Author

Mr Steven Finizio

Partner - Wilmer Cutler Pickering Hale and Dorr LLP

Author

Mr Cem Kalelioğlu

Associate - Wilmer Cutler Pickering Hale and Dorr LLP

Allocation of Costs

I. Definition of costs

II. Sources of the arbitral tribunal's authority to allocate costs

2.

An arbitral tribunal’s authority to allocate costs can be addressed in the applicable law, agreements of the parties, and applicable rules of arbitration.

3.

In some investment arbitrations not taking place under the ICSID Convention, the parties may agree to a procedural law to govern the arbitration or the procedural law of the place of arbitration may apply. Although some procedural laws address the question of cost allocation, many do not do so. Some arbitration laws are simply silent on cost allocation. For example, the UNCITRAL Model Law on International Arbitration, which has been adopted by or is the basis for arbitration legislation in a number of jurisdictions, does not address the issue of costs (except with regard to orders for interim measures and preliminary orders). Other procedural laws refer to cost allocation, but provide no standard for allocating costs.3 Other laws start with a presumption as to how costs should be allocated, but many of those also provide that the tribunal has the discretion to allocate costs as it considers appropriate under the circumstances.4 Moreover, most such laws are not mandatory and provide that the parties can agree to another approach.5 With respect to arbitrations subject to the ICSID Convention, the  Convention does not provide a default standard, and states that the tribunal has discretion to allocate costs as it deems appropriate.6 

4.

Cost allocation may also be addressed in the parties’ agreement. In investment arbitration, the arbitration agreement between the parties is usually found in an investment treaty, in the form of an offer to arbitrate by the host State that is then accepted by the foreign investor when it initiates the arbitration, or in an investment contract.7 (See Arbitration clause, Arbitration contract). Most investment treaties are either silent on costs8 or provide that the tribunal has the discretion to take a different approach than that provided.9 Parties may also address cost allocation in a separate agreement, and such agreement may be evidenced in, inter alia, procedural orders, terms of reference, or in settlement agreements.10

5.

The parties may also have addressed the tribunal’s authority to allocate costs by agreeing to rules to govern the arbitration. Many arbitration rules provide a default rule or standard for allocating costs, but those rules also usually provide that the tribunal has discretion to allocate costs based on the circumstances of the case.11 Other rules simply provide that the tribunal may allocate costs as appropriate under the circumstances without referring to standard.12 The ICSID Rules do not provide a default rule or standard, but provide the tribunal discretion to allocate costs as it deems appropriate.13 A number of rules also provide that the tribunal can consider party conduct in deciding on cost allocation.14 The proposed revisions to the ICSID Rules expressly provide that the tribunal consider the parties’ conduct when allocating costs.15

III. Cost allocation standards in international arbitration

6.

As discussed above, under the applicable law and rules, arbitral tribunals generally have broad discretion when deciding on cost allocation. Two broad approaches to cost allocation are often identified in international arbitration: (a) the “loser pays” or “costs follow the event” approach (sometimes known as the “English Rule”), under which the losing party compensates the prevailing party for the costs it has incurred, and (b) the “bear your own costs” or “pay your own way” approach (sometimes known as the “American Rule”), under which each party bears its own legal costs and its proportional share of the arbitration costs.16 In practice, however, tribunals often use their discretion and allocate costs as they deem appropriate taking into consideration factors such as, inter alia, relative success on all the issues presented (rather than whether one party prevailed overall), party conduct, and whether the proceedings were conducted in an efficient and cost-effective manner. Tribunals may also take a different approach depending on the nature of the costs—e.g., treating legal costs differently from administrative costs. 

7.

In international commercial arbitration, tribunals often start with a “costs follow the event” approach, but adjust the allocation based on the circumstances.17 In contrast, as discussed below, in investment treaty arbitration, many tribunals have historically required the parties to bear their own costs, although, in recent cases, an increasing number of tribunals have taken the approach of allocating costs between the parties.18

IV. Approaches to cost allocation in reported investment arbitration cases

8.

Many investment arbitration awards do not explain in any detail how the tribunal reached its conclusion on costs,19 and there has not been a consistent approach to cost allocation in investment arbitration.20 Historically, many tribunals have required parties to bear their own costs21 (except in some cases where the conduct of a party has caused an increase in costs),22 although that approach has not been uniform, and it is increasingly common for tribunals to allocate costs. Ordering parties to bear their own costs is similar to the approach in interstate disputes,23 which is often justified on the basis of comity.  Taking this approach in investment treaty cases is sometimes justified as a comity measure intended to avoid straining relations between states,24 or as a concern about the potential economic impact of adverse cost orders on states or smaller investors.25

9.

The number of tribunals that have allocated costs in investment arbitration has increased significantly in recent cases,26 with several tribunals describing this as the “emerging trend” in investment arbitration.27 Taking this approach in investment arbitration is sometimes justified as necessary to indemnify the successful party, to ensure that a party that has suffered loss and has had to litigate to obtain compensation is made whole,28 and to protect States against frivolous claims and investors against frivolous defences.29

10.

In many of the investment cases in which the tribunal has allocated costs, the tribunal has applied the “costs follow the event” principle as a starting point and adjusted the allocation by taking into account factors such as the relative success of the parties (looking at all the issues raised during the case), reasonableness of the parties’ positions, the complexity and novelty of the issues, the reasonableness of the costs claimed by the successful party, and the parties’ conduct.30 In a majority of investment arbitration awards issued between 2015 and 2019 in which the tribunal allocated costs, the cost award was in favor of the respondent State.31

V. Cost allocation procedures in investment arbitration

11.

Procedures for addressing cost allocation can vary greatly. The more common practice is for costs to be addressed either after the completion of a phase of the case (e.g., in a bifurcated proceeding, after a decision on jurisdiction) or at the end of the case. However, parties in some cases may seek payment of their costs after each decision or event (e.g., after an application for interim measures or a disclosure decision), Tribunals may address costs in the form of an order or a partial award, although tribunals in investment treaty cases most often address costs in the final award.32

12.

Approaches to issues of the burden of proof, as well as the form of submissions and the level and type of proof required in costs submission can vary widely and may be addressed through party agreement during the proceedings. In practice, parties often agree or the tribunal may decide that costs do not need to be fully substantiated.33

Bibliography

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