Costs in Arbitration
Time for guidance
The award of costs to a successful party in arbitration is made not to punish the unsuccessful party but to compensate the successful party for the expense to which it has been put by reason of the arbitral proceedings.
Williams & Kawharu on Arbitration at para 16.8
There are many reasons for parties to go to arbitration. Central to them is party autonomy; the parties have decided to go to arbitration, not to court; and with that comes different considerations.[1]
It has been my practice for some time to ask the parties at the preliminary conference how they would like costs to be dealt with. This is invariably greeted with some surpriseby counsel and,predictably with the suggestion by counsel that the High Court Rules on costs should apply.
In most cases clients see no reason why, if they are 100% successful, they should not get the entirety of their fees reimbursed. It can be difficult to explain why a reasonable contribution is preferred and why, for example that contribution is fixed at 2/3 of what is considered to be a reasonable daily rate for the proceedings.[2]
The case law in New Zealand is inconclusive, with some cases giving support to using the court’s approach to costs as a starting point,[3] and others recognising that arbitration is different.[4]
The Arbitrators’ and Mediators’ Institute of New Zealand (AMINZ) hasproposed new Rules and Guidelines which clarify this issue. Clause 6 of the Second Schedule to the Arbitration Act 1996 gives primacy to agreement of the parties, which the proposed rules look to fill.
The AMINZrules and guidelines the following core principles:
(a)costs follow the event
(b)party costs fixed by the arbitrator should be reasonable and proportional
(c)the allocation of costs can be adjusted to reflect the circumstances of the case
The core of this approach is that the arbitratorfirst considers whether the costs claimed are reasonable and proportionate to the dispute, or need to be fixed; the arbitrator then considers whether there are circumstances which require an adjustment to the allocation of the full amount to the successful party.
The principle underlying the Courts’reasonable contribution approach is that of encouraging (or at least not discouraging) access to justice on the basis of cost. While in court proceedings this is laudable, it is less so in arbitration.
It also needs to be recognised that in practice, the High Court scale of costs is inadequate, and arguably always has been.
The policy issue is then whether the entire cost should be recoverable or if arbitrators should retain a buffer to reward or sanction either party for conduct. If the statement of policy at the head of this paper is correct, arbitrators are not in the business of promoting good or punishing bad behaviour like some Pavlovian ringmaster. That is simply not our role.
The starting point must be whether or not the costs and expenses claimed are reasonable and proportionate to the matter in dispute. It is incumbent, therefore, on the arbitral tribunal to review the successful party’s claim for costs on that basis.
The best definition in the context of assessing legal costs, to my mind, is given by US Judge Holtzmann in the Iran-US Claims Tribunal:[5]
A test of reasonableness is not … an invitation to mere subjectivity. Objective tests of reasonableness of lawyers’ fees are well known. Such tests typically assign weight primarily to the time spent and complexity of the case …The pragmatic fact that a businessman has agreed to pay a bill, not knowing whether or not the Tribunal would reimburse the expense, is a strong indication that the amount billed was considered reasonable by a reasonable man spending his own money, or the money of the corporation he serves. That is the classic test of reasonableness.
The issue of proportionality may be seen to be the flipside of the same coin.
The concept has recently been introduced into the English Civil Procedure Rules, and it has generated some academic discussion.[6] TheUK rule recognises the relationship between the sum in dispute, the value of non-monetary relief, complexity of the litigation, conduct of the losing party and wider factors like public importance, in contrast to the approach taken in our own High Court Rules.
The draft AMINZ Rules also propose the following circumstances which may cause an arbitral tribunal to move away from ordering reimbursement of the entirety of the successful party’s reasonable and proportionate costs:
(i)interim cost orders;
(ii)degree of success;
(iii)conduct of the parties; or
(iv)any other factor the arbitral tribunal deems relevant.
The degree of success can be surprisingly problematic, as in some cases it is not at all clear which party has prevailed, and to what extent. For example, in a rent review dispute, an award splitting the difference would hardly favour either party, though I have seen counsel try. In such a case, letting the costs lie where they fall could well be appropriate.
In relation to the conduct of the parties, consistent with the public policy distinction outlined above, it is not the role of arbitrators to promote access to justice, or to punish bad behaviour. It is surely disincentive enough that a party has lost its case and is potentially exposed to the other parties actual costs.
Clause 6 provides a broad discretion for arbitral tribunals when fixing and allocating costs; but it also identifies a lacuna. We are left dangling, and the approaches to costs are as varied as the professional disciplines which bring people to the profession of arbitrators.
The proposed AMINZ Guidelines and institutional Rules will help to fill that lacuna.
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[1]At the time of writing, the Supreme Court is yet to issue its decision in Carr & Brookside Farm Trust Ltd v Gallaway Cook Allan SC 44/2013. In that case, the agreement to arbitrate included a right to appeal on findings of fact (in error). The issue was not picked up in the course of the arbitration, and the unsuccessful party then challenged the award on the basis that the agreement to arbitrate was not valid in terms of Article 34(2)(a)(i). The case turned on the reading of the definition of arbitration agreement in section 2(1). The decision is of considerable interest to the international arbitration community as it goes to the heart of party autonomy, and the support of the NZ courts for that concept.
[2]See rule 14.2, High Court Rules 2008.
[3]O v SM[2000] 3 NZLR 114 at para [44].
[4]The Marble & Granite Centre Ltd v Emery M1384/98, 30 September 1998, High Court, Auckland, Robertson J at page 11.
[5]Sylvania Technical SYS Inc v Government of the Islamic Republic of Iran (1985) 8 Iran-US Claims Tribunal Reports 329, cited in Williams & Kawharu at paragraph 16.7.
[6]See the 12 March 2014 edition of the Law Gazette.