1. The Categories of Costs in Interantional Arbitration
There are mainly two categories of costs in international arbitration:
(1) Cost of the reference, namely, the legal costs, expert costs and witnesses costs etc., which borne by each party respectively;
(2) Costs of the award, mainly refers to the fees of arbitrators (the arbitral tribunal).
(1) Cost of the reference
In international arbitration, the legal costs are usually charged by hour. However, some clients (especially clients from Mainland China) prefer a fixed fee, which makes them feel more secured. Both ways of charging have their virtues and their faults, but charging by hourly rates can show the workload of lawyers more clearly, while in case of a fixed fee, lawyers may be unwilling to devote too much time or energy to fight for their clients’ benefits in some cases. They are motivated to settle the disputes as soon as possible.
(2) Costs of the award
In institutional arbitration, the arbitration fees are usually collected by the arbitration institutions from the parties first. Afterwards, the institutions would pay the arbitrators (part of) the fees collected as their remuneration. The way of charging arbitration fees vary between different arbitration institutions. For example, ICC charges a proportional rate according to the disputed amount, while in HKIAC, the parties may either choose a fixed fee or pay by hourly rates. In terms of the level of costs, in general, ICC charges higher, HKIAC charges lower while CIETAC charges the lowest (some senior international arbitrators are unwilling to take the cases in CIETAC due to the low pay).
2. The General Rule as to Costs in International Arbitration
In international arbitration, the general rule for the costs is Costs Follow the Events. The losing party not only need to cover his own legal costs but also all the arbitration costs and the legal costs of his opponent.
But in fact, following this rule, what the winning party could recover is only part of what he has paid (not all). Because the arbitral tribunal usually makes costs award on the party-to-party basis, which generally means that, the losing party needs to pay the reasonable legal costs of the winning party. But if there is some doubts towards the reasonableness of certain costs incurred by the winning party, the tribunal will decide in favor of the paying party, which would be then exempted from paying such costs. As a result, in practice, the legal costs that the winning party could recover is approximately 50% to 60% of the his actual costs (legal costs charged by hourly rate).
There is another type of award on costs, namely costs on indemnity basis. What makes it different from the above-mentioned party-to-party basis is that where there are some doubts towards the reasonableness of certain costs of the winning party, the tribunal will decide the costs in favor of the winning party, meaning that the losing party still has to pay such costs. In practice, the winning party could generally recover around 90% of the his actual costs (legal costs charged by hourly rate) under such costs award.
Normally, the arbitral tribunal would made costs award on party-to-party basis. Only on special occasions, for instance, there are wasted costs or additional costs incurred due to the especially unreasonable actions of one party, the arbitral tribunal may make costs award on indemnity basis against the said party in terms of such costs.
3. The Deposit for the Arbitration Costs
In institutional arbitration, once the arbitration proceeding has been commenced, the arbitral tribunal will ask both parties to pay the deposit for the arbitration costs. At this point, both parties will generally be requested to pay the deposit half by half because the outcome of the arbitration is unknown yet. Then, what would the arbitral tribunal do if both parties or one party refuse(s) to pay the deposit?
In international arbitration, both parties may jointly appoint one arbitrator, or each party may appoint one arbitrator respectively and then the two appointed arbitrators further appoint a third arbitrator as the chairman of the arbitral tribunal jointly. No matter how the arbitral tribunal is formed, there is a tripartite contractual relationship among each appointed arbitrator and both parties. This tripartite contractual relationship exists even in cases where each party appoints one arbitrator respectively. (As such, if an appointed arbitrator is challenged by one party, he/she could not withdraw from the arbitral tribunal unless the other party agrees).
The said tripartite contractual relationship, in terms of the arbitration costs, means that the Claimant and the Respondent shall be jointly and severally liable for the payment of the arbitrators’ fees.
Therefore, the answers to the question raised at the beginning of this section are: (a) if both parties refuse to pay the deposit, the arbitral tribunal will be entitled to terminate the handling of the case (no one would work for you without being paid)；(b) if the Respondent refuses to pay (which is very likely, since no one wants to pay for being a judgment debtor), the Claimant has to pay the full amount of deposit (including the half required to be paid by the Respondent), if the Claimant refuses to do so, then the answer will be the same as the answer to (a).
Some may be curious that if the Respondent refuses to pay the arbitration costs, will the arbitral tribunal made an adverse judgment against the Respondent based on such refusal? The answer is simply no.
4. The Lien on the Arbitral Award
In ad hoc arbitration, the arbitrator(s) may start to arbitrate the case without receiving the deposit first (or the deposit received is less than the actual arbitration costs incurred). In that situation, the arbitrator(s) would usually inform both parties of the date on which the formal arbitral award will be made before it is issued. Parties will have to pay all the arrears of the arbitration costs in order to get the original signed arbitral award. As long as the full payment has been received (no matter it is paid by one party or by both parties), the arbitral award will be issued to both parties. The party which has paid all the arbitration costs in order to get the arbitral award has the right of recourse against the other side according to the costs award.
Is there a possibility that neither of the parties show up to get the arbitration award? In fact, it is a rare circumstance. The party which estimates that it is going to win the case will take the initiative to get the award (in order to apply for the enforcement of the award as soon as possible). The potential losing party also needs to get the award promptly, for raising the application to court for setting aside the arbitration award within the time limit (which can only be raised within 3 months after receiving the arbitration award).
5. Security for Costs
Application for security for costs is another powerful weapon which could be utilized by the Respondent in international arbitration.
What is security for costs? As we have mentioned above, the losing party has to pay the winning party’s costs. If the Respondent holds proof which could convince the arbitral tribunal that the Claimant has financial difficulty and will not be able to pay the legal costs of the Respondent in case the latter wins the case, then the Respondent is entitled to applying to the tribunal to order the Claimant to provide security for the Respondent’s legal costs to be incurred in the arbitration. If the tribunal approves the application, it will make an interim order against the Claimant to pay deposit as the security for the Respondent’s costs. Unless the Claimant provide security for costs as ordered, the arbitral tribunal will have the power to strike out the arbitration application.
6. Settlement Offer and Legal Costs
In international arbitration, the Claimant and the Respondent can put themselves in a good position in terms of the bearing of legal costs by way of tendering proper settlement offer to the other side. For example, the amount claimed by the Claimant is US$1,000,000, then the Respondent may take any of the following actions at any point of time before the arbitral award has been finally made:-
(1) Payment into Court – the Respondent deposits the amount of the settlement offer it tenders(like US$500,000), informs the Claimant of the same and asking that whether the Claimant would accept the offer or not. If the Claimant wants more and rejects the offer, there are two possibilities: if the amount finally awarded to the Claimant is less than or equals to US$500,000 (the settlement offer tendered by the Respondent), it means that the Claimant has lost the case where the Claimant has to pay the legal costs of the Respondent incurred since the date the Respondent tendered the settlement offer (because if the Claimant accepts the offer then, there would be no more legal costs thereafter due to the end of arbitration proceedings). on the other hand, if the amount awarded to the Claimant is more than US$500,000, then the Claimant’s previous decision of rejecting the offer is correct, the Respondent has to pay the legal costs of the Claimant according to the general rule of Costs Follow the Events.
(2) Sealed Offer – the above-mentioned payment into court is more frequently adopted in civil litigation, which is rare in arbitration (after all, it is now still in the arbitral proceedings, the court hasn’t been reached yet, it is very unlikely that either party is willing to pay out a big sum of money at this stage ). Sealed Offer is more frequently adopted in arbitration proceedings. In brief, the Respondent will ask the Claimant that whether the latter would accept the offer of US$500,000 or not. If the Claimant rejects the offer, then the Respondent would put such settlement offer on paper and put it into a sealed envelope, which will be handed to the arbitral tribunal(the arbitrator(s)) and can only be opened after the arbitral award in terms of the bearing of costs has been made. After such arbitral award has been made, the arbitral tribunal would open the envelope and make comparison between the settlement offer and actual arbitration result. If the amount awarded to the Claimant is less than or equals to US$500,000, the Claimant loses the case and has to pay the legal costs of the Respondent incurred since the date the Respondent tendered the settlement offer. If the amount awarded to the Claimant is more than US$500,000, then the Claimant wins the case , the Respondent has to pay the legal costs of the Claimant according to the general rule of Costs Follow the Events.
What is good about Sealed Offer is that the party can also put itself on a good position in terms of bearing of costs without paying out actually (if the offer tendered is proper). However, the negative side of Sealed Offer is that once the Respondent hands in the sealed envelope containing the settlement offer to be kept by the arbitral tribunal, an experienced arbitrator would know what is inside. It would arouse more or less unfavorable hints against the Respondent in one way or other in the mind of the arbitrator, that the Respondent must be in the wrong, otherwise it will not tender such offer.
(3) Caldbank Offer – in this case, there is no need to pay into the court in advance or to hand in the sealed envelope containing the settlement offer to be kept by the arbitral tribunal. One party can directly write to the other party tendering a settlement offer. For example, the Respondent may put it that if the Claimant accepts, the Respondent is willing to pay US$500,000 to reach a settlement. Certainly, the Claimant could also tender a settlement offer, like, if the Respondent is willing to pay US$800,000, the Claimant agrees to settle. If no settlement can be reached, after the arbitral tribunal has made an award over the substantive disputes and starts to make the award regarding the bearing of the costs, the party once tendered a settlement offer could submit the settlement letter to the tribunal and apply for a costs award against the party, which rejected the settlement offer, to pay the his legal costs since the date the offer was tendered (in case it turns out that the rejection of the settlement offer was wrong).
Some may ask, can I play a trick here? If the Respondent tenders a US$500,000 settlement offer, I would reject it but submit the letter containing the offer to the arbitral tribunal or the arbitrator(s) later as evidence showing that the Respondent has admitted that there are defects in the goods and it is willing to pay me US$500,000 for a settlement.
The answer is, with hundreds of years’ history of common law, such trick is not going to work. In legal practice, the documents produced during the settlement process are privileged, which means, in order to encourage both parties to open their minds to reach a settlement in good faith, such documents and correspondence will not be admissible as evidence in the arbitral proceedings. Even though the arbitral tribunal has been inevitably exposed to such documents, the content of such shall not be considered when making the award. If the arbitral tribunal gets biased against one party because of the exposure of such documents, which has influenced its impartiality of judgment, the adversely influenced party may apply for changing such arbitral tribunal (arbitrators) appointed.
（Author, Bob Yan, principal solicitor of Yan Lawyers. Mr. Yan is qualified as both Hong Kong solicitor and PRC lawyer. He worked in a PRC law firm, an international law firm and two Hong Kong local law firms successively before establishing Yan Lawyers as founder. In terms of international arbitration, he focuses on handling the arbitration cases in HKIAC and the enforcement of arbitration awards in Hong Kong. For any issue regarding arbitration in Hong Kong or the enforcement of arbitration awards in Hong Kong, please do not hesitate to contact Mr. Yan.)