Cost recovery is often a key consideration for parties both in contemplation of and during international arbitration.
As with all other forms of dispute resolution, the overall cost to parties will largely depend on the nature of the dispute and the length and complexity of the procedure required to determine it. By way of example, even a relatively low value dispute concerning many technical facts is likely to require extensive witness and documentary evidence. Such a dispute may cost far more than a higher value dispute which simply turns on a point of contractual interpretation.
Accordingly, parties should be well informed in relation to the type of costs that they may incur and the rules applicable to allocation of costs.
Type of costs which may be incurred
Parties' arbitration agreement may specify that a particular institution is to be engaged to assist with the administration of the arbitration. Even if that is not the case, parties may still opt to use such an institution to facilitate the appointment and formation of the arbitration tribunal.
Involvement of an institution will inevitably involve incurring cost. The nature and amount of those costs will depend on which institution is being engaged and the purpose for which it is engaged, but potential costs include filing fees, tribunal appointment fees and, if the institution is to remain involved post-appointment of the tribunal, advance payments towards its ongoing fees.
The most significant cost incurred during proceedings will most likely relate to those necessarily incurred in the preparation and presentation of the case. This includes fees incurred on lawyers, Counsel, expert witnesses and potentially other professionals such as IT specialists.
Tribunal fees and costs
Unlike judges in publicly funded national court systems, arbitration tribunal members are paid in accordance with contracts with the parties or with the appointing authority. Parties are therefore responsible for paying the fees and reasonable expenses of arbitrators. Usually, the arbitrators require advance payment based on estimated fees with any positive balance returned to parties at the end of proceedings.
Who ultimately pays?
Unless the applicable law provides otherwise, parties can (but rarely do) agree how costs are to be allocated. Under English law, such an agreement is only valid if it is constituted after the dispute has arisen. Of course, by that stage, parties have different views on the merits of the dispute and thus agreement on allocation of costs is unlikely.
Most national laws allow arbitrators to exercise broad discretion in relation to awarding costs. The most significant factor considered by the tribunal will be the levels of success achieved by parties. Generally, a successful party can expect to benefit from a costs award. However, the tribunal may opt to split the cost award in a proportion that reflects mixed success (e.g. the successful party may have lost on issues which considerable time was expended on) or perhaps to reflect costs incurred as a consequence of one party's conduct or approach to the arbitration.
What can the successful party recover?
Once a party has been awarded interim costs in its favour, it will assess its recoverable costs with reference to fees and costs actually incurred during the proceedings.
If parties cannot then agree the amount of recoverable costs through negotiation, it will be for the tribunal to decide what is awarded. There is usually some scope for the paying party to negotiate the figure downwards, but because the recoverable amount derives from fees and costs actually incurred, the successful party stands a good chance of recovering a large proportion of its spend.
Typically, with final awards in arbitration, parties will put in cost schedules setting out what they have incurred so that the Tribunal can make a final decision on costs without the need for parties to re-engage with it after it has determined the merits of the dispute.
Unlike litigation where cost recovery rates are significantly poorer a successful party in arbitration can expect to recover a very high proportion of its legal spend. This is one of the many advantages of arbitration.