The impact of applicable provisions and legal traditions: c - PowerPoint Presentation

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

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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

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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

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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

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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

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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

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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

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