Controlling costs in international arbitration

The fact is that arbitration is neither cost-effective nor time-efficient per se.  That said, proactive, experienced and confident—if not courageous—tribunals have within their power the tools to make a difference both in terms of the timeliness of the process as well as control the recoverable legal costs incurred by parties.In terms of timeliness, a well-structured and thoughtful procedural timetable enforced with discipline can remove months from the process.

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But what about the costs of legal representation and experts? What tools, if any, are available to a tribunal to impose a degree of control over these costs?

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Article 34.2 of the HKIAC Administered Rules is a little used (if at all acknowledged) power provided to tribunals which, if exercised, can have a significant impact on legal and expert costs:

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“With respect to the costs of legal representation and other assistance referred to in Article34.1(d) [e.g. experts], the arbitral tribunal, taking into account the circumstances of the case, may direct that the recoverable costs of the arbitration, or any part of the arbitration, shall be limited to a specified amount” (emphasis added).

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Article 34.2 is based on section 57 of the Arbitration Ordinance Cap 609, which in turn is based on section 65 of the Arbitration Act, England.

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The significance of setting a limit on recoverable legal, expert and other costs should not be overlooked or underestimated. Particularly if the limit is established at the earliest possible stage of the proceedings—say at the first procedural hearing.

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By way of illustration, let’s imagine a contractual dispute involving a claim for damages of US$2 million. It is a significant sum of money for the claimant, but it is not hard to imagine the legal fees required to pursue the case quickly becoming disproportionate to this sum. However, if recoverable costs were to be limited to, say, US$400,000 (assuming a timetable of 15 months, a few legal and factual issues, and one technical issue requiring expert opinion), both the claimant and respondent would likely change how they approach the arbitration and the amount of costs incurred by either side:

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1.    Greater thought will be given to the key issues to be resolved by the tribunal;

2.    Pleadings and evidence will be more focused;

3.    Discovery/document production should not become a separate battleground;

4.    A party will be reluctant to use expensive and unnecessary procedural tactics if there is no likelihood of recovering actual costs incurred;

5.    Cross-examination will be honed and targeted; and

6.    Opening and closing arguments will be anchored to the issues established early in the proceedings.  

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Put another way, a party and its lawyers are more likely to behave in a manner consistent with achieving a resolution to their dispute in a timely and cost-effective manner if a limit is set to the amount that can be recovered if they prevail in the case.

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So why isn’t Article 34.2 used more often in arbitrations under the HKIAC rules? Why do we not see a similar power under the rules of other prominent arbitral institutions? There are likely many reasons that greater control is not imposed on costs. A sensible starting point to create change is for tribunals and legal counsel to raise the benefits of Article 34.2 with parties as early as possible in the process.

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Perhaps we will start to see arbitrations living up to the ideal of being a more efficient and cost-effective form of dispute resolution.