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M. Gustavo Laborde

Principal - Laborde Law

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Arbitrator Compensation

I. Definition

1.

An arbitrator has the right to compensation for the legal services rendered in the arbitration, and for the expenses incurred in connection thereof. The right to compensation is generally rooted in the contract between the parties and the arbitrator: the arbitrator is appointed to adjudicate the dispute between the parties in exchange for financial compensation. This right is likewise in line with the customs and expectations in international arbitration.1

II. Where the fees are set

2.

The calculation of the arbitrator’s fees is either stipulated in the contract between the parties and the arbitrator or in the institutional rules governing the procedure. In ad hoc arbitration, the fees will be the subject of a direct negotiation between the parties and the arbitrator(s).2 Market rates will usually apply. By contrast, in institutional arbitration, the arbitration rules already set out the method for the calculation of these fees: this method is incorporated by reference into the arbitrator’s contract.3

3.

The question has arisen as to whether the parties and the tribunal may agree to amend the fees provided for in the institutional rules. In one known instance, an OHADA award was set aside on the grounds that the parties and the tribunal had entered into a separate fee arrangement in lieu of the institutional fees.4 This remains an open question as the rules of most institutions are silent on this.

III. How to set the fees

4.

While there is no universally established method to calculate the arbitrator’s fees, the two most frequently used methods are the ad valorem and “time spent” methods.5

5.

Under the ad valorem method, the arbitrator’s fees are set by reference to the amount in dispute. In practice, this means that the fees will amount to a percentage of the amount in dispute. Typically, a regressive fee scale will apply under most arbitration rules: the higher the amount in dispute, the lower the percentage to which the arbitrator shall be entitled.6

6.

Under the “time spent” method, the arbitrator’s fees are calculated by reference to an hourly or a daily rate at which the arbitrator will be compensated for time spent working on the case.7 The time spent must be reasonable in view of the significance and the complexity of the case.8

7.

Arbitral institutions will usually rely on one of these two methods. The ICC,9 CIETAC,10 the SCC,11 the CRCICA12 and CCJA13 employ the ad valorem method. Conversly, ICSID,14 the LCIA,15 DIFC-LCIA16 and the ICDR17 apply the “time spent” method. Under other rules, such as those of the HKIAC,18 the SIAC19 and the TIAC,20 the parties may choose one of the two methods.21

IV. Expenses

8.

In addition to legal fees, arbitrators also have the right to be compensated for the expenses incurred in connection with the arbitration. These expenses ordinarily include travel, board and lodging.22 Two different methods are used. First, the reimbursement method, whereby the arbitrators are reimbursed at cost, for which they must keep notes of their expenditures. The only limitation usually being that these expenses must be reasonable. Second, the per diem method, whereby arbitrators are paid a fixed daily rate intended to cover all expenses, including accommodation and other subsistence expenses.23

V. Advance on costs

9.

A common practice in international arbitration is for the arbitrators—or an institution on their behalf—to require both parties an advance on the arbitration costs to guarantee the payment of the fees and expenses.

10.

As a general rule, each party will be asked to pay an equal share of the advance on costs. This is the case under most arbitration rules, including under the ICSID Administrative and Financial Regulations.24 ICSID tribunals have noted that, to depart from the default rule25 of equal shares of the advance on costs, there must be a good reason or “good cause”.26 This “good cause” standard is lower than the “exceptional circumstances” standard applied for the granting of security for costs.27 Some arbitration rules expressly provide that advances on costs may be allocated on a ratio other than fifty-fifty.28 In addition, there is an exception to the equal shares rule under the ICSID rules: the party applying to have the award annulled must pay the advance on costs in full.29

11.

If a party does not pay its share of the advance, the other will be invited to cover the missing share, as the parties are jointly and severally liable for the fees and expenses of the arbitrators.30 In accordance with various arbitration rules, if the missing share is not settled within certain time, the proceedings may be terminated, suspended or the case dismissed.31 In investment arbitration, this means that, when a respondent State does not settle in full its share of the advance on costs, the claimant or claimants will have to shoulder the payment of the advance on costs in full to avoid the termination or suspension of the proceedings.32

12.

How the advance on costs is distributed between the parties—in equal shares or other—has in any event no impact on the final allocation of the arbitration costs at the end of the proceedings. However, a tribunal can take into account a party’s failure to settle its share of the advances on costs when deciding how to allocate the arbitration costs.33 An ICSID tribunal, for instance, held that failure to cover the advance on costs is “a breach” of the ICSID procedural rules.34 See further Allocation of costs.

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