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Does arbitration need costs budgeting?

In a recent address at an international arbitration conference in Mauritius, Sir Rupert Jackson, famous for his wide ranging reforms to English civil procedure, invited people to consider the benefits of introducing costs budgeting and costs management into arbitrations, at least for lower value claims.

In spite of the popularity of arbitration, costs remain a major area of concern. Back in 2007, the ICC Arbitration Commission published the first edition of its Report on Controlling Time and Costs in Arbitration and over the last 11 years most of the major arbitral institutions have taken steps to encourage the use of techniques designed to control costs in arbitration. But it seems that the problem remains as acute as ever. In the 2018 QMUL Arbitration Survey, 67% of respondents identified costs as one of the worst characteristics of international arbitration.

So could the introduction of costs budgeting change that and, if so, who should drive that change?

Costs management: Jackson style

In his Review of Civil Litigation Costs, Jackson LJ (as he then was) refined the essence of costs management to the following four elements:

  • The parties prepare and exchange litigation budgets and, if necessary as the case proceeds, amended budgets.
  • The court states the extent to which those budgets are approved.
  • The court manages the case so that it proceeds within the approved budgets.
  • At the end of the litigation, the recoverable costs of the winning party are assessed in accordance with the approved budget.

In the English courts, cost budgeting applies to multi-track cases valued under £10 million unless the proceedings are the subject of fixed/scale costs, or where the court otherwise orders.

It has to be said that the effect of the introduction of the costs management rules into the English Civil Procedure Rules has not been without its problems (problems which are beyond the scope of this blog) and it is clear that this sort of regime would not be suitable for arbitration. The Jackson-style approach requires significant intervention from the court whereas party autonomy and procedural flexibility are key in arbitration. Arbitrators can give, and parties can request, guidance as to how costs will be dealt with, but arbitrators tend to be reluctant to impose procedures without the consent of the parties.

However, a mild version of cost budgeting does exist in maritime arbitrations under the LMAA Terms. Here, parties are required to provide an estimate of costs through to the end of the reference, which arbitrators can then take into account when assessing recoverable costs. The benefit of this approach is that the parties get a degree of clarity and transparency regarding costs before they are incurred, something that is missing from the current approach to cost management in arbitration.

Costs management in arbitration

Costs management in arbitration has tended to focus on improving the efficient conduct of arbitration in order to reduce costs. Arbitrators are actively encouraged to consider using the allocation of costs as a tool to encourage parties to conduct arbitrations in an efficient and cost-effective way.

Arbitrators generally have a broad discretion when it comes to the allocation of costs in arbitration, and a number of institutional rules also include express provisions allowing the tribunal may take into account the parties’ conduct in the arbitration when allocating costs.

For example, Article 28.4 of the LCIA Rules provides that the tribunal make take into account the parties’ conduct including “any co-operation in facilitating the proceedings as to time and cost and any non co-operation resulting in undue delay and unnecessary expense”.

This approach allows the tribunal to encourage efficiency in the arbitral process, but it does not necessarily provide the parties with clarity as to the costs that are being incurred or allow them to control the costs before they are spent.

One technique that tribunals could use to provide additional clarity and control is to invite the parties to consider capping costs for all or any part of the arbitral proceedings. Capping costs would not limit the amount of costs that a party may incur; but would set a limit on the recoverable costs of a successful party.

Section 65 of the English Arbitration Act 1996 specifically empowers the tribunal to limit the recoverable costs of the arbitration, or any part of the arbitral proceedings, to a specified amount. The rationale for the provision was explained in the DAC Report:

“Such a power, properly used, could prove to be extremely valuable as an aid to reducing unnecessary expenditure… [It] enables the tribunal to put a ceiling on costs, so that while a party can continue to spend as much as it likes on an arbitration it will not be able to recover more than the ceiling limit from the other party.”

The rules of the Belgian arbitration centre, CEPANI, expressly invite arbitrators to draw the parties’ attention to the possibility of making an agreement of party costs, including determining an upper maximum limit for recoverable costs.

In most jurisdictions, the broad power of a tribunal to determine their own procedure would include the power limit the amount of recoverable costs. However, the ICC Commission Report on Decisions on Costs in International Arbitration suggests that, whilst tribunals have broad powers in relation to costs, costs capping instigated by tribunals is rare. Whilst tribunals will uphold agreements on costs, including costs caps, made by the parties, they are unlikely to take the initiative and issue costs capping orders as part of their general case management powers.

Should arbitral institutions take the lead?

So should arbitral institutions take the lead and consider the introduction of a version of cost budgeting in appropriate cases?

In recent years, most of the major arbitral institutions have introduced procedures for expedited arbitration for lower value claims or where the parties agree. Some institutional expedited procedures are contained in the main arbitral rules (for example Rule 5 of the SIAC Rules and Article 41 of the HKIAC Rules), other institutions have adopted separate standalone expedited rules (for example the SCC Expedited Arbitration Rules and the DIS Supplementary Rules for Expedited Proceedings).

In March 2017, the ICC introduced a new expedited procedure for lower value claims as part of its drive to improve efficiency and lower costs. Somewhat controversially, the ICC decided that the new procedure should apply automatically to disputes worth US $2 million or less, unless the parties explicitly agreed to opt out of the new provisions. Parties could also agree to opt in to the procedure where the value of the dispute exceeds US $2 million.

In spite of concerns about the impact of the new procedure on party autonomy, preliminary statistics released by the ICC in March 2018 seem to show that the new expedited procedure is proving popular, with 50 requests to opt in to the procedure being made in the first 12 months.

These expedited arbitration procedures all have similar characteristics:

  • They are primarily designed for lower value claims.
  • The case is likely to be dealt with by a sole arbitrator.
  • Time limits tend to be shortened.
  • The number of submissions restricted.
  • There is a preference for document-only arbitration.

The focus is very much on the speed of the process and the making of an award. Interestingly, none of the procedures include any provisions relating to costs budgeting which, given the manifest concern about the high level of costs in arbitration, is perhaps a missed opportunity.

Even a mild form of cost budgeting, similar to that contained in the LMAA Terms, could provide significant benefits. It would:

  • Give parties greater transparency regarding costs.
  • Provide an opportunity (in appropriate cases) to limit costs to a level proportionate to the sum in dispute.
  • Perhaps most importantly, allow parties to control costs before they are spent.

As arbitration users continue to express their concern over the high level of costs in arbitration, arbitral institutions may wish to consider the benefits of introducing some form of cost budgeting into their expedited arbitration procedures.

Bryan Cave Leighton Paisner Victoria Clark

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