04 Jun Navigating the Costs in Arbitration: Insights from YCAP’s Panel Discussion at CanArb Week 2024

Author: Abubaker Ahmed

On June 4th 2024, the Young Canadian Arbitration Practitioners (YCAP) hosted a panel discussion titled “Costs Report: DOs and DON’Ts in Cost Awards” as part of Canada Arbitration Week 2024, held in Toronto, Canada. The panel members provided insightful perspectives on the current practices and challenges in costs recovery. The panel was moderated by Ekin Cinar (Dentons Canada LLP) and featured Stephanie Cohen (Cohen Arbitration), Hugh Meighen (Borden Ladner Gervais LLP), Geoff Moysa (Omni Bridgeway), and Paul di Pietro (SICANA Inc.). The panelists shared their experiences and recommendations on various aspects of cost awards in arbitration.

The panel discussion was preceded by a presentation of the key findings from the YCAP/Secretariat report titled “YCAP/Secretariat Costs Survey – The Cost of Arbitration in Canada”. The report provides a deep dive into the financial dimensions of arbitration in Canada, shedding light on patterns of costs claims and recoveries. The findings were presented by Donny Surtani (Independent Arbitrator), Chris Milburn (Secretariat Advisors), and Inkoo Lee.

Key Findings from the Report

• In the majority of cases surveyed, the costs claim was less than or equal to 10% of the main claim value.
• On average, claimants recovered around three-quarters of their claimed costs when they succeeded fully in their main claims (occasionally reaching 100% recovery). In contrast, respondents who successfully defended claims in their entirety recovered just over half of their claimed costs on average. This disparity highlights the inherent challenges faced by respondents in arbitration when it comes to cost recovery.
• In cases with mixed outcomes, cost recoveries were more muted, but again claimants tended to do significantly better than respondents.
• The survey found that costs claimed tend to be higher in international cases than in domestic matters. However, the percentage of costs recovery in international cases tends to be lower.
• The report also emphasized a general trend: when there is a clear ‘winner’ and a costs award is made, the successful party tends to recover around 80% of its claimed costs on average. Even in cases with mixed results, the party that recovers costs can still achieve substantial recoveries, averaging around 60%.
• The most common arguments supporting cost claims were related to the outcome of the claim and the prevailing norm that the losing party should pay the winning party’s costs. Settlement-related factors (past offers made) also had traction with tribunals, as did conduct-related matters (albeit to a lesser extent). This observation provides a glimpse into the strategic considerations parties must weigh when engaging in arbitration.

Panel Discussion

Regional Differences in Costs Awards
Differences exist between international and domestic cases, often influenced by regional rules and cultural expectations. Referencing the 2015 International Chamber of Commerce (ICC) Commission report on costs in international arbitration, arbitrators are often informed by the practice in local courts. For example, in jurisdictions like Canada, recovery of all applicable taxes is possible, whereas in other regions, this is not the case.

It was highlighted that the “loser pays” principle, although common, is not universally applied. A report by the New York City Bar Association’s International Commercial Disputes Committee on how tribunals seated in New York handle costs, found similarities with international norms but also some unique approaches. The report found that in New York seated arbitrations, 90% of costs were recovered in cases where the “loser pays” norm was applied.

Cultural and regional differences and how they are applied may result in unpredictability in international arbitration procedures. To negate this unpredictability, the panel emphasized the critical role arbitration institutions can play in managing costs. Some institutions provide guidance to ensure cost efficiency and include provisions on costs in their rules. The ICC, for instance, ensures predictability on a preliminary basis by fixing arbitrator and institutional fees. They also obligate parties and arbitrators to conduct proceedings efficiently. Institutions can also scrutinize draft awards to ensure thorough analysis and clear decisions on costs.

Early Cost Considerations in Arbitration
The panelists advised starting to consider costs from the beginning of the arbitration process. The importance of planning and categorizing costs early to avoid issues later was emphasized. This proactive approach helps in managing client expectations and ensuring detailed and organized cost submissions.

The feeling of fatigue towards the end of arbitral proceedings is not exclusive to arbitrators; counsel will experience it as well. Concluding aspects such as closing submissions and costs become difficult to deal with. The importance of presenting a clear and justified case for cost recovery, focusing on the merits of the dispute and the reasonableness of the costs incurred, is crucial. As such, dealing with costs upfront and being cognizant of them throughout the proceedings was noted as a good practice to undertake.

Costs are an area of significant discretion and require thorough analysis from both counsel and arbitrators. Even in cases where there is a clear ‘winner’, there is often a haircut on the recoverable fees. However, discretions should not seem arbitrary and award scrutiny procedures are useful in ensuring that is not the case. Counsel should be aware of this broad discretion and ask themselves what the best path is to lead the tribunal where it wants them to go.

Presentation of Cost Awards
When it comes to presenting cost awards, the distinction arbitration offers compared to litigation was noted. Case law from Canada supports the idea that costs should be fully indemnified in arbitration, a trend reflected in regions like Ontario and British Columbia. In New Brunswick and British Columbia, there are cases that are becoming increasingly relied upon that state a) court fee scales are not applicable to arbitration, and b) the norm in arbitration is full indemnification of costs.

Although arbitration rules are quite open, there is nevertheless some guidance in different rule sets; discretion exists, but it is not unbound. Article 42(1) of the UNCITRAL Arbitration Rules state that in principle, unsuccessful parties need to pay. In contrast, Article 38 of the ICC Rules of Arbitration take all factors into consideration when making an award on costs.

When presenting the cost awards, the importance of highlighting relative success and reasonableness in cost claims was discussed. Counsel should consider pitching to the tribunal what it means to be the prevailing party in their specific case. The panel advised against focusing on the opponent’s behavior unless supported by concrete examples (such as requesting numerous documents for the sole purpose of delaying proceedings), as it detracts from the merits of the commercial dispute.

Impact of Third-Party Funding
Third-party funding (TPF) in arbitration proceedings raises several considerations for both parties and arbitrators, particularly concerning disclosure and cost awards. The panel emphasized the importance of transparency, noting that if TPF is disclosed, arbitrators can better address its implications for the case. Disclosure is critical as it can influence decisions related to adverse costs and security for costs. The presence of TPF often necessitates evaluating whether the funder provides indemnity against adverse costs, as this can affect the financial strategy of the parties involved. Tribunals must navigate a complex landscape, with case law offering varied interpretations on whether TPF justifies security for costs. While some tribunals view TPF as a sufficient reason to mandate security, others consider it an extraordinary measure, only warranted in specific circumstances, such as a history of unpaid cost awards. The ICCA-Queen Mary University of London report on Third Party Funding in International Arbitration suggests that the need for security should be assessed independently of TPF presence, yet this recommendation has not been uniformly adopted by tribunals.

The recoverability of TPF-related costs is another nuanced aspect discussed. The panel argued that the costs associated with obtaining funding, including the funder’s fee – often a multiple of the amount spent or a percentage of the recovery – should be recoverable. This perspective is gaining recognition in institutional rules and case law. For instance, in the 2016 UK case Essar Oilfields Services Limited v Norscot Rig Management Pvt Limited [2016] EWHC 2361 (Comm), the arbitrator awarded £2 million in funding costs due to the claimant’s reprehensible conduct, which necessitated seeking external funding. Such decisions illustrate a growing trend where tribunals, especially in jurisdictions like the UK and Singapore, are beginning to incorporate TPF costs into awards, provided they are connected to the arbitration process and justified by the circumstances. Thus, while TPF introduces additional layers of complexity in arbitration, it also prompts a re-evaluation of cost allocation and recovery standards to ensure fair and equitable outcomes.

Conclusion
The panel discussion provided a comprehensive overview of the challenges and considerations in cost awards in arbitration. From the influence of regional practices and the role of institutions to strategic cost management and the impact of third-party funding, the insights shared are invaluable for practitioners. These discussions underscore the complexity and evolving nature of cost awards in arbitration. Staying informed about these developments is essential for ensuring effective and fair cost recovery practices. For a deeper understanding of the costs associated with arbitration in Canada, the YCAP/Secretariat report is highly recommended