Fabrizio Arossa and Edoardo Marcenaro Rome 31 March 2016 Introduction How is the decision on costs disciplined Agreement of the parties Applicable law Institutional rules Other rules ID: 610964
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Slide1
The impact of applicable provisions and legal traditions: counsel and parties’ perspective
Fabrizio Arossa and
Edoardo
Marcenaro
Rome, 31 March 2016Slide2
Introduction
How is the decision on costs
disciplined?
Agreement of the partiesApplicable law Institutional rulesOther rules
2Slide3
The agreement of the parties
The arbitration agreement under the contract
The applicable arbitration rules referred to under the arbitration agreement
Terms of reference
Mandatory provisions under the law chosen by the parties
Any other agreed rules or guidelines
3Slide4
The law applicable to decisions and costs
Lex arbitri
= the law of the seat of arbitration
Lex contractus = the law governing the contract under disputeAny applicable mandatory provision in the arbitration statute of the lex arbitri and of the place of enforcement
Articles 19 and 21 ICC Rules
4Slide5
Legal traditions in allocation of costs and their influence on arbitration
Loser pays (or “costs follow the event
”)
Approach followed by English, Italian and other European CourtsAims at discouraging unmeritorious claims and defences, and restoring the prevailing party
to the position it would have been in had the wrong not
occurred
Default rule under LCIA (Article 28.4), UNCITRAL (Article 42) and other arbitration rulesEven where not the default rule (e.g. ICC), tends to be the
starting
point
(
notably
where claimant is loser)The difficulty: who is the winner?
5Slide6
Legal traditions in allocation of costs and their influence on arbitration (cont.)
Pay your own way
Approach followed by
US Courts (but not the default rule in AAA Rules)Aims at encouraging access to justice when the outcome is uncertainNot expressly set out under any set of arbitration rules but possibly fitting the provision of any of those given the broad discretion afforded to arbitratorsSometimes adopted where the assessment of who has won is difficult
Tends to be the rule in ICSID awards (except where loser-pays is applied to manifestly untenable claims, abuse of ICSID process, inefficient pleadings, egregiously wrongful underlying conduct)
6Slide7
Legal traditions in allocation of costs and their influence on arbitration (cont.)
Allocation pro rata
Approach followed by
Swedish CourtsApportions the costs proportionally to the relative merits of the claims/counterclaimsAims at incentivising parties to align the amounts claimed and the amounts they are likely to obtainTriggers a deeper analysis of the tribunal
May
de facto
be applied, where ‘adjustments’ to the loser-pays rule are made (even if some are linked to different principles, e.g. reasonableness of costs, conduct in the proceedings). ICSID slowly moving there?7Slide8
Institutional rules on decision as to costs of arbitration
Art. 26. 3 and 27 AIA Rules
Artt.
36-37 ICC Arbitration RulesRule 28 ICSID Rules
Article
40-42
UNCITRAL Arbitration RulesArticle 28 LCIA Arbitration RulesArticle
43-44
SCC
Arbitration Rules
Article 44
VIAC
RulesArt. 35–38 CAM Rules
Rules
31-33
SIAC
Arbitration Rules
8Slide9
Other rules
The parties may agree on the application of other rules or guidelines with specific provisions on costs e.g.
IBA Rules on the Taking of Evidence in International Arbitration
IBA Rules on Party Representation in International Arbitration
Article
9(7) of the IBA Rules on the Taking of Evidence in International Arbitration permits the tribunal to order costs against a party that fails to conduct itself in good faith in the taking of evidence
9Slide10
The counsel perspective
Arbitration counsel must battle on two fronts
Clients
are no longer prepared to “foot the bill”increasingly demand their lawyers to depart from hourly rate-based feessometimes fail to catch settlement opportunities
frivolous claims, counterclaims and objections sometimes driven by a “
total war spirit
”Arbitrators (in)ability to efficiently conduct arbitral proceedings has a huge impact on the overall arbitration costs concern for stability of the award may give rise to excessive regard for due process/tolerance for lengthy/unnecessary defensive activities
taking of evidence entails lengthy/costly exercises unknown in domestic Continental proceedings (e.g. cross-examination, discovery/Redfern Schedule)
ultimate costs (and their allocation) unpredictable
10Slide11
Managing the Arbitration Costs: Counsel/Party Perspectives
Arbitrators’ selection: getting it right!
Having the right arbitrators
(especially the Chair) is key tool to manage arbitration costs (“arbitrator as wrangler”)Counsels’ (and parties’) role in suggesting the Arbitral Tribunal cost-efficient techniques is fundamental in all stages of the proceedings: Preliminary phaseWritten submissions
Hearings
Award drafting phase
11Slide12
Managing the Arbitration Costs: Suggestions to the Arbitral Tribunal
During the
preliminary phase
:Address potential allocation of costs and solicit the parties’ views on cost awards as early as the preliminary conference (tabling the expectations)Indicate what cost items are considered recoverable (e.g. in-house costs?), what justifying records will be required, what disclosures are expected (e.g. fee arrangements, third party funding), etc.Cover
all procedural matters which may impact on costs
: e.g. bifurcation of proceedings, structure of pleadings, scope/process of document production and cost for interim relief
Avoid reference to Redfern Schedule when possible, and rather refer to Article 3 of the IBA Rules on Taking of Evidence (i.e. introduce relevance/materiality limit)?
Be prepared to challenge
overly extended schedules
or excessive filings
12Slide13
Managing the Arbitration Costs: suggestions to the Arbitral Tribunal
During the
written submission
stage:Limit the number and length of submissions: e.g. with agreed page limitsStay on top of disclosure, whether or not using the Redfern Schedules Schedule US federal judges-type conference calls
to check status and attempt to prevent minor issues from becoming overly contentious
Overall goal: avoid too much
disclosure, too much evidence, too much argument
13Slide14
Managing the Arbitration Costs: suggestions to the Arbitral Tribunal
At the
hearing
stage:Provide the parties with early set of neutral questions, pointing at evidentiary and legal issues of particular interest for the hearingFavour “hot-tubbing” of experts as opposed to lengthy (and often useless) cross-examination
Consider
focused pre-deliberations
and day-end conferences with counsel At the award drafting stage
:
At the cost of stating the obvious:
draft more quickly
Ask counsels to draft sections
concerning procedural history and parties’ arguments, with a view to combining and editing
them
14Slide15
Third Party Funding: implications on costs/cost awards
How it works
:
funder pays claimant’s cost, the latter pays nothing up-front, theformer cannot recover funds from claimant if the claim is unsuccessful, in return for full recovery and an uplift (or share of damages) if claim is successful
15
Pros
Access to justice
Reduced dispute risk
Benefit from funder’s expertise
Improves cash flow/
balance
sheet
De-risking the job of General Counsel
Cons
Potential conflict of interest
Waiver of privilege
Possible consequences on decisions on costs
Likely to be available only for large claims
Possible changes in the (non-existing) legal framework?Slide16
Third Party Funders’ involvement: can it influence decisions on costs?
The disclosure of a third party funder (
TPF
) – not a party to the proceedings - may cause the Tribunal to:Expect the funded party to be insolvent if ordered to pay costs (e.g. where funding agreement is silent)Order the funded party to pay a higher amount in costs than it would have done absent any funding scheme (e.g. where funding agreement provides for funder to bear all such costs)Address other arguments/requests from the non-funded party (e.g. TPF costs should not be recoverable, security for costs should be ordered against funded party, etc.)
Determine how/what costs are recoverable (e.g. > success fee/uplift?) and what proof they are payable/incurred by funded party
16Slide17
Third Party Funders’ involvement: can it influence decisions on costs?
Case law:
Kardassopoulos v Georgia
(2010): respondent state submitted that since the claimant’s costs were borne by a third party funder it was arguable whether the costs should be recoverable. The tribunal, however, considered that it “knows of no principle why any such third party financing arrangement should be taken into consideration in determining the amount of recovery by the claimants of their costs”
RMS Production Corporation v Grenada
(2011):
rejected the non-funded party’s submission that it did not have to pay for the funded party’s costs because of the presence of the funder
ATA Construction Industrial and Trading Company v Jordan
(2011
):
rejected
the
argument that because of the existence of a third party funding agreement, the costs of the proceedings could not be shifted to the non-funded party
17Slide18
Third Party Funding and implications on costs: case law (cont.)
RSM v St. Lucia (
2014)
: respondents should always be able to obtain orders for security for costs against claimants who have third-party funding, unless the claimant can demonstrate that they have the means to pay any eventual costs order themselves- Excalibur Ventures LLC v Texas Keystone Inc (UK litigation, 2014): The funders were joined to the proceedings by the defendant and held
to be jointly and severally liable to pay the defendant’s costs
on an indemnity
basis. The funders were held liable because without their assistance the claim could not have been brought. It was not necessary to prove “control” or “influence” of the funders to establish liability. The
provision of funding itself satisfied the requirement of “causation”.
Liability
was only
extended (a) up to
amount of funding
and (b) in respect of costs that the defendants had incurred after the funders had made their contribution. Arkin v Borchard Lines “cap” (2005): a
professional funder
who financed part of the costs of the litigation for the losing litigant
should be liable for the other side’s costs to the extent of its
contributions.
Parents
of funders with no assets were also held
jointly
and severally
liable
18Slide19
Third Party Funders’ involvement: soft law and draft regulations
Code of Conduct of the Association of Litigation Funders of England and Wales
provides that funding agreement must state whether, and if so to what extent, the funder is liable for adverse costs orders and security for costs ordersDraft report of Costs Subcommittee of the ICCA-Queen Mary Task Force on Third Party Funding
:
TPF should
not generally be a relevant factor in determining allocation of costs in principle, a tribunal lacks jurisdiction to issue costs orders against third party funders
it
is not appropriate for a tribunal to award funding costs (for example, after the event insurance premiums or conditional fees) as they are not procedural costs of the
arbitration
Agreed
EU-Vietnam Free Trade Agreement: when making decisions on costs the tribunal shall take into account whether the requirements on disclosure
of
TPF
have been complied
with
Draft
SIAC Investment Arbitration Rules
:
tribunal
may take into account any third party funding arrangements in apportioning the costs of the
arbitration, and shall
have the authority to order in its award that all or a part of the legal or other costs of a party be paid by another party or, where appropriate, any third party funder
19Slide20
Relevance of cost allocation
in
challenging the Award
Commercial Arbitrationrelevance of lex arbitrichallenge should be based on grounds of a breach of public policy pursuant to Article V(2)(b) of the New York Convention, hence it would be highly
unlikely to
succeed
as cost award should be considered as violating the most fundamental principles of justice of a given legal systemwe are not aware of precedents on this issue so farICSID Investment Arbitration
absence of
lex arbitri
allocation of costs may be
challenged in
annulment proceedings on one of the grounds allowed
(e.g., manifest excess of power, failure to state reasons >contradictory reasoning)partial annulment of the
award (in re costs)
20Slide21
Conclusions
Considering
the variety of rules as regards the definition of costs under most legislations as well as the rules and regulations of most relevant arbitral institutions, it is always advisable for the parties to somehow agree in advance on the method of definition of costs to be awarded by the arbitral tribunal
The regulation of costs may be set forth under the arbitration clause in the contract or at the beginning of the proceedings, e.g. in the Terms of Reference or the Case Management Conference
In this respect, the parties should be more and more involved in the definition of
costs
21