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.
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. [Read more…]
[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:
[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