The issue of costs in arbitration is one of the factors to considered before deciding whether to resolve a dispute through arbitration or not. Indeed, arbitration is sometimes criticized as being an "expensive" dispute resolution mechanism. This article provides a general overview of costs and fees in arbitration, as well as the repartition of costs, in light of the survey conducted by the Chartered Institute of Arbitrators ("CIArb") titled "CIArb Costs of International Arbitration Survey 2011"1 ("Survey") and, finally, addresses the issue of how to reduce costs in arbitration.
Costs in arbitration may be analyzed under two different groups. The first group pertains to the fees related to the arbitration proceeding itself, which may not be attributed to a particular party. The second group are the costs related to the representation in arbitration, which are incurred directly by the parties during arbitration proceedings. In this article, the first group is referred to as "common costs" and the second group, as "party costs"2.
The most important cost related to arbitration proceedings is the arbitrator's fees. Administrative costs of the arbitration institution (assuming that the parties opted for institutional arbitration) also belong to this group.
Another group of costs and expenses are the costs related to the representation in arbitration, namely legal costs. This group is composed of the costs incurred by the parties, mainly based on regal representation. The main element within this group is counsels' fees and expenses. If experts are appointed by the parties, which is usually the case in international arbitration, the fees and expenses of these experts will also belong to this group.
Institutional vs. Ad hoc Arbitration
While institutional arbitrations are administered by one of the specialized arbitral institutions, such as the ICC, LCIA, or ISTAC (Istanbul Arbitration Centre), ad hoc arbitrations are not administered by such institutions. As there are no "administrative fees" concerning ad hoc arbitrations, it is useful to understand whether the latter is more cost-effective than institutional arbitrations.
The Survey is based on 254 arbitrations, conducted between 1991 and 2010, 62% of which are institutional arbitrations3. However, the findings of the Survey state that "It was not possible to make statistical observations as to whether institutional arbitration is more or less expensive than ad hoc arbitration or if arbitrations administered by one institution were more expensive than those administered by another."4
The fact that the parties would not have to pay administrative fees could be seen as an advantage with regard to ad hoc arbitration proceedings. However, it should be emphasized that there are many advantages with regard to institutional arbitrations, which justify the payment of these fees. Institutional arbitrations are conducted in accordance with pre-established rules and procedures, which facilitate the proceedings. Additionally, arbitral institutions provide assistance with regard to the different stages of the proceedings. Accordingly, the non-payment of administrative fees should not be decisive in order to conclude that ad hoc arbitrations would be less expensive than institutional ones.
Another issue to emphasize here is that the arbitral institutions propose cost-effective fee scales. For instance, the fee scales offered by the Istanbul Arbitration Centre5 are more cost-effective when compared to court litigation6. Considering that the proportional fees applied before Turkish courts, which total 6.831% of the disputed amount, may reach substantial amounts for high-value disputes, ISTAC arbitrations may be more cost-friendly than litigation before Turkish courts.
Repartition of Costs and Fees in Arbitration Proceedings
In order to comment on the possible ways to reduce costs in arbitration, understanding the repartition of costs and fees is important. Some interesting numbers from the Survey shed light on the understanding of repartition of costs.
According to the Survey, 74% of party costs were spent on external legal costs7. This percentage concerns the external legal fees (63%) and barrister fees (11%), if applicable. External legal costs are followed by expert costs, with a percentage of 10%.
When we take a closer look at the specific tasks, which the external legal fees are related to, 25% of the fees pertain to the exchange of pleadings phase. Fees concerning hearing-related tasks make up 37% of party costs, namely 12% on hearing preparation, 16% on hearings, and 9% on post-hearing tasks.
As per the allocation of common costs, 60% of these costs pertain to arbitral fees. The other common costs are arbitral expenses, as well as costs pertaining to hearing venue and transcripts.
It is also interesting to note that claimants spend 12% more than respondents in arbitration proceedings8.
Reducing Costs in Arbitration
The possibility to reduce costs in arbitration depends on various factors, such as the arbitrators, the parties, and how willing the parties are to resolve the dispute, as well as the particularities of the dispute at hand. Therefore, the explanations below would certainly not be relevant for each dispute, and should be tailored in accordance with each dispute.
The largest portion of the costs incurred by the parties during an arbitration proceeding pertains to legal fees. Accordingly, reducing counsel costs would have a great impact on the costs of arbitration in general. The use of experienced and cost-effective lawyers, who are familiar with the peculiarities of arbitration, could help with the reduction of legal counsel costs.
Even though arbitrator's fees are not the main factor that cause costs to rise, stipulating one arbitrator instead of three arbitrators would reduce arbitrator fees. On the other hand, it should also be kept in mind that it is not preferable to resolve all disputes by a sole arbitrator; therefore, these differing interests should be weighed in order to find a balance between reducing costs and resolving the dispute in the most effective manner.
Again, designing the arbitration procedure in accordance with the needs and interests of the parties is also quite important. This would include holding the hearing in a venue that is convenient for the parties and the arbitrators, or holding some of the meetings through teleconference or videoconference. It would also be helpful to take precautions to avoid any bad-faith procedural tactics of the counterparty, which may lengthen the proceedings. This goal could be achieved by providing detailed provisions pertaining to written submissions, such as the number of submissions, or by avoiding a lengthy document production request phase.
The issue of costs in arbitration is a very delicate issue that can be quite decisive in the decision of whether or not to initiate dispute resolution mechanisms. The correct understanding of the reasons that cause costs to rise is quite important in the techniques to be applied to reduce costs. All in all, different interests, whether legal or economic, should be weighed in order to reach a healthy conclusion about the issue of fees and costs in arbitration.
(First published on the website of Erdem & Erdem Law Office in July 2017)
1 CIArb Costs of International Arbitration Survey 2011, ("Survey"). Source: https://www.international-arbitration-attorney.com/wp-content/uploads/2017/01/CIArb-Cost-of-International-Arbitration-Survey.pdf.
2 This classification is based on the wording used in the Survey.
3 Survey, p.1.
4 Survey, p.2.
5 Istanbul Arbitration Centre Rules on Costs and Fee Scales, Appendix-3 to the Arbitration and Mediation Rules.
6 Introductory explanations on ISTAC official website, available at: https://istac.org.tr/en/dispute-resolution/arbitration/.
7 Survey, p.10.
8 Survey, p.13.