Due to continued cuts in Civil Justice and the strict mandatory cost budgets in civil litigation, there is an increased risk of delay, poor decisions, and non-recovery of costs even if a case is won. Arbitration is therefore an increasingly attractive option.

A procedure in which parties are able to refer a dispute to a specialist third party for determination rather than proceeding through the courts now has distinct advantages over traditional litigation. Court proceedings are frequently time consuming, cumbersome and expensive and so a procedure in which the parties are free to agree how their disputes may be resolved is becoming increasing popular. The objective of arbitration is enshrined in section 1 of the Arbitration Act 1996 which refers to the fair resolution of disputes by an impartial tribunal without unnecessary delay or expense. Arbitration also allows privacy to the parties in the resolution of their dispute and can often be less formal, thereby providing much greater flexibility in timetables and in the scheduling of hearings.

When asked to assess costs, an Arbitrator is not bound to follow the procedures for assessment of costs in line with CPR, but they may choose to apply/adapt them. In some circumstances however, there are set fees. For example, the London Maritime Arbitrator’s Association publish a number of set fees in relation to Arbitrations in maritime matters and provide certain limitations on the recoverable costs allowed.

How are costs assessed in arbitration?

The Arbitrator must assess costs as he “sees fit” in line with Section 63 (3) of the Arbitration Act 1996. Unless the arbitrator or Court orders otherwise, Parts 4 & 5 of Section 63 state that where costs are determined by the arbitrator, they are to be assessed on the standard basis as it was defined before the introduction of the CPR. However, the CPR states at 44.1(2) that where an arbitrator determines the costs of proceedings that CPR 44-47 should apply. Subsequently, general civil principles should apply on which costs are to be award, quantified and the significant of offers made/received to settle. This includes the issue of proportionality, however an arbitrator may ignore the test of proportionality if they believe it to be appropriate.

“The arbitrator may ignore the test of proportionality if they believe it to be appropriate.”

Which costs are awarded in arbitration proceedings?

Section 59(1) of the Arbitration Act 1996 states that costs in arbitration proceedings fall into three categories.

  • The arbitrators’ fees and expenses,
  • The fees and expenses of any arbitral institution concerned, and
  • The legal or other costs of the parties.

An agreement which has the effect that a party is to pay the whole or part of the costs of the arbitration in any event is only valid if made after the dispute in question has arisen. Any arbitration agreement entered into before a dispute arises would not be able to provide that each party bears their own costs.

Can the arbitral tribunal depart from the general rule?

Typical circumstances where the arbitral tribunal may depart from the general rule are where there has been:-

  • A gross exaggeration of the claim
  • Unsatisfactory conduct by one of the parties
  • Failure by the successful party on an issue that was time consuming
  • Extravagance in the conduct of the hearing
  • A sealed offer

Although the tribunal will usually give reasons for departing from the general rule, they are not required to. In order to ensure all parties are given a fair opportunity to share their views, the Arbitrator will sometimes send a draft of the proposed award as to costs to all parties to consider before the final award is made.

“Although the tribunal will usually give reasons for departing from the general rule, they are not required to.”

No agreement?

If costs are not determined by agreement or by the arbitrator the parties can apply to the Court (upon notice to the other parties) which may— (a) determine the recoverable costs of the arbitration on such basis as it thinks fit, or (b) order that they shall be determined by such means and upon such terms as it may specify. Unless the tribunal or the court determines otherwise— (a) the recoverable costs of the arbitration shall be determined on the basis that there shall be allowed a reasonable amount in respect of all costs reasonably incurred, and (b) any doubt as to whether costs were reasonably incurred or were reasonable in amount shall be resolved in favour of the paying party.

Unless otherwise agreed by the parties, the tribunal may direct that the recoverable costs of the arbitration, or of any part of the arbitral proceedings, shall be limited to a specified amount. Any direction may be made or varied at any stage, but this must be done sufficiently in advance of the incurring of costs to which it relates, or the taking of any steps in the proceedings which may be affected by it, for the limit to be taken into account.

If you are looking for expert costs guidance in this area, please contact our highly experienced team on 0161 830 8474.

Looking for more ways to maximise your costs? Follow us on LinkedIn and Twitter for daily updates.