According to the 2021 Queen Mary University of London International Arbitration survey, arbitration remains the preferred dispute resolution mechanism for cross-border disputes. However, the biggest concerns for arbitration users are that it takes too long and it costs too much. As a result, one common question is whether and to what extent parties can recover costs incurred in connection with an arbitration. The answer can be an important factor in deciding whether a party should incur (or continue to incur) these costs or seek settlement.
When recovery of costs is discussed, the focus is usually on costs of external counsel and experts. This is understandable given these are typically the most significant costs incurred by parties. What is discussed less is whether the costs of in-house counsel and other party employees are recoverable. An arbitration requires significant attention of in-house teams. It is unlikely to form part of business as usual for many companies and running an arbitration invariably redirects substantial time from other projects.
Until recently, except for out-of-pocket expenses, in-house costs were not considered recoverable as a matter of principle. This position is changing. In the appropriate circumstances, tribunals are more inclined than before to award these costs: in one recent case, we successfully recovered a large percentage of our clients' in-house costs. In this article, we look at general principles regarding the recovery of in-house costs and a few points for parties to consider at different stages of the arbitration process.
Arbitrators usually have wide discretion to award and allocate costs. National arbitration legislations and arbitral rules recognise a tribunal's authority to make cost decisions and may provide some general guidance on allocation of costs. However, there is limited or no guidance on categories of recoverable costs. The prevailing approach of tribunals (particularly in commercial arbitrations) is that 'costs follow the event' or 'loser pays'; however, there may be other factors which qualify this approach.
In-house costs of managing the dispute are typically irrecoverable. Traditionally, in-house costs were considered irrecoverable on the basis that such costs fall within the general operational expenses of the party. For the same reason, tribunals still typically consider that costs incurred by in-house counsel or other employees in instructing external counsel and/or in the general management of a dispute are not recoverable.
In-house costs might be recoverable if the work done internally reduced the work carried out by external counsel and experts. The Chartered Institute of Arbitrators' Guide on Drafting Arbitral Awards notes that arbitrators may award in-house costs "if they are satisfied that the work done internally obviated the need for outside counsel or experts to do it and hence led to an overall saving of costs". This makes sense as a matter of fairness – a party should not be disadvantaged because the counterparty allocated all work to outside counsel and experts. This is also implicit recognition of the evolving role played by in-house counsel who often provide strategic input and make important contributions throughout the arbitration, with the result that running an arbitration is more collaborative than before. It is usually easier to persuade a tribunal this was the case in a particular arbitration if there was a detailed record of what the internal teams did.
Moreover, dividing the work appropriately between the internal and external teams may reduce the overall costs incurred by the party. In this regard, a tribunal might look at whether the number of hours and the fees billed by external counsel instructed by the party claiming its in-house costs are lower than that billed by the other party's external counsel.
To be recoverable, in-house costs must also be substantiated. In contrast to external counsel who provide detailed invoices, a significant practical hurdle in claiming in-house costs is such costs are often difficult to accurately substantiate with supporting evidence. Ideally, in-house teams would provide a record of the time spent working on the particular arbitration along with an explanation as to how that time translates into costs, and whether and how those costs are recorded in the party's systems.
Such evidence might conceivably be available in a situation where in-house counsel is specifically hired for the purposes of a dispute, or where internal work is carried out by a group company which is not party to the arbitration and there is an intra-group agreement to govern how the party shall bear the costs (pursuant to which invoices are issued for that internal work). However, such clear evidence is unlikely to be available in most other circumstances. Parties can consider providing an approximate figure for the time spent by internal teams and calculating the costs by reference to a proxy rate. However, the less evidence there is for substantiating in-house costs, the less likely it would be for a tribunal to award such costs.
What should parties consider?
In-house counsel and other internal teams often dedicate substantial time to an arbitration and their contributions are indispensable to its outcome. Therefore, it makes sense to consider whether internal costs can be recovered in the event of a successful outcome. While it is not possible to predict how a tribunal will approach these costs, it is worth considering the following points:
- At the stage of drafting the arbitration agreement – should in-house costs be expressly addressed? Given the uncertainties in how a tribunal will approach decisions on costs, you may wish to address costs in the arbitration agreement and expressly provide that in-house costs are (or are not) recoverable. In practice, however, this level of detail is unlikely to be front of mind at the drafting stage.
- At the commencement of the arbitration – should you put systems in place to record the time spent, work done, and costs incurred by in-house teams? If there is a possibility that you may wish to claim in-house costs, it would be sensible to discuss with external counsel and put these systems in place. As noted above, it would likely make it more straightforward to substantiate these costs and explain how the work carried out by the external teams was reduced by the in-house team's contributions. It might also be helpful to flag the involvement of in-house counsel to the tribunal by, for example, including them in the first procedural order as part of the legal team to be copied on procedural correspondence.
- At the stage of cost submissions – should you claim in-house costs? As costs submissions are typically exchanged simultaneously and before the substantive outcome of the arbitration is known, different factors might be relevant to this decision. If you claim in-house costs, you would likely be seen as accepting as a matter of principle that such costs are recoverable. This might give credence to the other party's claim for in-house costs (if any). If the total costs claimed (internal plus external costs) are significantly higher than the total costs claimed by the other party, it might make your costs appear unreasonable or disproportionate. On the other hand, if it appears during the course of an arbitration that the other party's legal fees would likely be higher (for example, given a significant disparity in the number of attorneys on record), you might feel more comfortable claiming in-house costs.