Who bears the legal costs in international arbitration?

Parties litigating in United States courts typically bear their own costs and pay their own attorneys’ fees.  But in the world of international arbitration, that “American Rule” may be replaced by a number of other approaches, such as the rule that “costs follow the event” – i.e., that the losing party pays the winner’s costs. 

Below are discussed three key questions on how costs might be divided in an international arbitration.

Did the parties agree on how costs would be allocated?

One of the fundamental tenets of international arbitration – and arbitration generally – is party autonomy.  In the context of fees and costs, that means that any enforceable agreement to divide fees and costs will be respected by the arbitral tribunal. 

Although applicable state and national laws differ, enforceability of such costs allocation agreements is often a nonissue, and U.S. courts most often enforce awards giving effect to an agreement on costs. 

Absent agreement, what rules might apply?

When the parties have not agreed in advance on how costs will be divided, the selection of the appropriate rule in international arbitration is often left to the arbitral tribunal, subject to certain limitations. 

When their discretion is unfettered, arbitral tribunals might use one of the methodologies below:

  • The American Rule (parties generally bear their own costs and fees).
  • The pure “costs follow the event” rule (the loser pays all costs and fees).
  • The pro rata “costs follow the event” rule (the loser pays costs and fees in proportion with the outcome).
  • The parties share costs and fees equally, or share costs equally with fees borne by each side.

Other options are also possible.  But the sizable number of methods does not mean that the arbitral tribunal’s choice among them is random. 

What authorities might affect the arbitral tribunal’s methodology?

Before granting an award of costs and fees, arbitral tribunals may need to consider the impact that other authorities beyond the contract may have on their award of fees or costs.  Those authorities may include:

  • The Arbitration Rules. Choosing different rules can impact costs and fees.  The International Chamber of Commerce (ICC), for example, empowers arbitrators to assess costs and fees as part of the arbitral award but does not require any particular methodology.  By contrast, the rules of the United Nations Commission on International Trade Law (UNCITRAL) generally presume that the unsuccessful party will bear the costs of the arbitration.
  • Local Arbitral, Substantive, or Procedural Law. Arbitral tribunals might look to the arbitration laws of the countries in which they sit – or other laws related most closely to the substance of the dispute – to assess who will bear the costs in international arbitration.  In England, for example, legislation requires that, absent contrary agreement, the unsuccessful party pay the successful party’s recoverable costs in international arbitration. 

Arbitrators often look to guidance published in the arbitration community and in prior cases to assess which methodology might be most appropriate. In 2015, for example, the ICC published a report entitled “Decisions on Costs in International Arbitration.”  The report lists cost-allocation factors for arbitral panels to consider when exercising their discretion to award an appropriate and reasonable allocation of costs and fees between the parties. 

Some case-specific factors might include: the relative successes and failures of the parties; the reasonableness of the costs and fees incurred; the submission of proof; and any improper conduct or bad faith by the parties in the matter.

Considering such factors may inspire arbitrators – subject to relevant limitations – to craft bespoke cost and fee awards that depart from the typical categories outlined above.  Forum rules and legislation may still leave arbitrators substantial discretion on how to award costs and fees.  It thus can be difficult to predict how an arbitral tribunal will rule on them.

Some parties may be comfortable with that uncertainty.  But others may prefer to mitigate it by formalizing early on an agreement on the division of costs and fees.

To learn more about international arbitration, follow us on LinkedIn.  “Brilliant lawyers with courtroom savvy” – Benchmark Litigation.  Copyright MoloLamken LLP 2021.

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