Reducing the cost of arbitration: could cost allocation be the answer?

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Summary: We all know that legal costs are a significant issue for clients and, whilst arbitration remains an extremely popular form of dispute resolution, “cost” is often seen as one of its worst features.

We all know that legal costs are a significant issue for clients and, whilst arbitration remains an extremely popular form of dispute resolution, “cost” is often seen as one of its worst features.

The majority of the costs incurred in arbitration proceedings are party costs (as opposed to tribunal fees and the administrative charges of the arbitral institution) and it’s generally accepted that the effective management of an arbitration is essential to reduce costs of arbitration. As clients come under increasing pressure to control legal costs, there is an increasing pressure to improve the management of time and costs in arbitration.

The issue is not new. It was recognised by the ICC Commission in its 2012 Report on Techniques for Controlling Time and Costs in Arbitration and the 2012 ICC Rules incorporate a range of techniques designed to ensure that the tribunal and the parties make every effort to conduct the arbitration in an expeditious and cost-effective manner.

However, in practice, the length of time it takes to conduct an arbitration has not been significantly reduced. In 2011, the Chartered Institute of Arbitrators’ Survey on the Costs of International Arbitration found that the average arbitration takes between 17 and 20 months. In 2015, data published by the LCIA  (based on arbitrations over the period 1 January 2013 to 15 June 2015) revealed that the mean duration for an arbitration was 18.5 months with a sole arbitrator and 21 months with a three member tribunal.

This data, coupled with survey responses (most recently the 2015 International Arbitration Survey conducted by White & Case and Queen Mary University of London), suggest that cost and lack of speed remain a significant problem in arbitration. This raises a couple of interesting questions:

  • How might these issues be tackled?
  • What should be the role of arbitrators, counsel and the parties in managing costs?

The role of the tribunal

The procedural innovation perceived by respondents to the 2015 White & Case/QMUL Survey as the most effective at controlling time and costs was a requirement for tribunals to commit to a schedule for deliberations and delivery of final awards. Whilst this proposal may well alleviate some of the frustrations (felt by clients and lawyers alike), over long delays between the end of an arbitration and the delivery of an award; it will do little to reduce the length and cost of the arbitration itself.

The role of counsel

The survey also explored what users thought arbitration counsel could do better. Four options were particularly popular:

  • Working with opposing counsel to narrow issues.
  • Limiting document production.
  • Encouraging settlement, including the use of mediation during an arbitration.
  • Avoiding disproportionate use of resources in the conduct of the arbitration.

These are all techniques that are recommended in most of the major institutional rules and guidelines, including the ICC’s Guide to the Effective Management of Arbitration for in-house counsel and other party representatives. This suggests that arbitration counsel may be reluctant to make full use of the techniques available to them.

The role of the parties

One of the major advantages of arbitration is that it offers the parties the flexibility to tailor-make an effective procedure that is suitable to the nature and complexity of the dispute. Some institutional rules (including SIAC and HKIAC) include simplified procedures for claims under a certain value that expedite the procedure and provide a fixed time for the delivery of an award. However, even in the absence of such a procedure, there is nothing to prevent the parties from agreeing a simplified process.

Options include:

  • Early determination of threshold issues, that could dispose of the entire arbitration, or discrete issues, that could narrow or simplify the remainder of the arbitration or facilitate settlement.
  • Limiting rounds of written submissions.
  • Limiting (or eliminating) document production.
  • Limiting (or eliminating) witness evidence and expert reports.
  • Deciding the case solely on documents, without the need for an oral hearing.

Whilst recognising that no one size fits all, and that strategic considerations will always have a significant impact on the management of an arbitration, the fact remains that very few parties really take advantage of the procedural flexibility that arbitration offers.

Could cost allocation be the answer?

The ICC Commission has recently published a new Report on Decisions as to Costs in International Arbitration. This report recognises the importance of controlling time and costs in arbitration and considers how the tribunal may use costs allocation as a tool for controlling time and costs at every stage of the arbitral process.

The standard for costs allocation under most arbitral rules is usually one of reasonableness and tends to be applied by considering whether the costs incurred are reasonable and proportionate in the context of the value of the claim and the overall importance and complexity of the matters in dispute. In assessing whether the amount of work done is reasonable, tribunals may take into account various factors which include:

  • The parties’ approaches to the determination of preliminary issues.
  • How the parties have dealt with document production.
  • The scope, relevance and extent of the evidence in written witness statements and expert reports.
  • The length and conduct of any oral hearings.

Historically, tribunals have tended to take a “broad brush” approach to the allocation of costs in arbitration and the vast majority of tribunals simply allocate all or part of the costs to the successful party without any detailed analysis of how those costs have been incurred.

In its latest report, the ICC Task Force has sought to identify stages in an arbitration when tribunals (and the parties) might use cost allocation powers to promote cost effective and efficient conduct of proceedings. It will be interesting to see whether tribunals are willing to assume greater control of time and costs by using their cost allocation powers and, if they are, whether this will encourage arbitration counsel and their clients to make greater use of the case management techniques that are available to them in arbitration.

This article was first published by Practical Law Arbitration Blog as part of our regular arbitration blog series in which we share our practical experiences of working in international arbitration and give our opinion on the current and future legal developments that shape and will shape the industry. To read more from the series, visit the Practical Law blog.

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