Costs in arbitration—when should parties make their submissions?

26 Aug 2014

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Edward Poulton and Anjuli Patel of Baker & McKenzie LLP discuss the thorny question of when parties should make their costs submissions and the consequences of that decision.

What's the issue?

Much has been said, and written, about the fact that arbitrations are lasting longer, the process is becoming more complex and, inevitably, this is giving rise to greater costs for the parties. While there is much discussion about how the parties should maximise the efficiency of the process, and how they manage their costs, it is equally important to focus on cost recovery. It is a crucial factor for parties to consider in weighing up whether to pursue or defend a case, and too often ignored until late in the procedure. An essential factor for parties to consider in this regard, but which is often overlooked (or its impact is underestimated), is the timing of when they should make their submissions on costs (and for the purposes of this article, we shall assume that costs submissions will be required, which is not always the case).

This decision may be impacted by the arbitration rules applicable to their arbitration, which may require the tribunal to deal with costs in a particular way. Some arbitration rules, such as those of the International Chamber of Commerce (ICC) and UNCITRAL, provide for costs to be fixed in the award. The tribunal then has the choice of either requiring the parties to make their costs submissions before it renders the award or dealing with the costs of the arbitration in a separate award, thereby reducing the status of the final award to a partial award on the merits of the case. Most rules—absent of any prescriptive provisions regarding how costs are to be dealt with—will typically leave the tribunal with a wide discretion as to the method and timing for the assessment of costs. The parties are therefore encouraged to decide when they should make their submissions on costs. Alternatively, the tribunal may need to make the decision.

Factors which the tribunal is required to consider when apportioning costs may also influence the parties' decision on the timing of their submissions. In its recently published guidance, ICC Arbitration Commission Report on Techniques for Controlling Time and Costs in Arbitration the ICC lists examples of parties' behaviour which should be considered unreasonable, including excess document requests, excessive cross-examination, exaggerated claims and failure to comply with procedural orders. Similarly, the new London Court of International Arbitration (LCIA) Rules, effective from 1 October 2014, will require the tribunal to take into account the parties' level of co-operation in facilitating the proceedings as to time and costs and any non-co-operation resulting in undue delay and unnecessary expense (Article 28.4 LCIA Rules 2014 and see LCIA Arbitration Rules 2014—some thoughts on the final draft).

There are generally two stages at which the parties can choose to make submissions on costs:

the English law approach of making submissions after the award on the merits and/or liability has been issued (ie the parties know the outcome of the case)
after the final hearing but before the award is rendered—an approach more commonly adopted in civil law jurisdictions

Costs submission after the award has been issued

Pros

Where the arbitration rules, such as those of the LCIA, require costs to be allocated to reflect each party's relative success and failure in the award, the parties and the tribunal may prefer to wait for the tribunal to render its award before making their submissions on costs. The advantage here is that the parties will know which of them will be required to pay the costs of the arbitration and in what proportion before embarking on adducing evidence to justify their costs which, on the basis of the allocation of liability in the award, may end up being irrelevant. In this way, the parties may avoid incurring unnecessary costs.

Where cases are particularly complex, one may consider it an unwieldy and unmanageable task for the tribunal to deal with costs in addition to the substantive issues of the case as part of the final award. From a practical perspective, the parties may prefer to make submissions on costs after the award to give them the opportunity to address each point in the arbitration and tailor their submissions by reference to the tribunal's allocation of liability. This facilitates an issue by issue merits-based approach, and may assist a tribunal in following the new emphasis on costs reflecting the merits. A successful party may find this option attractive because it will be able to itemise with greater precision and clarity the extent of its costs throughout the arbitration. Moreover, without being hindered by the threat of potential liability, the successful party will likely feel more confident in submitting arguments to justify these costs.

Cons

That said, one may argue that this approach could, in fact, be more advantageous for the losing party as it better equips the losing party to advance arguments as to why the winner's itemised costs are excessive and/or unreasonable. This option arguably only benefits the losing party (a 'loser's charter') as the successful party has little to gain.

Imagine, for example, the situation in which two parties incur the same level of costs, but incurred in very different ways. On the one hand, the winning party (W) incurs significant costs in solicitors' fees but comparatively less in barristers' fees. On the other hand, the losing party (L) incurs much less than W in solicitors' fees by instructing a firm with notably cheaper charge-out rates but relies heavily on its barrister in the arbitration and therefore incurs considerably higher barrister's fees than W. If submissions are to be made simultaneously before the outcome of the arbitration is known, both parties (and most crucially the tribunal) will be aware of the fact that the costs are of a similar magnitude, albeit different composition. In that situation, it is difficult for L legitimately to argue that W's costs are unreasonable.

Where submissions are made after the award, W will be required to submit a detailed breakdown of the costs it has incurred throughout the arbitration, revealing the amount of its solicitors' and barristers' fees. Conversely, L will not have to submit a breakdown of its costs because it will have been recognised by the outcome of the award that L will, at least in principle, be liable for W's costs. This affords L the benefit of being able to 'attack' W's costs without having to show its hand, for example, by arguing that there was no need for W to instruct such an expensive firm, challenging the hourly rate of W's solicitors by reference to its own cheaper solicitors' rates (but without having to reveal that it incurred substantially more than W in barristers' fees). Accordingly, where a party is less confident on the merits of its case and is concerned that it may lose the arbitration, by choosing to make costs submissions after the award, that party may be in a stronger position to advance arguments which would not otherwise have been available to it had the parties chosen to make submissions on costs before the award.

It is also important for parties to remember that the costs of dealing with costs allocation and costs assessment will themselves form part of the costs of the arbitration. Inevitably, the longer this process, the higher the costs. It follows that a clear disadvantage of making submissions on costs after the award is that it is likely to take longer and the parties are therefore likely to incur greater overall costs.

Another drawback of this approach is that it seeks to transpose into arbitration the arduous and lengthy process of English law costs assessment, a process for which arbitration is simply not designed. In the English courts, the question of costs is handed over to a specialist costs judge who is specifically qualified and experienced to deal with costs assessment at an entirely separate stage from the merits of the case. This is not the case in arbitration. It may therefore be said that by opting to make submissions after the award, the parties are choosing to use a tool for a purpose for which it is not built and in a context for which it is not intended.

Costs submissions before the award

Pros

One of the clear advantages of parties making their submissions on costs after the final hearing but before the award is that the threat of potential liability keeps the parties honest. In this instance, both parties are required to submit a breakdown of their costs and to justify the nature and extent of their costs without knowing the outcome on liability. In practice, this usually leads to the situation where both parties are arguing that the losing party should pay the successful party's costs: they cannot then complain when the tribunal decides just that in its award.

This approach also fosters a more level playing field between the parties and does so irrespective of the merits of the case. In this case, L in the example above would be required to submit a breakdown of its costs and make submissions accordingly. This time it would be revealed that while L instructed a cheaper firm, its barristers' fees were considerably higher than those of W—a fact which would otherwise never be made known to W or the tribunal. Here, W (as well as L) will have the chance to challenge the nature and extent of L's costs, and the tribunal will be able to make an order for costs in the knowledge that both parties' costs were of a similar level of magnitude.

Cons

The main objection to making submissions on costs ahead of the award is that the parties are unable to itemise their costs in the arbitration by reference to the allocated liability. On its face, this appears to undermine any attempt at an issue by issue merits-based approach. However, there is no reason why a proactive tribunal could not overcome this. For example, a tribunal could invite the parties to present their costs broken down into different categories so as to enable it to allocate costs to reflect the merits (for example, the tribunal may consider that the successful party was unreasonable in its document production requests, and may wish to order that while it should get its costs of other items, it should in fact pay the losing party's costs of that aspect of the case).

Is there a middle ground?

In some instances, it may be difficult to decide, or for the parties to agree whether to make submissions on costs after the award or after the final hearing but before the award. Where this is the case, one option as a middle ground is for the parties to each submit to the tribunal a breakdown of their costs in a sealed envelope only to be opened after the tribunal has rendered its award on the merits. The tribunal will then render the award and the parties will thereafter make their submissions on costs.

This compromise informs the tribunal of the reasonableness of the parties' submissions by reference to the numbers presented to them in the sealed envelope. It also affords the parties the benefits of: avoiding the inequitable position described between W and L in the example above; facilitating an issue by issue merits-based approach; and keeping the parties honest.

Filed Under: Arbitration