Awarding Costs in Domestic Arbitration in India

Akin to adversarial dispute resolution, arbitration can prove to be a costly proposition.[i] The savings in the form of Court fee is often offset by other costs, some of which are peculiar to this method of alternate dispute resolution. The possibility of inflating arbitration costs justifies a need for certainty and transparency in computation and recovery of such costs.

The approaches to cost allocation accepted in recent years[ii]:

  • Costs follow the event (pure) rule: As per this rule, the victor is fully recompensed for the successful result. Through this approach, presumed unmeritorious claims are sought to be deterred. This approach claims to be “almost universally recognized”[iii] and is embraced by both common and civil law jurisdictions.
  • Costs follow the event (pro rata) rule: This rule seeks to award the victors, only in proportion or relation to the degree of success.
  • Costs follow the event (modified) rule: This approach distinguishes between the costs of arbitration (institution, arbitrators, etc.) and costs of representation (attorney’s fee, etc.), classifying only the former as following the event.
  • Costs to be shared equally: This practice envisages a 50-50 split, seeking neither to dissuade, nor to encourage significant investment in attorney’s fees.
  • Costs to be shared equally (modified): With a 50-50 split, this practices envisages the respective attorney’s fees to be borne by each side.
  • American Rule: Under this rule, each party bears the risk of its decision respecting the scope of investment in attorney’s fees. Besides America, this rule is also applied in Japan, the People’s Republic of China, Indonesia and Philippines. The American Rule is fairly prevalent in treaty-based investment arbitration abroad.[iv]
  • American Rule (exception): Providing dissuasion, this approach poses a rare possibility of partial or complete cost recovery by the victor, or by the non-culpable loser, in the presence of abuse of process, manifest dilatoriness, etc.

Legislative provisions:

The object of awarding cost is not to punish the unsuccessful litigant but to compensate the successful party.[v] Clause (a) of section 31(8) of the Arbitration and Conciliation Act, 1996 deals with costs. Clause (b) provides that unless otherwise agreed by parties, the arbitral tribunal shall specify

  • The party entitled to costs,
  • The party who shall pay the costs,
  • The amount of costs or method of determining the amount, and
  • The manner in which the costs shall be paid.

The provision also makes it clear that what is awardable is not ‘actual’ expenditure but ‘reasonable’ costs. These provisions however grant the arbitrator with a very broad discretion in awarding costs.

The Law Commission of India, in its 246th report[vi] had highlighted the need for stability in apportionment of costs in arbitration. It had proposed addition of Section 6-A to the Act, furthering the same general rule, i.e. the unsuccessful party to be responsible to pay the costs.

These suggestions were provided, keeping the spirit of the decision of the Supreme Court in the case of Salem Advocate Bar Association, Tamil Nadu v. Union of India[vii], wherein the apex Court had endorsed the view that the costs have to be those which are reasonably incurred by a successful party, except in those cases where the Court in its discretion may direct otherwise by recording reasons for the same.[viii]

The basis of the suggestions of LCI is stated to be Rule 44 of the Civil Procedure Rules of England. With the provision being greatly self sufficient[ix], predictability in cost recovery can be accentuated by employing greater precision in the arbitration clauses which are drafted by lawyers and bind the parties. It is yet to be seen if these suggestions have been included in their entirety in the new Arbitration and Conciliation Bill, 2015.[x]

Problem areas:

A study conducted in 2013 had revealed that in India, in 90% of arbitration matters, parties bear their own costs. In 6% of the proceedings, the arbitration tribunal apportions the costs of the proceedings between the parties and in 4% of the cases only costs follow the event.[xi]

There exists a lack of transparency or specificity with regard to the nature and degree of the discretion that rests with the arbitral tribunal, in respect of awarding the attorney’s fee. The uncertainties may be attributed to two major sources: First, not all arbitrators follow the same principles in order to determine which party should pay (all or a part of) the costs of arbitration. Second, arbitrators may take different views on which costs incurred by a party are reimbursable.[xii]

The law Commission of India has suggested the “costs follow the event” principle. However, the arbitrators in India would have to follow procedural safeguards, in order to accentuate the utility of the practice.

Suggestions and conclusion:

Assessment based on the outcome of the case:

The Law Commission of India suggests that the “as a rule, it is just to allocate costs in a manner which reflects the parties’ relative success and failure in the arbitration, unless special circumstances warrant an exception”.[xiii] This is typically the “relative success” approach, which is followed in Germany, Switzerland and Austria in particular.[xiv] This approach finds mention in the LCIA India Arbitration Rules[xv]. This suggestion however, should be implemented with the parameter of reasonableness ingrained in the Act. This is because assessment of the costs, merely on the basis of the degree of outcome might not be the best approach to awarding costs.

Following the approach strictly might not be practicable. For instance, in a case where the claimant claims Rs. 1, 00,000 but is awarded Rs. 40, 000 and all his other claims are dismissed. In such a situation, would it be prudent to allow less than 50% of the costs to be recovered, merely because certain claims were dismissed? Reducing the costs merely because during the course of a successful claim or defense, it has also raised arguments which were unsuccessful has been considered unfair.[xvi]

It is suggested that the computation should be based on the time and resources spent on such claims. This approach, termed as the reasonable contribution approach, is supported by a respectable body of literature and judicial authority.[xvii] For instance, Rs. 80, 000 was claimed for the main issue, which attributed liability on the respondent. This claim was a success. The remaining Rs.20, 000 was claimed for the consequent mental trauma. This issue however was considered moot since the beginning and was pursued neither by the parties, nor the tribunal. In such a situation, it might be prudent to award 100% of the costs, even though 80% of the claim amount was decreed. The Chartered Institute of Arbitrators Guidelines for Arbitrators on Making Orders Relating to the Costs of the Arbitration also prescribes consideration of time and money spent on each issue, in the event of partial success.[xviii]

Further, the tribunal shall lay down the reasons[xix] for exercising their discretion granted to them, which ultimately provides legitimacy to its decision and helps a party to accept the award.[xx]

Advance on costs:

This methodology envisages that a case shall be transmitted to the Tribunal, only after certain advance costs are paid by both the parties, in respect of the arbitral procedure. This would ensure certainty of cost as well as negate any default in payment of such costs, paid in accordance with a table of fees and costs.[xxi] The scheme has already been adopted by the Delhi International Arbitration Centre.[xxii] The International Centre for Alternate Dispute Resolution[xxiii] and Indian Council of Arbitration[xxiv] also stipulate advance costs to be submitted by the parties.

When a request for an advance on costs has not been complied with, the arbitral tribunal may consider the claims withdrawn and proceed with the claims of the party who paid the advances on costs.[xxv]

Pre-meditating the Costs:

Arbitration can be made more cost-effective if the parties are allowed to make informed choices about their cost-incurring practices, guided by the factors that the arbitral tribunal will finally consider when determining the allocations of costs at the conclusion of the arbitration. The parties’ views on the matter of costs could be solicited at the same time as their views on, e.g., the amount of submissions required, i.e. as early as possible. The parties’ agreements and/or tribunal decisions could be set forth in the document which memorializes the ground rules for the arbitration.[xxvi] This practice would be more beneficial for the parties, as compared to the arbitral tribunal exercising discretion for the first time while drafting a final award, after it is too late for the parties to do anything differently.[xxvii]

Greater transparency in the cost recovery methodology supported by an Arbitral tribunal would also enable to parties to formulate their tactics accordingly, assessing the feasibility of their approach at each step and analyzing scope of the arbitration risk. Brevity in issuance of cost awards has been criticized as a shot across the bow for underfunded future claimants, in the absence of any guiding light to ascertain an estimated cost regime.[xxviii]

[i] “Emerging trends in arbitration in India, A study by Fraud Investigation & Dispute Services”, Ernst & Young LLP, available at: http://www.ey.com/Publication/vwLUAssets/EY-FIDS-Emerging-trends-in-arbitration-in-India/$FILE/EY-Emerging-trends-in-arbitration-in-India.pdf

[ii] “Best Practices in International Arbitration”, ASA Swiss Arbitration Association, Conference of January 27, 2006 in Zurich, Edited by Markus Wirth, available at:

:http://www.shearman.com/~/media/Files/NewsInsights/Publications/2006/07/Final%20Rulings%20on%20Costs%20Loser%20Pays%20All/Files/Publikation/FileAttachment/ASA%20Best%20Practices%20in%20International%20Arbitration.pdf

[iii] Draft Principles and Rules of Transnational Civil Procedures, UNIQROIT 2002, at p. 63

[iv] S.D. Myers v. Canada, Final Award (concerning the apportionment of costs between the disputing parties), December, 2002, available at: http://www.italaw.com/sites/default/files/case-documents/ita0754.pdf

[v] Ladega v. Akiyili, (1975) 2 S.C. 91

[vi] http://lawcommissionofindia.nic.in/reports/Report246.pdf

[vii] Writ Petition (Civil) Nos. 496 and 570 of 2002

[viii] Ibid, Para 38

[ix] “Costs awards in international arbitrations”, Available at: http://costsbarrister.co.uk/uncategorized/costs-awards-in-international-arbitrations/

[x] http://pib.nic.in/newsite/PrintRelease.aspx?relid=126356

[xi] “Emerging trends in arbitration in India, A study by Fraud Investigation & Dispute Services”, Ernst & Young LLP, available at: http://www.ey.com/Publication/vwLUAssets/EY-FIDS-Emerging-trends-in-arbitration-in-India/$FILE/EY-Emerging-trends-in-arbitration-in-India.pdf, pg. 20

[xii] M. BUHLER, “A warding Costs in International Commercial Arbitration: an Overview”, available at:

https://www.international-arbitration-attorney.com/wp-content/uploads/arbitrationlaw85.pdf

[xiii] Law Commission of India, Report No. 246, at page 34, available at:

http://lawcommissionofindia.nic.in/reports/Report246.pdf

[xiv] P. ANJOMSHOAA, “Costs awards in international arbitration and the use of “sealed offers” to limit liability for costs”, International Arbitration Law Review [2007] Issue 2, available at: https://www.international-arbitration-attorney.com/wp-content/uploads/costs-awards-in-internationalarbitration-and-the-use-ofsealed-offers-to-limit-liabilityfor-c.pdf

[xv] LCIA India Arbitration Rules, available at: http://www.lcia-india.org/Arbitration.aspx

[xvi] M. HODGSON, “Costs in Investment Treaty Arbitration: The Case for Reform”, ISSN: 1875-4120, Vol. 11, Issue 1, January 2014, available at:

http://www.allenovery.com/SiteCollectionDocuments/Costs%20in%20Investment%20Treaty%20Arbitration.pdf

[xvii] T. SISSONS, “Awarding Costs in Arbitration”, available at: http://www.victoria.ac.nz/law/nzacl/PDFS/SPECIAL%20ISSUES/HORS%20SERIE%20VOL%20XVII/24%20Sissons.pdf

[xviii] #4.6, CIArb Practice Guideline 9: Guideline for Arbitrators on Making Orders Relating to the Costs of the Arbitration, available at: https://www.ciarb.org/docs/default-source/practice-guidelines-protocols-and-rules/practiceguideline9.pdf?sfvrsn=2

[xix] Anand Bros Vs Union of India, (2014)9SCC 212

[xx] M BUHLER, “A warding Costs in International Commercial Arbitration: an Overview”, ASA Bulletin 2/2004 (JUIN), Pg. 278

[xxi] DIAC Arbitration Rules, 2007, available at: http://www.diac.ae/idias/rules/Arb.Rules%202007/Cost/

[xxii] Rule 4 of The Delhi High Court Arbitration Centre (Administrative Costs and Arbitrators’ Fees) Rules, available at: http://www.dacdelhi.org/topics.aspx?mid=21

[xxiii] Rule 31, The ICADR Arbitration Rules, 1996, available at: http://icadr.nic.in/file.php?123?12:1392879878

[xxiv] ICA Rules of International Commercial Arbitration, available at: http://www.icaindia.co.in/ICAInternationalRulesofArbitration.pdf

[xxv] E. BABUR, “Advance On Costs In ICC Arbitration”, available at: http://www.erdem-erdem.com/en/articles/advance-on-costs-in-icc-arbitration/

[xxvi] White & Case LLP, “Focus on costs in international arbitration”, available at:

http://www.lexology.com/library/detail.aspx?g=5663aa4f-ea22-4ba1-9967-77500a8fbedf

[xxvii] R. H. SMIT, T. B. ROBINSON, “Cost Awards in International Commercial Arbitration: Proposed Guidelines for promoting time and cost efficiency”, The American Review of International Arbitration, Vol. 20, pp. 268, available at: http://www.stblaw.com/docs/default-source/cold-fusion-existing-content/publications/pub1081.pdf?sfvrsn=2

[xxviii] cf. Methanex v. United States, Final Award, NAFTA Tribunal, 3 August 2005, available at:

http://www.italaw.com/sites/default/files/case-documents/ita0529.pdf

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