The Last Year and a Half of Cost Allocation in Investment Arbitration
Cost allocation in investment arbitration is often as controversial as the dispute itself. And there is a good reason for that: it is not uncommon that parties incur several millions of dollars in legal fees. The Yukos case set a new “record” last year; the claimants incurred legal fees in an amount of more than USD 80 million, the respondent incurred USD 31 million. A review of the 16 most recent ICSID- decisions on costs shows that it is difficult to predict the outcome of a tribunal’s cost decision.
Arbitral tribunals in investment arbitration have been divided on how to proceed with cost allocation: some advocate a “costs follow the event” approach; others refute this principle altogether, and advocate a “costs lie where they fall” approach, with each party paying for its own expenses and half of the costs of the tribunal and ICSID. A middle ground between these two positions has been a mitigated use of the “cost follow the event” approach, which allocates common costs to the loser, while each party foots at least part of the bill for their legal armies.
The last year and a half of ICSID decisions show that arbitral tribunals have not been so willing to give all spoils to the victor. We analyzed 16 decisions (including final awards, decision on revision and annulment decisions), published in this period and found a surprising number of cases applying either a “costs lie where they fall” approach, or a mitigated ” costs follow the event” approach:
- Among the analyzed sample, 6 tribunals applied a “costs lie where they fall approach”. These comprise 5 final award and 1 annulment decision. In this sub-sample, the respondent state won 5 out of the 6 decisions, either on jurisdiction or admissibility grounds. These tribunals justified their approach on the argument that these cases were not clear-cut and involved complex factual and legal issues, as well as on the fact that the conduct of both sides was appropriate. In the case won by claimant, the tribunal justified its approach on the fact that respondent won on significant jurisdictional objections.
- Other 8 cases applied some form of a mitigated “costs follow the event” approach. 4 of these shifted only the common costs of the proceedings to the losing party, using a “costs lie where they fall” approach regarding the legal fees. The other 4 tribunals granted the winner a right to recover both common costs and legal fees, but significantly reduced the legal fees asked by the winner, either because the bill was too hefty or because the loser had prevailed (at least partially) on some of its arguments. In all cases, the winner was left with a seven figure bill to pay despite its victory.
- The 2 remaining cases were the only ones where the tribunal accepted a pure “costs follow the event” approach. However, one of them was a decision for revision of the award, so only the costs related thereto were footed to the loser.
Overall, tribunals seem more reluctant to apply a costs follow event approach in cases won on jurisdictional and admissibility grounds, especially when it comes to decisions on legal fees: of the 10 cases where the tribunal decided to apply a “costs lie where they fall” approach to legal fees, 9 were won on these grounds. This means parties who won on jurisdiction or admissibility grounds were generally denied recovery of legal fees. In most cases, this was a respondent state that successfully challenged the tribunal’s jurisdiction. The cases in which claimant won based on this type of preliminary objections were restricted to annulment proceedings initiated by the respondent state. It is symptomatic that, in the 10 decisions applying a “costs lie where they fall” approach to legal fees, the respondent state was denied recovery of legal costs on 7 occasions, while claimant was denied recovery on the remaining 3 cases.
An interesting decision that came up during our research was an order for discontinuance of proceedings after the claimant failed to pay the advance on costs for several months. The case was in an advanced stage, since proceedings had been bifurcated and claimant had prevailed partially on jurisdiction. Therefore, both parties must have had incurred significant costs by the time the proceedings were discontinued. The tribunal’s order to discontinue the arbitration was accompanied by an individual statement of one of the arbitrators, who believed the tribunal should have issued a decision on costs prior to terminating the proceedings. The ICSID Arbitration Rules contain no provision on cost allocation after termination of proceedings. Also, the provisions governing discontinuance in case of default to pay the advance on costs do not provide guidance to the tribunal. Whether the tribunal can still issue an award on costs (and whether the respondent state has actually sought it) remains to be seen.
A detailed overview of the analyzed decisions and a link to their full text may be found here.
