Article New York Law Journal

Through the Looking Glass: Transparency in Arbitration Costs and Costs Allocation

At the beginning of October, the London Court of International Arbitration (LCIA) released an updated version of its costs and duration report.  This report builds on the original one published in 2015, which marked the first attempt by an institution to provide information on institutional cost calculations. For this updated report, the LCIA recruited the help of The Brattle Group to analyze the information gathered.  The report states that its purpose is to provide more transparency to the issue of costs and duration in arbitration -- a timely and appropriate goal in view of the increasing scrutiny arbitration has been under in the last few years, both in terms of escalating costs associated with arbitration and transparency (or lack thereof).

The new LCIA report compares costs of cases administered by the LCIA between January 1, 2013 and December 31, 2016 with an estimate of the costs for those same cases had they been administered by competing institutions that use ad valorem cost calculation methods. The LCIA developed its cost estimates by utilizing the costs calculation schedules and mechanisms made available by the other institutions. The report concludes that LCIA has the lowest costs as compared to the International Chamber of Commerce (ICC), the Hong Kong International Arbitration Centre (HKIAC), the Stockholm Chamber of Commerce (SCC), and the Singapore International Arbitration Centre (SIAC).  While the LCIA cases analyzed had a median cost of USD 97,000, including both tribunal fees (USD 69,000) and administrative charges (USD 17,000), the rest of the institutions ranked in the following order, from lower to higher, given the estimated median costs (and tribunal fees / administrative charges breakdown as noted in parenthesis):

(1) SCC: USD 133,000 (97,000 / 26,000);
(2) SIAC: USD 169,000 (146,000 / 23,000);
(3) HKIAC: USD 199,000 (177,000 / 22,000); and
(4) ICC: USD 199,000 (146,000 / 53,000).

Other institutions like the ICC, SCC, HKIAC and SIAC have also followed LCIA’s original initiative to publish reports on costs and duration of arbitrations since 2015.  The ICC published its first and only costs report in 2015; SCC published its report on costs in February 2016; SIAC published its most recent report in October 2016, and the HKIAC published its updated report in October 2017, right after the publication of the LCIA’s report.
Unfortunately, given the disparity in the number of cases and the amounts in dispute in the underlying cases, it is not possible to compare the data between the reports from different institutions.  This is why the LCIA’s report utilized the cost calculation tools of other institutions to its own cases to generate reliable comparables and figures.  That said, based on their own caseloads, the 2016 SIAC report, which analyzed data from April 1, 2013 to July 31, 2016, reveals that its median total costs of arbitration was USD 29,567. The recent HKIAC report notes a median cost of arbitration of USD 40,671 for cases between November 1, 2013 and October 13, 2017.  

A comparison of costs between commercial and investment arbitration runs into similar, if not even more complex issues, when attempting to compare costs between institutions. That said, in broad terms, costs in investment arbitration have generally been considerably higher than in commercial arbitration.  In fact, an analysis published on February 29, 2016 in the Kluwer Arbitration Blog, based on information from ICSID cases available between 2011 and 2015, noted that the median ICSID tribunal costs totaled USD $875,907.97.  In view of the information contained in the latest LCIA report, this figure surpasses most institutions handling commercial disputes even for cases involving amounts in controversy in excess of USD $100,000,000. This suggests that the large difference in costs between commercial and investment cases is attributable in part to the exorbitant amounts in dispute found in investment cases as well as the prolonged duration of investment arbitration, which often involve separate jurisdictional and merits phases that can take several years to complete.
While institutions are doing their share to increase the transparency of cost calculations, we now turn to review what arbitral tribunals are doing to address similar transparency concerns regarding costs determinations. One of the key ways that tribunals can provide additional transparency to the process is by including detailed reasoning regarding the cost allocation decision.   As we note below, however, this is not the norm, which is particularly concerning given that there is no uniform practice regarding cost allocation.

Most institutional rules have no specific rules as to how costs are to be allocated by tribunals. Rather, they simply grant discretion to tribunals to award and allocate costs as they see fit.  Historically, the majority of tribunals in commercial arbitrations have opted for the “loser pays” approach.  The principle underlying this approach is that a prevailing party is entitled to recover those costs that reasonably led to its victory. Some commentators have characterized such costs as a necessary part of any order to pay full reparation or compensation given that such costs constitute an unavoidable harm.  Even for tribunals that have opted for this approach, however, there has been a diversity of approaches applied in determining the ultimate cost allocation.  Some tribunals, for instance, take a binary approach in determining who the winner and loser are, and then awarding costs accordingly.  Other tribunals take a more particularized approach, assessing success regarding specific claims and defenses.  Thus, for instance, if a claimant succeeds on two out of the three claims that they asserted, they may only be awarded two-thirds of their costs.

Both the 2016 SCC and the 2015 ICC reports on costs and costs allocation confirm the tendency that the majority of tribunals opt for a “loser pays” approach, mostly awarding costs to the winner.  Furthermore, the 2015 ICC report on costs references language from numerous tribunal awards generally citing the following ten factors as the most commonly noted reasons for different apportionment methodologies: 1) whether the parties could have avoided the arbitration; 2) principles of cost allocation in the applicable law; 3) agreements between the parties on costs; 4) costs incurred in determining preliminary issues; 4) procedural behavior of parties; 6) reasonableness of costs; 7) legal and factual complexity of the claims; 8) parties’ legal fees and expenses; 9) disparities between the costs claimed by each party; and 10) recoverability of different types of costs.

Investment arbitration tribunals, in contrast to their commercial counterparts, have traditionally favored dividing costs evenly between parties, irrespective of the final result reached. Given that investment arbitration derives from principles of public international law, having the parties each bear their own costs has been thought to avoid offending national sovereignty.

In recent years, however, a growing number of investment arbitration tribunals have resorted to the “loser pays” approach of cost allocation. ICSID tribunals who have opted for the “loser pays” system have generally argued in favor of this approach in view of (i) reasonableness of costs that are proportional to the amount in dispute, (ii) the risk that parties assume when initiating a dispute, and (iii) the need to deter frivolous or bad faith claims. In deciding the allocation of costs between the parties, tribunals have regularly pointed to the same type of factors listed above used by commercial arbitration tribunals when applying the “loser pays” methodology. However, a review of costs awards by ICSID tribunals showed us that tribunals, for the most part, have issued vague costs decisions that provide no lucid reasoning as to why a party is entitled to certain costs and not others. Indeed, the majority of investment tribunals fail to provide any detailed reasoning regarding the mechanism applied or the calculation used.  Parties are therefore left with a great deal of uncertainty regarding the award for costs. Unfortunately, it is this sort of vagueness that directly jeopardizes the efforts to increase transparency in arbitration.

Respondents of the 2015 Queen Mary International Arbitration Survey ranked cost and lack of insight into arbitrator decision-making as the worst features of arbitration.  To address these concerns, it is important to continue efforts at increasing transparency regarding costs and cost allocation decisions. Institutional attempts at providing open access to their costs figures and calculations are a commendable step that should be embraced by all institutions.  Developing a consistent reporting model to facilitate comparison across institutions, perhaps in line with the LCIA report, would also be a welcomed step. Arbitral tribunals in both commercial and investment arbitrations also will need to continue their efforts to produce costs decisions that will meet the transparency expectations of parties. These combined efforts will enable end-users to make better decisions regarding the selection of dispute resolution mechanisms that will meet their needs.