related to the arbitration.

This means that cost awards in arbitration need not follow the general rule that courts award only a portion of the successful party’s costs, absent some factor which would justify a higher (or lower) costs award, such as a rejected settlement offer, or conduct which unnecessarily increased the cost of the proceeding.

It is also noteworthy that, unlike B.C. and other arbitration statutes and institutional rules, the Ontario Arbitration Act does not require that the costs awarded be “reasonable”. However, as the court said in the Azurix case:

Clearly, a discretionary power conferred on a judicial or quasi-judicial body cannot be exercised arbitrarily, irrationally or whimsically. It must be exercised judicially. I think the arbitrator here did act judicially in determining how to award costs. [paragraph 11]

So the essential questions in most arbitrations still include:

• Who was the “successful” party? Do you look at the overall result or individual issues?
• What costs are reasonable in the circumstances of the case?
• Is there a reason for departing from a general principle that the successful party should recover their reasonable costs?

That answers to those questions remain firmly in the discretion of the arbitrator.