Our previous article raised the issue that the costs of commercial arbitration are quite high in Hong Kong. So who should bear the costs at the end of the arbitration? As a general rule, the arbitral tribunal has the power to decide on the proportion of the arbitration costs to be borne by the parties. Here, we provide a brief introduction to how the arbitral tribunal assesses the costs of arbitration, including administrative fees, tribunal fees and expenses, and the parties’ own legal and other fees.
Article 74 (1) of the Hong Kong Arbitration Ordinance provides that “an arbitral tribunal may include in an award instructions regarding the costs of the arbitral proceedings”. Article 74 (2) further provides that the arbitral tribunal may direct in the award to whom and by whom and in what manner the costs are to be paid.
As a general rule, at least in international commercial arbitrations, the basic principle for costing is that “costs follow the event”, which means that, generally speaking, the losing party must pay the costs. costs of arbitration. In other words, the losing party will be required to pay its own costs as well as the costs of the winning party, the arbitral tribunal and the administering institution, if any.
It should be noted that this principle is only the starting point for the tribunal to award the costs of the arbitration; the tribunal will take into account all relevant factors and assess the proportion and amount of the arbitration costs.
First, the arbitral tribunal determines by whom the costs are to be paid. The outcome of an arbitration is the starting point for deciding which party will pay the arbitration costs. However, in many cases, the arbitration award is not necessarily as simple or straightforward as one might think. For example, when a dispute involves multiple causes, including a claim by the plaintiff and a counterclaim and set-off by the defendant, and sometimes when the arbitration proceeding involves more than one contract or different parties to the same contract or one. series of issues involving the same contract, the end result of the arbitration may be that one party succeeded in some claims while it failed in others, or that only a small portion of the amounts claimed were awarded. been awarded.
In these situations, the arbitral tribunal, when deciding the outcome of the arbitration, should take into account the following factors:
- Which party won the main claims?
- If there are multiple complaints, which party prevailed over the numerical or quantitative majority of their complaints?
- What is the proportion between the amounts claimed and the amounts of compensation finally awarded by the court?
Second, the arbitral tribunal will determine the amounts of each party’s own costs to be paid. Here, the arbitral tribunal will examine the reasonableness of the costs incurred by the winning party taking into account the following:
- If the costs incurred are reasonable and appropriate in relation to the amounts in dispute: if the amounts in dispute are relatively small, then the costs should not be excessive.
- The complexity of the subject-matter of the dispute and its importance for the parties: if an arbitration concerns a simple dispute over a contract of sale and purchase, the legal points are relatively simple and its factual context in question is less questionable, then the winning party should not have incurred excessive costs. On the other hand, if the arbitration involves a complex construction contract dispute, with important factual issues, involving many witnesses and documents, and covering a long period of time, then the legal costs incurred should be relatively high.
- If the lawyers’ qualifications, professional expertise, rates and the number of team members providing the services are reasonable: if some work can be done by a junior associate, it should not be done by a senior associate; also, the same job should not be handled by too many lawyers.
- Inappropriate or dishonest conduct by the parties in an arbitration is also an important factor to consider: for example: if a party makes excessive requests for disclosure of documents, employs various delaying tactics, does not respect procedural timetables, makes redundant, irrelevant of excessive legal arguments, conducts excessive cross-examinations during the trial, makes unfounded allegations of fraud or, more seriously, submits false evidence and statements to the court, these are factors the court must take into account. consideration in the assessment of arbitration fees.
- As a general rule, the losing party should bear 60-70% of the total costs incurred by the winning party and otherwise attributable in accordance with the above.
Third, “without prejudice” regulation: if a party to an arbitration has made an offer to settle the case on a “without prejudice” basis but the offer is not accepted by the other party and an arbitration award is ultimately made in which the amount awarded by the court to the winning party is lower than that offered by the losing party in the settlement, the court would then take the settlement offer into account when assessing the costs of the winning party.
For example, suppose the plaintiff claims HK $ 500,000 in arbitration and the defendant offers on a “without prejudice” basis to pay HK $ 350,000 to reach a settlement and asks the plaintiff to agree to the arbitration. offer to settle before June 30, but the claimant rejects this proposal. In the award, the arbitral tribunal rules in favor of the plaintiff, but the amount payable by the defendant is HK $ 100,000.
Under normal circumstances, the Respondent lost the arbitration as a whole and should have paid the costs of the winning party. However, the defendant can ask the court to decide that the plaintiff will pay the arbitration costs incurred after July 1. The costs incurred by the parties subsequently could have been avoided if the plaintiff had accepted the settlement offer.
Fourth, third-party funding: If the losing party in an arbitration is funded by a third party, can the arbitral tribunal make an adverse costs order against the third party funding? There are no express provisions on this in the revised Arbitration Ordinance, but as stipulated in the Code of Good Practice, funding agreements should indicate whether, and to what extent, third-party funders will be liable to the funded parties for unfavorable cost estimates.
The arbitral tribunal has wide discretion in determining the responsibility for payment and the amount of arbitration costs. In addition to the final outcome of an arbitration, the behavior of both parties during the arbitration is also a relevant factor that the court must take into account in awarding arbitration costs.