Arbitration: Getting value for your money
Where a dispute resolution clause requires a party to pursue, or defend, arbitration proceedings, one of the first questions that we are often asked as lawyers is:
“How much will the arbitration cost me?”
We recently addressed some of the steps being taken at an institutional level to ensure that proceedings are conducted in an efficient and cost-effective manner. In this article, we discuss how you can work with your legal counsel to control arbitration costs and obtain the best possible return on your legal spend.
What are the main arbitration costs?
Before thinking about controlling and reducing costs, you first need to know where those costs are likely to arise. In 2015, the International Chamber of Commerce (ICC) published its Commission Report on Decisions on Costs in International Arbitration. The Report examined the costs incurred in more than 200 arbitral awards delivered in 2012 and found that on average:
- 83% related to party costs, including fees and expenses related to lawyers, witnesses and experts.
- 15% related to the Tribunal’s fees; and
- 2% related to the ICC’s cost to administer the proceedings (i.e. institutional costs).
In our recent experience, it continues to be the case that the bulk of your legal spend will be allocated to party costs. The good news, from a costs control perspective, is that you are able to manage 83% of your total legal spend.
We set out below some key questions to ask yourself when you are involved in arbitration to ensure that, as a party to the dispute, you actively monitor your overall legal spend and obtain the best value for your money.
Lawyer fees in arbitration
If you want to make sure that the return on lawyer fees is as effective as possible, you should always consider the “three Ps” when deciding to take a particular action: Purpose, Proportionality and Perspective.
Disputes are usually, by their nature, emotionally charged and the easiest way for you to lose control of your legal spend is to get drawn into extensive, tit-for-tat arguments on irrelevant points taken by the other side, or to allow procedural skirmishes to get out of hand. Engagement not only increases lawyer fees; but it typically also results in delay to the overall resolution of the dispute.
From a practical perspective, when considering whether there is merit in responding or taking a particular course of action, try to ensure you have identified a clear and achievable purpose or outcome. Taking a step back and asking yourself whether the time and cost of pursuing a particular course of action, or line of correspondence, will positively advance your case can easily avoid rapidly escalating legal costs.
If you feel compelled to respond in detail to inflammatory language adopted by your opponent or to deny a request for a deadline extension as a matter of principle, before doing so, ask yourself: what strategic advantage will I obtain? How material is this point to the case overall? If I do not agree to an extension, will the Tribunal probably grant one anyway? If we object to an extension, are we sure that we will not require one at a later stage?
If you do need to take steps to protect your position or to achieve a tangible strategic outcome, consider what the proportionate course of action is, regardless of what the other side has done. For example, if you receive a long letter which makes a variety of unsupported, unnecessarily aggressive points, the instinctive response is to respond to each point in kind, even if the underlying issue is trivial - but a more cost-effective approach may be to respond to the points in short order and to refuse to be dragged into protracted correspondence which is unlikely to impact the outcome of the claim.
In our experience, adopting a considered and measured approach not only reduces overall legal spend, it has the added benefit of improving your standing before the Tribunal which will ultimately decide the allocation or award of costs at the end of the arbitration. By actively demonstrating that you are the party behaving in a reasonable manner which does not drive-up legal fees, you may be awarded more of your legal costs if you win, or you may limit the amount of any adverse costs that you are ordered to pay if you lose.
Expert fees in arbitration
If you want to control expert fees, the first question is whether you really need an expert. If the answer to that question is yes, remember that fees can be substantial where the issues are complex or specialised; or can be minimal where the opinion required amounts to a confirmation of calculations prepared by a party and supported by a simple set out documents. It is important that you work with your lawyer to agree a defined scope of work or instructions from which to negotiate and agree rates with any expert.
The second question to ask yourself is when is the right time to instruct an expert?
In some cases, there is a benefit obtained by seeking expert evidence before drafting and filing a Request for Arbitration. Whilst the initial costs of instructing the expert are borne upfront, there is a tangible benefit to understanding the strength of any expert evidence so that you can pro-actively devise your strategy and, in particular, avoid further wasted costs if you find that there are evidential difficulties to your claim succeeding.
Conversely, where the expert evidence required relates to matters such as liability for payment of outstanding invoices, or the quantum of payments made, it may have little impact on the legal merits of your claim and instructing experts at a later stage in the proceedings could avoid wasted costs in the event of an early settlement of the claim.
Hearing costs in arbitration
Hearing costs are generally determined by your choice of venue (i.e. the place in which any arbitration hearing will take place) which may be set out in your arbitration agreement or subsequently agreed between the parties, for example, within the Terms of Reference.
Most arbitral institutions recognise, and actively promote, the benefit of virtual hearings which, leaving aside the benefit of reducing the environmental impact of arbitration, allow the parties to avoid hearing venue, travel, and accommodation-related costs.
With improvements in virtual platforms and technology, a simple way in which to control costs is to consider whether a virtual hearing is appropriate in circumstances where, for example, the dispute is largely legal (rather than factual) and centres on documents rather than recollections. However, where your claim turns on the reliability of witness evidence and cross-examination is required, you may decide that the benefit of insisting on a physical hearing taking place outweighs the associated cost of travel and accommodation.
How do I control arbitration costs?
Your total spend on arbitration costs will largely depend upon what you have agreed in your arbitration clause. Where you have agreed to institutional arbitration (i.e. administered by an arbitral body or centre), arbitration costs include both the costs of the Centre to administer the proceedings, and the fees and costs of the Tribunal deciding the dispute. The basis on which they are calculated is defined within the relevant procedural rules and will usually depend on two main criteria: (1) the number of arbitrators; and (2) the value of the claim.
When preparing your arbitration clause or agreement, you should review the applicable institutional cost structures and remember that when you file a claim, you should always be prepared, and able, to make payment of the full arbitration costs. Even though the rules provide that arbitration costs should be split and paid equally by the parties, it is common for a party to have to make a substitute payment on behalf of their opponent for the arbitration to proceed.
When considering the number of Tribunal members required, consider whether, in light of the potential future issues or disputes that may arise, any dispute will need the expertise of a three-person tribunal, or whether one appropriately experienced arbitrator would suffice. A sole arbitrator will, in all cases, cost you less than a three-member Tribunal to decide the same dispute.
In all of this, remember the result of the ICC’s Commission Report - arbitration costs (i.e. Tribunal fees and administration costs) represent less than 20% of overall legal spend. In a case of critical importance to you or your business, the benefit obtained through the efficient administration of the proceedings by an experienced institution and Tribunal will, in all cases, outweigh the arbitration costs incurred.
Conclusion
Being involved in arbitration proceedings will inevitably involve legal costs. Whilst a portion of these costs may be unavoidable, the key to reducing your overall spend is to make sure that you consider with your lawyer what is needed to achieve a “successful outcome” and work with your team to ensure that you adopt a targeted approach to legal spend which has a clear cost-benefit to your business. By doing so, you will not only reduce your overall legal spend, but you will also put yourself in a better position before the Tribunal when it comes to allocating costs between the parties following the final award.
Our expertise
With offices in many of the world’s major arbitration centres, including London, Paris, Geneva, Dubai, Hong Kong and Singapore, we are ideally placed to work with you both to prevent and to resolve disputes as they arise, whatever the law, language, rules, industry sector, or subject matter of that dispute may be. Our dedicated multicultural and multilingual specialists conduct arbitrations under both civil and common law systems and regularly act in arbitration-related domestic court proceedings.
Whether you are a state, a state-owned entity, a sovereign wealth fund, a corporate, a sports federation or authority, private business or individual, our strategically focused specialists will work alongside you through every aspect of any arbitration. Please contact Thomas Snider or your usual Charles Russell Speechly LLP contact if you would like to get in touch.
