Costs in International Arbitration: What’s “Reasonable?”

In a previous column, I looked at some principles behind awards of legal costs and expenses in Canadian domestic arbitration.

In international arbitration the general rule is that the unsuccessful party pays the successful party’s costs. The question, usually, is how much?

The high cost of international commercial arbitration is the main source of complaint by users of the system, according to a series of surveys by Queen Mary University of London between 2013 and 2018. Costs have continued to increase steadily. In large commercial and in investor-state disputes, they can be in the millions (or tens of millions) of dollars. Or pounds, or euros.

In a 2019 article, Professor Mohamed S. Abdel Wahab, of Cairo University, says there are two main factors driving complaints about arbitration costs.

First, are the fees charged by arbitral institutions and the arbitrators themselves. Plus the costs of translation, transcripts, tribunal secretaries, and – in pre-pandemic days – travel.

However, those costs are “a drop in the ocean” compared to the fees and expenses of legal counsel, advisers and expert witnesses.

(For detailed analysis of all of these costs see: Mohamed S. Abdel Wahab, ‘Costs in International Arbitration: Navigating Through the Devil’s Sea’, in Jean Engelmayer Kalicki and Mohamed Abdel Raouf (eds), Evolution and Adaptation: The Future of International Arbitration, ICCA Congress Series, Volume 20 (International Council for Commercial Arbitration/Kluwer Law International 2019) pp. 465 – 503.)

Although the UNCITRAL Model Law on International Commercial Arbitration makes no provision for costs, the UNCITRAL Arbitration Rules do.

Article 42(1) of the Rules says:

The costs of the arbitration shall in principle be borne by the unsuccessful party or parties. 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.

“Costs” are limited to those listed in Article 40(2). They include the reasonable fees and expenses of the arbitral tribunal and the fees of the appointing or administering body. And they include:

(e) The legal and other costs incurred by the parties in relation to the arbitration to the extent that the arbitral tribunal determines that the amount of such costs is reasonable;

As many commentators have noted, cost considerations are – or should be – a driving factor at every stage of arbitration, from the original agreement to arbitrate, through the decision to give notice of arbitration, all of the pre-hearing procedural steps, and the hearing itself. There are wide disparities in what costs tribunals consider to be “reasonable” at each stage. (See for example: Jean-Claude Najar, ‘How to Mitigate Legal and Arbitration Costs: Considerations by a User’, in Albert Jan Van den Berg (ed), International Arbitration: The Coming of a New Age?, ICCA Congress Series, Volume 17 (© Kluwer Law International; ICCA & Kluwer Law International 2013) pp. 305 – 320

In PHILIP MORRIS ASIA LIMITED v. AUSTRALIA, Permanent Court of Arbitration (PCA) Case No. 2012-12, the panel considered the allocation and calculation of costs under the UNCITRAL Rules at the end of a long, complex arbitration in which each party was successful on some issues and unsuccessful on others.

The tribunal had to consider what costs were reasonable in the circumstances. The Claimant argued that it would be reasonable to split the costs equally, with each party paying half of the arbitration fees and expenses and all of its own legal expenses. The Respondent argued that the question when determining costs is which party is successful overall, not who was successful on each issue. Since the Claimant was not successful in the end, they should pay all of the costs. Both parties referred to dozens of investor-state cases which supported their arguments.

The Tribunal concluded that the words “in principle” in Article 42(1) create a presumption that the unsuccessful party will bear the costs. However, the wording of the next sentence makes it equally clear that the Tribunal has discretion to depart from this result if it finds that the circumstances of the case at hand make another result more “reasonable”.

The Tribunal also concluded that the “unsuccessful party” is the one whose requests for final relief sought in the arbitration have been dismissed, even if that party prevailed on some of the procedural, factual or legal issues along the way. Nonetheless, the Tribunal decided that it was reasonable in the circumstances to award the Respondent only a portion of its costs (the actual percentage and amount are redacted in the published award). In deciding whether the amounts claimed in legal costs were reasonable, the Tribunal looked at costs awarded in other comparable investor-state cases.

Canada’s international arbitration statutes are based on the UNCITRAL Model Law, with some variations.

In Ontario, the International Commercial Arbitration Act, 2017, simply incorporates the Model Law by reference and offers little guidance on how it should be applied.

Other provinces have more detailed implementing statutes.

In British Columbia, for example, Section 31(8) of the International Commercial Arbitration Act says “unless otherwise agreed by the parties, the costs of an arbitration are in the discretion of the arbitral tribunal” and that those costs may include “legal fees and expenses.”

Arbitral institutions also have rules governing costs. Article 38 of the Vancouver International Arbitration Center’s International Commercial Arbitration Rules says: “the costs of arbitration shall be borne by the unsuccessful party unless the arbitral tribunal determines that it is appropriate, taking into account the circumstances of the case, to apportion the costs between the parties.” Costs include the “reasonable legal fees and expenses, as determined by the arbitral tribunal, of the successful party…” Article 37(1)(e).

Factors that the tribunal may consider when deciding if costs are reasonable include:

• Whether the costs are proportional to the amount in dispute
• The conduct of either (or both) of the parties , especially conduct which unnecessarily increased the costs
• Success on significant procedural matters
• The ultimate degree of success by each party, especially if there were inflated claims by either party

If costs fall outside the scope of the arbitration, they are beyond the authority of the Tribunal.

For example, under Art. 38(1) of the International Chamber of Commerce Rules of Arbitration, costs include “the reasonable legal and other costs incurred by the parties for the arbitration”. Costs that are not “for the arbitration” are not be recoverable.

A party may claim legal costs incurred before the arbitration started. These may include initial legal advice, settlement negotiations, obtaining and reviewing evidence, and preparing the claim. Sometimes pre-arbitration costs may include mediation, especially where mediation is a pre-condition for arbitration. Are those “for the arbitration”?

A party may also seek recovery of some of its internal costs relating to the arbitration. These could be recoverable under the ICC Rules which refer to “legal and other costs incurred by the parties.” But are they recoverable under the British Columbia statute and VanIAC Rules, which refer to “reasonable legal fees and expenses”?

For example, to save time and money, a party might take on some or all of the task of collecting and organizing documents and other evidence, rather than paying to have the lawyers or paralegals do it. Do those costs still qualify as “legal fees and expenses”?

Contingency fees are also problematic in international arbitration. These arrangements are more common in jurisdictions where the default rule is that each party bears its own costs, win or lose, unless there is misconduct or some other overriding factor. Are they appropriate in a “loser pays” regime? Does the Tribunal have the jurisdiction to determine whether a contingency fee agreed between a party and their counsel is “reasonable”?

In international arbitration, all of these questions are made more difficult by the fact that the parties may come from jurisdictions where there are very different expectations about how much arbitration should cost and who should pay.

Arbitrators must weigh all of these factors in light of the circumstances of each matter.

And Counsel must be aware of them, and give careful consideration to the potential cost consequences, when they embark on an international arbitration matter.