Latest ICC research emphasises speed and cost effectiveness of arbitration, says expert

'Decisions on costs in international arbitration', a new report by the ICC's Commission on Arbitration and ADR (alternative dispute resolution), is the latest in a series of papers by the Paris-based arbitral institution aimed at improving the management of time and costs in international commercial arbitration proceedings. The research draws on awards made in over 300 disputes heard by the ICC, as well as contributions from other high-profile international arbitral institutions.

"This work by the ICC, which reflects similar work being carried out by other arbitral institutions, shows how decisions on costs can be used to incentivise effective case management by parties - and so prevent unnecessary delay to proceedings," said Alistair Calvert, an expert in international arbitration at Pinsent Masons, the law firm behind Out-Law.com.

"Although the commission is careful not to endorse any particular method of allocating costs, its review of practices from around the world provides plenty of food for thought on how tribunals can use this to encourage efficiency and so speed up proceedings. Its report will provide encouragement to practitioners, and help them demonstrate to commercial parties that arbitration is a more cost effective and efficient means of resolving disputes than litigating in the courts," he said.

Parties to international arbitration do not generally have the automatic right to recover any costs associated with the process, such as the fees and expenses of the tribunal and arbitral institution and their own reasonable legal and other costs. Some arbitration rules, including those of CIETAC, the LCIA and UNCITRAL, include a rebuttable presumption that the successful party may recover these costs from the unsuccessful party while others, including the ICC's latest rules, do not contain any such presumption and instead give the tribunal broad discretion when allocating costs.

Following its analysis of over 300 ICC awards, along with reports from eight other arbitral institutions and over 40 national arbitration laws, the commission concluded that the majority of tribunals adopted a presumption in favour of recovery of costs by the successful party regardless of whether this was stated in their rules. Some institutions used the presumption that parties would cover their own costs as an alternative starting point. The commission then went on to establish the factors that tribunals would take into account when coming to a final decision on cost allocation, including the reasonableness of the costs claimed and the conduct of the parties.

"Although the factors taken into consideration to determine reasonableness vary, reasonableness in itself was a criterion considered in most of the awards studied," the commission said in its report. "Generally, arbitrators appear to be relatively willing to deduct legal fees on the basis of unreasonableness. Even where arbitrators begin from the starting point that the successful party is entitled to recover its costs, they frequently adjust the amount recovered, by awarding less than the full amount of the fees claimed."

"Arbitrators tend to take party conduct into account. It was observed that parties whose conduct was seen to have contributed to excessive costs often did not recover all of the costs claimed," it said.

Tribunals also had to consider the scope of any agreement between the parties as to costs, the proportion of allocation between the parties, the reasonableness and reality of the costs incurred, and other relevant circumstances, according to the report. For example, the Arbitration Act in England prevents parties from agreeing to pay costs in any event unless that agreement is made after the dispute arises. The laws of several jurisdictions did not contain any rule on the arbitral tribunal's power to cap costs, but this was generally considered permissible, according to the research.

Arbitrators were generally prepared and permitted to use their powers to allocate costs at various stages of the arbitration proceedings, not only in the final award, the commission found. However, given the absence of any uniform approach to costs allocation, it suggested that both arbitrators and parties set out their expectations on cost issues "relatively early in the proceedings".

"Users would like decisions on costs to be predictable, but at the same time, the discretion enjoyed by arbitrators needs to be preserved so as to ensure that a fair result can be achieved in each case," said Christopher Newmark, chair of the ICC's commission. "The report describes how arbitrators can address both these needs – but it does not establish guidelines or endorse a specific approach."

The commission's report follows its findings last year on the practical steps that parties should take to ensure a smooth arbitration process. Its June 2014 report emphasised that parties would not be able to take advantage of the speed and efficiency of arbitration as a means of dispute resolution without actively shaping the proceedings at an early stage.