Cost allocation in international arbitration is a significant concern for the parties of the dispute, as well as a debated topic among the practitioners and the scholars. The costs associated with arbitration may be grouped as procedural and parties' costs1. While procedural costs may be illustrated as fees and expenses of the arbitrators, in addition to the administrative expenses of the arbitration institution, the party costs consist of fees and expenses incurred due to a party's presentation of its case before the arbitral tribunal2.
The Methods for Allocation of Costs
In terms of cost allocation, international arbitration practice has broad flexibility. There is no uniform approach towards the division of costs among the parties of the dispute; hence, the discretion of arbitral tribunals is remarkably divergent in this field. Although this variance appears to create obscurity in costs allocation at first glance, there are three approaches that are commonly used by the practitioners, which are: the Costs Follow the Event; the Apportionment of Costs and the American Rule.
Costs Follow the Event
This outcome-based approach that refers to "Loser Pays All," and the losing party is assessed the costs of the arbitration3. Thus, the successful party of the dispute gets full indemnification of the legal costs incurred4. This approach, which was developed in the English court system, has spread to many other common law jurisdictions, with the notable exemption of the United States of America5.
According to a survey on the preferred practices in the arbitral process ("Survey"), in 50% of the awards examined, the arbitral tribunals applied the Costs Follow the Event method for cost allocation6. The Costs Follow the Event appears to be the most preferred method amongst the arbitral tribunals, especially in ICC arbitrations7. Nevertheless, it shall be noted that in the last few years, the arbitral tribunals have been taking into consideration factors, such as the relative success and conduct of the parties in the proceedings and have a tendency to move towards other methods, such as the Apportionment of Costs.
Apportionment of Costs
Another outcome-based approach that allocates costs in line with the award is the Apportionment of Costs / Proportional Allocation method. According to this method, the parties bear the costs in line with the actual success they have gained on the merits.
According to the Survey, the arbitral tribunals applied the Apportionment of Costs method in 30% of the arbitrations reviewed; hence, it rose to the level of the second-favored cost allocation method amongst the three.
By taking into consideration the relative success of the parties, this method is claimed to provide more equitable results. Since it is not always possible to detect "the actual winner" at the end of the arbitration, proportional allocation enables the tribunal to rule for parties to bear the costs on each individual claim or defense raised. It is emphasized that it is not equitable to count a claimant who failed on a complex, lengthily argued dispute, or a defendant who successfully dismissed the majority of a claim, to be noted as the "loser."8
The followers of this approach underline that in the event that the monetary results do not reflect the actual balance of the merits, the Apportionment of Costs appears to be more practical9. To the contrary, this method is criticized where it is applied with a strict mathematical approach, as it fails the fairness test in cases where the parties claim unreasonable legal costs with significant discrepancy10.
The last approach towards the allocation of costs is the American Rule, which prescribes equal share as to the procedural costs, while the remaining costs are borne by the one who incurred the cost, unless a statute or an agreement regulates the opposite. Hence, unlike the above-mentioned methods, the American Rule is outcome-neutral.
The American Rule, which stems from English Common Law has been maintained in the American legal system, while England has moved towards to the Costs Follow the Event method, over time11.
The followers of this approach state that it encourages promising claims and lowers the barriers to arbitrate, since the parties bear the risk of the costs they have incurred, in contrast to the higher risks that may be faced upon the application of the outcome-based methods12.
Although cost efficiency has been one of the major factors leading parties to choose arbitration as a method for dispute resolution, the parties sometimes face unreasonable costs by the end of the arbitration.
Since there is broad flexibility in terms of cost allocation, the methods applied by the arbitral tribunals have vitality for the parties willing to resolve their dispute through arbitration. The Costs Follow the Event, which basically rules that the loser bears the costs, appears to be the most popular method. While the American Rule reduces the cost-related concerns of the parties willing to arbitrate, the Apportionment of Costs method provides a better answer to the question of "Who is the actual winner?"
(First published on the Erdem&Erdem website in January 2018)
1 For further details on costs in arbitration, please see: Ezgi Babur von Schwander, "Costs and Reduction of Costs in Arbitration", Erdem & Erdem Newsletter July 2017, available at: http://www.erdem-erdem.av.tr/publications/newsletter/costs-and-reduction-of-costs-in-arbitration/.
2 Micha Bühler, "Awarding Costs in International Commercial Arbitration: an Overview", ASA Bulletin, Association Suisse de l'Arbitrage; Kluwer Law International 2004, Volume 22, Issue 2, p. 249.
3 Gustav Flecke-Giammarco, "The Allocation of Costs by Arbitral Tribunals in International Commercial Arbitration", in Jorge A. Huerta-Goldman , Antoine Romanetti , et al. (eds), WTO Litigation, Investment Arbitration, and Commercial Arbitration, Global Trade Law Series, Volume 43, Kluwer Law International 2013, p. 412, available at: http://www.kluwerarbitration.com/document/KLI-Huerta-Ch13a.
4 Jenny Power / Christian W. Konrad, "The Award - Costs in International Commercial Arbitration-A Comparative Overview of Civil and Common Law Doctrines", in Christian Klausegger, Peter Klein , et al. (eds), Austrian Yearbook on International Arbitration, Volume 2007, Manz'sche Verlags- und Universitätsbuchhandlung 2007, 263, available at: http://www.kluwerarbitration.com/document/kli-ka-1006-212?q=%22The%20Award%20-%20Costs%20in%20International%20Commercial%20Arbitration%20%E2%80%93%20A%20Comparative%20Overview%20of%20Civil%20and%20Common%20Law%20Doctrines%22.
5 Christopher Koch, "Is There a Default Principle of Cost Allocation in International Arbitration? - The Importance of the Applicable Provisions and Legal Traditions", Journal of International Arbitration, Kluwer Law International 2014, Volume 31, Issue 4, pp. 492, available at: http://www.kluwerarbitration.com/document/kli-ka-joia-310404?q=%22%27Is%20There%20a%20Default%20Principle%20of%20Cost%20Allocation%20in%20International%20Arbitration%22.
6 Queen Mary University and White & Case, "2012 International Arbitration Survey: Current and Preferred Practices in the Arbitral Process", p. 40-41, available at: http://www.arbitration.qmul.ac.uk/docs/164483.pdf.
7 Flecke-Giammarco, p.412.
8 Richard H. Kreindler, "Final Rulings on Costs: Loser Pays All?", ASA Special Series, No. 26, p.11, available at: www.transnational-dispute-management.com/article.asp?key=1505.
9 Robert H. Smit, & Tyler B. Robinson, "Cost Awards in International Commercial Arbitration: Proposed Guidelines for Promoting Time and Cost Efficiency", The American Review of International Arbitration vol. 20, no. 3 (2010): 267-283; Flecke-Giammarco, p.413.
10 Koch, p. 493.
11 Koch, p. 489.
12 Kreindler, p.4.