1

Costs awards in international

arbitration and the use of
sealed offers to limit liability
for costs
This article originally appeared in the International Arbitration Law Review [2007] Issue 2
Poupak Anjomshoaa
Senior Associate
Introduction
The costs of international arbitration can
be signicant. Parties to international
arbitration proceedings are increasingly
concerned about the costs of the
proceedings as they may ultimately
have to bear not only their own costs,
but also a part of their opponents legal
and other costs. This can be an
overwhelming burden.
This article considers costs awards in
international arbitration, the effect of
certain institutional arbitration rules on
the tribunals discretion in awarding costs,
the apparent tendency to award costs to
the prevailing party, and one way in which
parties to an international arbitration can
seek to control their potential costs liability
in those proceedings.
The proposed method of control is the
sealed offer, a mechanism which is
widely used in a number of common law
jurisdictions to encourage the parties
to settle their disputes by imposing
cost penalties on those who choose to
continue with the proceedings in the face
of a reasonable offer to settle. This article
discusses the concept of the sealed offer,
the policy behind it, the potential for using
it in international arbitration, how it should
be made and its expected effect on the
award of costs.
Costs awards in
international arbitration
Parties to an international arbitration can
generally expect to incur the following
categories of costs:
1. The administrative charges of any
arbitral institution which is involved
2. The fees and expenses of the
arbitral tribunal
3. The fees and expenses of the lawyers
4. The fees and expenses of any experts
5. The fees and expenses of any
other professionals whose services
may be required (e.g., transcribers
and interpreters)
6. The cost of hire of the hearing room
and facilities
7. Witness expenses
8. Any internal costs
These costs can be substantial, both per
se and when compared with the amounts
in dispute.
Unlike parties to litigation or domestic
arbitration proceedings in jurisdictions
Poupak Anjomshoaa
White & Case (Europe) LLP
AUG 2007 | 02440 | 0807036 WHITE & CASE
such as those in the United States where, in the
absence of a specic contractual provision to the
contrary, the parties are generally expected to bear
their own legal and other costs (i.e., the fees and
expenses of the lawyers and experts, witness
expenses and any internal costs) with only minimum
court costs being awarded, parties to international
arbitration proceedings may be liable not only for their
own costs, but also for those of their opponents.
1
This
is because a tribunal in an international arbitration
usually has the power (and is often obliged) to
make an award on costs as well as the substantive
claims referred to arbitration and the award of costs
may well allocate costs in such a way as to require
one party to pay all or part of the other partys legal
and other costs. As noted by Derains and Schwartz,
increasingly claims for the reimbursement of costs
constitute a substantial part of the relief sought in ICC
arbitrations; in large arbitrations, it is not uncommon
for cost claims to total several million US dollars.
2
This gives rise to the question: How are costs
awarded in international arbitration? The answer
is that any award on costs will be in the discretion
of the arbitral tribunal, regulated only by the specic
language of the arbitration clause and any applicable
institutional rules for international arbitration.
The most commonly used institutional rules require
a tribunal in an international arbitration conducted
under the auspices of those rules to make an award
on costs.
3
The majority also contain some suggestion
as to how costs are to be apportioned. While the
ICC Rules of Arbitration and the ICSID Arbitration
Rules are silent in this regard,
4
it is clear that under
the AAA International Arbitration Rules, the LCIA
Arbitration Rules, the UNCITRAL Arbitration Rules
and the Rules of the Arbitration Institute of the SCC,
there is a general expectation that the legal costs of
the successful party
5
will form part of the award
on costs, with the losing party
6
being ordered to
compensate the successful party for its reasonable
legal and other costs. The LCIA Arbitration Rules go
so far as to suggest that there is a
general principle that costs should reect the
parties relative success and failure in the award
or arbitration, except where it appears to the
arbitral tribunal that in the particular circumstances
this general approach is inappropriate
7

(emphasis added).
Costs awards in international arbitration and the use of sealed offers to limit liability for costs
With respect to ICC arbitration, Derains and Schwartz
comment that the attitudes and practices of both
arbitrators and parties vary considerably when it
comes to claiming and awarding costs, given the
great diversity in approach to the question of costs
in different jurisdictions. For example, while some
parties do not even consider making a claim for costs,
others make detailed submissions accompanied
by supporting documentation. Similarly, while many
awards contain no more than a few lines on the
question of costs, in some cases costs will be the
subject of a separate nal award, the merits having
been dealt with in an earlier partial award.
8
Derains and Schwartz observe that the treatment
of costs by arbitrators is often inuenced by their
national backgrounds, and that in this regard, there
are three approaches to awarding costs that appear
to be most commonly followed.
9
One approach is
to order the losing party to bear all costs; this is
noted to be the usual rule in England.
10
Another,
said to be prevalent in Germany, Switzerland
and Austria in particular, is to allocate costs in
proportion to the outcome of the case, taking into
account the relative success of each claim. The
third approach is to require the costs to be shared
equally by the parties or borne by the party which
incurred them.
Despite such variances, several international
arbitration practitioners have observed an emerging
trend in favour of the rst approach.
11
According to
Fouchard, Gaillard and Goldman:
It is increasingly common for the arbitral tribunal
to order the party which is defeated on the merits
of a dispute to pay all or a substantial part of the
costs of the arbitration. That is traditionally the
practice in some common law countries and now
frequently occurs when the arbitral tribunal has
its seat in continental jurisdictions such as France
or Switzerland.
12
In light of this evident inclination to award substantial
costs to the successful party, parties to international
arbitration who consider themselves at risk of receiving
an unfavourable award, albeit for substantially smaller
sums than those claimed, must look for a means by
which they can cap their potential costs liability.
One potential solution is the sealed offer.
2
What is a sealed offer?
A sealed offer (often referred to as a Calderbank
letter or Calderbank offer)
13
is a written offer
to settle a dispute which has been referred to
arbitration, made without prejudice save as to
costs. What distinguishes the sealed offer from
an ordinary offer to settle a dispute is the cost
penalty (in respect of which, see below) which the
arbitral tribunal is expected to attach to it, against
the offeree who does not accept the offer and fails
subsequently to achieve a more favourable award
by continuing the proceedings. The offer is sealed
and without prejudice because it is not to be
brought to the attention of the arbitral tribunal before
the determination of the substantive dispute, in case
it inuences the decision of the tribunal with regard
to the merits of the substantive case. However,
in order that the offer can be taken into account
in assessing liability for costs, it must be brought
to the attention of the arbitral tribunal before the
tribunal makes a determination on costs, hence the
words save as to costs.
A sealed offer will be used by a party to arbitration
proceedings which is concerned about the high costs
of the proceedings in which it has become embroiled,
for the purposes of capping its potential costs liability
(for both its own costs and the other sides costs,
where the tribunal has the power to order one party
to pay the other sides costs) in those proceedings.
Can a sealed offer be effective in an
international arbitration?
The sealed offer derives from English law and the
practice of the English courts and arbitral tribunals in
allocating costs. In litigation or domestic arbitration
in England, as a general rule, the party considered
to be the overall loser is ordered to pay the costs
of the proceedings and the reasonable legal and
other costs of the overall winner, as well as any sum
awarded on the merits. This has been described
as the loser pays all or costs follow the event
principle. It is generally followed, even where the
loser may have defeated the winner on a number of
points and the recovery of the latter is signicantly
less than the amount originally claimed, so long as
the recovery is for more than a nominal amount.
The sealed offer mechanism has been devised
specically to counteract this seemingly harsh
approach to allocating costs.
14
The sealed offer
alleviates the general rule on costs in England by
displacing the loser pays all principle when the
winner has failed to accept an offer which it does
not subsequently beat (in other words, where
it would have recovered the same or more by
accepting the offer). In such an eventuality, the
winner will generally be held liable for the losers
costs incurred after the time when the offer could
have been accepted.
15
Accordingly, the offeror
can seek to place a ceiling on its potential costs
liability in respect of the period following the
offer, by offering to settle the offerees claims for
such amounts as the offeror sensibly believes the
tribunal would award in respect of those claims,
if the proceedings were not settled.
It is unsurprising that common law jurisdictions
which follow the English approach towards
allocating costs, most notably Hong Kong, Australia
and Canada, also give cognisance to the use of
sealed offers to counterbalance the potentially unfair
effect of that approach.
16
It is submitted that such a
mechanism is crucial in any forum where costs are
awarded in accordance with the English principle that
costs follow the event; international arbitration,
where this principle is increasingly followed, is one
such forum.
Anyone conducting an international arbitration
which has its seat in England, Hong Kong, Australia
or Canada, which has the law of one of those
jurisdictions as its procedural law, or which is made
up wholly or partly of arbitrators who practise in
one of those jurisdictions, should certainly use the
sealed offer procedure where possible to contend
with the potential application of the general rule on
costs that is normally followed in those jurisdictions.
In light of the growing tendency in international
arbitration to allocate costs to the successful party,
it is submitted that those conducting international
arbitrations which have no connection with these
jurisdictions should also be considering the use of
this procedure in their arbitrations where the tribunal
has a discretion over the award of costs; the sealed
offer provides invaluable ammunition to those who
have no choice but to defend exaggerated or unduly
inated claims brought against them.
3
Costs awards in international arbitration and the use of sealed offers to limit liability for costs
4
The author recently represented respondents in
an arbitration conducted under the ICC Rules of
Arbitration who were keen to cap their potential
costs liability in the arbitration; they believed that
the tribunal would issue an award against them for a
fraction of the sum claimed, but were concerned that
they would nevertheless be held liable for the bulk of
the costs of the arbitration, including the claimants
legal and other costs, because the award would be
for more than a nominal amount. The respondents
were an unincorporated joint venture made up of
Continental European and Asian companies. The
claimant was an Asian company. The applicable law
of the contract was Taiwanese law, but the seat of
the arbitration was London. The chairman was a civil
law lawyer but the two party-appointed arbitrators
were English and the other side was represented by
an English claims consultant practising in Hong Kong.
It was felt that in all the circumstances, there was
a good chance that a sealed offer would be taken
into account by the arbitral tribunal when allocating
costs. A sealed offer was drafted and sent to the
claimant. The case settled within three and a half
weeks of the offer being made. It was subsequently
conrmed that the claimant shared the authors view
as to the potential impact of the sealed offer on costs,
and that this had a signicant bearing on its decision
to compromise its claims for a sum signicantly less
than that claimed.
Making the sealed offer
The sealed offer must be in writing and very clearly
marked with the words Condential and Without
Prejudice Save as to Costs. The signicance of
these words, which should be explained in the offer
letter, is that the letter should not be revealed to the
tribunal, save with respect to the question of the
costs of the arbitration following a decision on the
merits of the substantive claims.
Ideally, neither the fact nor the amount of the sealed
offer should be revealed to the tribunal before it has
made a decision on the merits of the substantive
claims, the rationale being that such knowledge
might inuence its decision with regard to the
merits of the substantive case. However, this is not
so straightforward, as it is customary for an arbitral
award to deal at one and the same time both with the
parties substantive claims and the question of costs.
Following the issue of the nal award, the arbitral
tribunal is rendered functus ofcio (i.e., it is deemed
to have fullled its functions and lacks the power to
reconsider or amend its decision) and cannot alter
the award on costs. Accordingly, the existence of any
sealed offer has to be brought to the attention of the
arbitral tribunal before it issues its nal award.
In England, there are two common methods of bringing
the sealed offer to the attention of the arbitral tribunal
before it makes its nal award.
17
The rst is to request
a bifurcation of the award, so that the substantive
claims are dealt with in an interim award and the
costs are addressed in a nal award, on the grounds
that the parties would like an opportunity to address
the tribunal separately on costs once they know the
outcome on the substantive claims. A bifurcation is
often requested on this basis, even where there is no
sealed offer. Therefore, a request that the award be
bifurcated will not suggest to the tribunal that there
has necessarily been a sealed offer.
Where there is a bifurcation, the sealed offer will
be revealed to the tribunal following receipt of the
interim award on liability and damages, during the
course of the submissions on costs. The sealed offer
can thus be taken into account in the award on costs
which will form part of the nal award.
The second method of bringing a sealed offer to
the attention of the tribunal before the nal award is
issued is actually to inform the tribunal that there has
been an offer of compromise from one of the parties
to the other,
18
and to provide the tribunal with a
sealed envelope containing a copy of that offer on the
understanding that the envelope will not be opened
before the tribunal has reached a nal decision on the
merits of the parties substantive claims.
This method is not prevalent in England due to
concerns that where the tribunal can guess the
identity of the offeror, the offer may be deemed an
admission of liability by that party and may inuence
the tribunals decision on the substantive claims.
However, since bifurcation will lead to further costs
and delays in reaching a nal award, the offeree
may object to the bifurcation of an award on such
grounds. In the case of an objection, the tribunal
would probably agree that bifurcation would be
overly burdensome, unless the indications were that
Costs awards in international arbitration and the use of sealed offers to limit liability for costs
the amount of costs at stake would be sufciently
high so as to justify a separate award on costs.
In the event that the tribunal declined to bifurcate the
award, there would be no choice but to follow the
second approach.
In truth, any fear that an arbitral tribunals decision
on the substantive claims may be inuenced by
the knowledge that one party has made an offer
of compromise to the other party in relation to the
dispute before it is unwarranted in most cases. Any
sophisticated arbitral tribunal should appreciate that
an offer of compromise may have been made simply
because the offeror is keen to remove any uncertainty
from its accounts, for commercial or other reasons,
and despite the lack of any belief in the merits of the
compromised claims. Equally, the tribunal cannot
dismiss the possibility of the offer being one to settle
the offerees claims for a nominal sum, aimed solely
at obtaining some costs protection.
Accordingly, while a party to an arbitration who
seeks to make a sealed offer should be warned of
the potential difculty in concealing the existence
of the offer from the tribunal, and the possible risk
in certain cases of the tribunal drawing adverse
inferences from the existence of the offer if made
aware of it, the failure to secure a bifurcation of
the award subsequently should not necessarily
be seen as an obstacle to utilising the sealed offer
procedure. This is not least because the offer places
the offeree on risk (in respect of costs) from the date
immediately following that on which the offer could
have been accepted, which may be relatively early
in the proceedings, thereby resulting in a settlement
long before the failure to secure a bifurcation could
become an issue.
Of course, this is largely a matter of judgment in
each case and may require some knowledge of the
arbitral tribunal, as well as careful consideration of
the circumstances of the case. In the recent ICC
arbitration in which the author made a sealed offer
on behalf of the respondents, the claimant would
not agree to a bifurcation of the award, therefore
the respondents would have had to have brought
the offer to the attention of the arbitral tribunal by
way of a sealed envelope, had the case proceeded
to a hearing.
However, it was considered unlikely in that particular
case that the arbitral tribunal would draw any
adverse inferences from the existence of an offer.
There were several counterclaims in that case which
meant that the tribunal could not guess the identity
of the offeror before it looked at the offer; the offer
may have been an offer by the claimant to settle the
counterclaims and the tribunal could not assume an
admission of liability on the part of the respondents
with regard to the claimants claims. Furthermore,
it was fairly clear on the facts of that case that the
respondents were liable to pay something to the
other side, albeit signicantly less than the sums
claimed, therefore it would not have been surprising
to the tribunal to learn that the respondents had
admitted some liability.
What are the general costs consequences of a
sealed offer in England?
Previously, an English arbitral tribunal was bound
to apply the same principles as are applied in the
High Court of England, when deciding its award
on costs.
19
This changed with the enactment of the
English Arbitration Act 1996, ss. 59 to 65 of which
contain an elaborate code relating to costs in an
arbitration that has its seat in England or Wales or
Northern Ireland.
20
Accordingly, the English Civil
Procedure Rules (the CPR), which set out the rules
and procedures that apply to the conduct of litigation
in the High Court of England and Wales,
21
including
provisions as to the effect of a Part 36 offer (which
is the court equivalent of the sealed offer), do not
govern arbitrations in England and Wales. The rule as
to the allocation of costs in an arbitration that has its
seat in England, Wales or Northern Ireland, is set out
in s. 61 of the English Arbitration Act 1996:
(1) The tribunal may make an award allocating the
costs of the arbitration as between the parties,
subject to any agreement of the parties.
(2) Unless the parties otherwise agree, the
tribunal shall award costs on the general
principle that costs should follow the event
except where it appears to the tribunal that
in the circumstances this is not appropriate in
relation to the whole or part of the costs.
22
5
Costs awards in international arbitration and the use of sealed offers to limit liability for costs
6
Unfortunately, the Arbitration Act provides no guidance
as to the effect of a sealed offer or how it should be
dealt with by an arbitral tribunal. Consequently, and
in the absence of any other guidelines, it is generally
accepted that while not bound to follow the practice
of the courts, an English arbitral tribunal should be
guided by the CPR when exercising its discretion
in relation to costs in an arbitration which has been
the subject of a sealed offer.
23
For that reason, we
must look at the relevant provisions of the CPR when
considering the likely cost consequences of a sealed
offer in an arbitration in England.
Part 36 of the CPR
The cost consequences of a Part 36 offer, which
is the court equivalent of a sealed offer, are set out
in Part 36 of the CPR.
Under Part 36 of the CPR, if a defendants Part 36
offer or a claimants Part 36 offer (this will be a
reverse offer from the claimant to settle its own
claims for a sum less than that claimed in the
proceedings) is accepted within the permitted
time period,
24
the claimant will be entitled to his
reasonable costs of the proceedings (including his
legal costs) up to the date of acceptance.
If a defendants Part 36 offer is not accepted and
subsequently it is found that the claimant would
have recovered the same or more by accepting the
offer, the court will, unless it considers it unjust to
do so, hold the claimant liable for the defendants
costs incurred after the permitted time period within
which the offer could have been accepted.
25
If a claimants Part 36 offer (to settle its own claims
for a lesser sum) is not accepted and subsequently
the claimant beats that offer, the court may, unless
it considers it unjust to do so, order the defendant
to pay the claimants costs on an indemnity basis.
The court retains a general discretion in relation to
costs where a Part 36 offer is not accepted and
may take account of a number of things, including
the conduct of the parties, to award costs on a
different basis than that suggested by Part 36 of
the CPR.
Nothing prevents a party from making an offer to
settle a dispute in any way he chooses, but if the
offer is not made in accordance with Part 36 of the
CPR, the costs consequences set out in that Part
will only follow from the offer to settle if the court
so orders.
English arbitration
As with court proceedings, it is entirely up to each
party in what form it wishes to make its offer
to settle the proceedings. However, the more
removed the contents of an offer are from that
envisaged in Part 36 of the CPR, the less likely it
may be that the costs consequences set out in
Part 36 of the CPR will be applied to that offer by
the arbitral tribunal. Accordingly, if a party to an
English arbitration wants its sealed offer to have
the same cost consequences as a Part 36 offer, it
must follow the rules as to the form and content of
a Part 36 offer, as contained in Part 36 of the CPR,
as closely as possible.
The offer does not have to include an offer to pay
the costs of the offeree, if accepted. However, the
intended cost consequences of the offer, if accepted,
should be clearly stated so that the offeree can make
an informed choice and the tribunal can ultimately
determine whether the offeree would have been
better off accepting the offer. An ambiguous or
uncertain offer may not be void, but it will be given
little weight by the arbitral tribunal in exercising its
discretion on costs.
26
An offer should be clear not only in relation to the
question of costs, but also as to whether it purports
to take account of interest and any counterclaims.
If an offer is made by the respondent to settle the
claimants claims only, a separate reverse offer
can be made by the respondent in respect of any
counterclaim that he has.
A sealed offer may be revised at any time as the
case proceeds. The usual consequence of revising
a sealed offer, however, is that the previous offer
will be ignored for the purposes of assessing costs
(i.e., costs will be assessed by reference to the date
of the revised offer).
Costs awards in international arbitration and the use of sealed offers to limit liability for costs
7
Conclusion
In international arbitration, the award of costs is
left largely to the discretion of the arbitral tribunal
and it is difcult to state with condence exactly
how the tribunal will allocate costs between the
parties. What is certain, however, is that the costs
of international arbitration can be signicant, with
losing parties often having to bear not only their
own costs, but also a considerable proportion of
the other sides costs. To deal with this additional
burden on parties to international arbitration, there
is no reason why the sealed offer procedure used
by parties to legal proceedings in certain common
law jurisdictions, to cap their potential costs
liability in those proceedings, cannot be effectively
used by parties to an international arbitration to the
same effect.
The cost consequences of sealed offers in England
are largely a matter of logic and common sense;
they go to the reasonableness of the conduct of
the offeree in declining to accept the offer. The
reasonableness of the conduct of the parties is
also an important consideration for an international
arbitral tribunal when exercising its discretion on
costs. As observed by Derains and Schwartz, the
award of costs in ICC arbitrations often depends on
the behaviour of the parties.
27
Therefore, it is to be
hoped that a tribunal in an international arbitration
might give effect to a sealed offer (made in that
arbitration) in line with the practice of the English
courts and tribunals. Certainly, logic and common
sense must be followed in the absence of any set
rule or procedure.
Parties who are at the contract negotiating stage
may wish to consider drafting their arbitration
clauses in such a way as to anticipate the use
of the sealed offer mechanism. For those who
are already at the dispute stage, there is no
harm in making any without prejudice offer of
compromise in the form of a sealed offer, so that
it can be brought to the attention of the tribunal
at the appropriate time and used in argument as
to who should be responsible for the costs of the
arbitration, where it was reasonable for the offeree
to accept the offer.
Appendix: relevant provisions of the most
commonly used institutional arbitration rules
Article 31 of the International Chamber of
Commerce (ICC) Rules of Arbitration 1998:
1. The costs of the arbitration shall include the
fees and expenses of the arbitrators and the ICC
administrative expenses...as well as the fees and
expenses of any experts appointed by the Arbitral
Tribunal and the reasonable legal and other costs
incurred by the parties for the arbitration.
...
3. The nal Award shall x the costs of the
arbitration and decide which of the parties shall
bear them or in what proportion they shall be
borne by the parties.
Article 31 of the American Arbitration Association
(AAA) International Arbitration Rules 2006:
The tribunal shall x the costs of arbitration in
its award. The tribunal may apportion such costs
among the parties if it determines that such
apportionment is reasonable, taking into account
the circumstances of the case.
Such costs may include:
(a) the fees and expenses of the arbitrators
(b) the costs of assistance required by the tribunal,
including its experts
(c) the fees and expenses of the administrator
(d) the reasonable costs for legal representation
of a successful party...
Article 28 of the London Court of International
Arbitration (LCIA) Arbitration Rules 1998:
28.1 The costs of the arbitration (other than the legal
or other costs incurred by the parties themselves)
shall be determined by the LCIA Court...
Costs awards in international arbitration and the use of sealed offers to limit liability for costs
8
28.2 The Arbitral Tribunal shall specify in the award
the total amount of the costs of the arbitration as
determined by the LCIA Court. Unless the parties
agree otherwise in writing, the Arbitral Tribunal
shall determine the proportions in which the parties
shall bear all or part of such arbitration costs...
28.3 The Arbitral Tribunal shall also have the
power to order in its award that all or part of the
legal or other costs incurred by a party be paid by
another party, unless the parties agree otherwise
in writing. The Arbitral Tribunal shall determine and
x the amount of each item comprising such costs
on such reasonable basis as it thinks t.
28.4 Unless the parties otherwise agree in writing,
the Arbitral Tribunal shall make its orders on both
arbitration and legal costs on the general principle
that costs should reect the parties relative
success and failure in the award or arbitration,
except where it appears to the Arbitral Tribunal
that in the particular circumstances this general
approach is inappropriate....
Articles 39 to 41 of the Rules of the Arbitration
Institute of the Stockholm Chamber of
Commerce (SCC) 1999:
Article 39 Arbitration Costs
(1) The Arbitration Costs consist of
(i) the arbitrators fee
(ii) the Administrative Fee of the SCC Institute
(iii) compensation due to the arbitrator and
the SCC Institute to cover their expenses during
the proceedings
(iv) the fees and expenses of any expert
appointed by the Arbitral Tribunal...
Article 40 Payment of Arbitration Costs
...
(2) The Arbitral Tribunal decides on the
apportionment of the arbitration costs as between
the parties with regard to the outcome of the case
and other circumstances.
Article 41 Costs Incurred by a Party
Unless the parties have agreed otherwise, the
Arbitral Tribunal may, at the request of a party,
in an Award or other order by which the arbitral
proceedings are terminated, order the losing
party to compensate the other party for legal
representation and other expenses for presenting
its case.
Articles 38 and 40 of the United Nations
Commission on International Trade Law
(UNCITRAL) Arbitration Rules 1976:
Article 38
The arbitral tribunal shall x the costs of arbitration
in its award. The term costs includes only:
(a) The fees of the arbitral tribunal...
(b) The travel and other expenses incurred by
the arbitrators
(c) The costs of expert advice and of other
assistance required by the arbitral tribunal
(d) The travel and other expenses of witnesses
to the extent such expenses are approved by
the arbitral tribunal
(e) The costs for legal representation and
assistance of the successful party if such costs
were claimed during the arbitral proceedings,
and only to the extent that the arbitral tribunal
determines that the amount of such costs
is reasonable
(f) Any fees and expenses of the appointing
authority as well as the expenses of the
Secretary-General of the Permanent Court of
Arbitration at The Hague.
...
Article 40
1. Except as provided in paragraph 2, the costs
of arbitration shall in principle be borne by
the unsuccessful party. However, the arbitral
tribunal may apportion each of such costs
Costs awards in international arbitration and the use of sealed offers to limit liability for costs
9
between the parties if it determines that
apportionment is reasonable, taking into
account the circumstances of the case.
2. With respect to the costs of legal representation
and assistance referred to in article 38,
paragraph (e), the arbitral tribunal, taking into
account the circumstances of the case, shall be
free to determine which party shall bear such
costs or may apportion such costs between
the parties if it determines that apportionment
is reasonable....
Rule 28 of the International Centre for the
Settlement of Investment Disputes (ICSID)
Arbitration Rules:
(1) Without prejudice to the nal decision on the
payment of the cost of the proceeding, the
Tribunal may, unless otherwise agreed by the
parties, decide:
(a) at any stage of the proceeding, the portion
which each party shall pay,... of the fees and
expenses of the Tribunal and the charges for
the use of the facilities of the Centre
(b) with respect to any part of the proceeding,
that the related costs... shall be borne
entirely or in a particular share by one of
the parties....
28
Poupak Anjomshoaa is a senior associate in the
London Construction & Engineering group whose
practice focuses on international arbitration.
The information in this article is for educational
purposes only; it should not be construed as
legal advice.
Copyright 2007 White & Case (Europe) LLP
1 Internal costs are not commonly awarded, save perhaps in
respect of in-house counsel.
2 Derains & Schwartz, A Guide to the ICC Rules of Arbitration
(2nd ed., 2005), p. 370.
3 See Art. 31 of the International Chamber of Commerce (ICC)
Rules of Arbitration 1998; Art. 31 of the American Arbitration
Association (AAA) International Arbitration Rules 2006; Art. 28
of the London Court of International Arbitration (LCIA) Arbitration
Rules 1998; Arts. 39 to 41 of the Rules of the Arbitration Institute
of the Stockholm Chambers of Commerce (SCC) 1999; Arts. 38
and 40 of the United Nations Commission on International Trade
Law (UNCITRAL) Arbitration Rules 1976; and Rule 28 of the
International Centre for the Settlement of Investment Disputes
(ICSID) Arbitration Rules (see also Art. 61(2) of the ICSID
Convention). The relevant parts of these rules are set out in
the Appendix hereto.
4 See Art. 31 of the ICC Rules of Arbitration 1998 and Rule 28
of the ICSID Arbitration Rules.
5 See Art. 31 of the AAA International Arbitration Rules 2005 and
Arts. 38 and 40 of the UNCITRAL Arbitration Rules 1976. Under
Art. 40 of the UNCITRAL Arbitration Rules, all but the legal and
other costs of the successful party shall in principle be borne by
the unsuccessful party; the tribunal remains free to determine
which party shall bear the legal and other costs of the successful
party, or may apportion such costs between the parties, but the
suggestion that the tribunal may order the losing party to pay
those costs is express.
6 See Art. 41 of the Rules of the Arbitration Institute of the SCC 1999.
7 Art. 28 of the LCIA Arbitration Rules 1998.
8 Derains & Schwartz, above fn. 2, pp. 370 et seq.
9 ibid., pp. 371 et seq. A study undertaken by the ICC Courts
Secretariat, referred to by Derains and Schwartz, has conrmed
that the tribunal does not always allocate legal and other costs
in line with its award on the fees and expenses of the arbitrators
and the ICC administrative expenses (see Art. 31 of the ICC
Rules of Arbitration 1998). However, both categories of costs are
awarded according to one of the three approaches outlined.
10 By way of example, see ICC Case No. 8528 (1996) (2000) 25 Y.B.
Com. Arb., in which it was stated that (i) n accordance with
well-established principles the prevailing party may expect
the losing party to pay the costs of the Arbitration and the legal
costs of the Parties (at p. 351).
11 See Micha Bhler, Awarding Costs in International Commercial
Arbitration: An Overview (2004) 22(2) ASA Bulletin 249-279.
See also Julian Lew, Loukas Mistelis and Stefan Krll, Comparative
International Commercial Arbitration (2003), pp. 654-655.
12 Fouchard, Gaillard and Goldman, International Commercial
Arbitration (1999), p. 686. An example of an ICC arbitral tribunal
sitting in Paris requiring the losing party to pay the prevailing
partys costs, is ICC Case No. 6962 (1992) (1994) 19 Y.B. Corn.
Arb. 192-193.
13 The name derives from the English case of Calderbank v Calderbank
[1975] 3 All E.R. 333; [1976] Fam. 93.
14 In English litigation, it is the payment into court or the Part 36
offer procedures referred to in the English Civil Procedure Rules
which must be used; the sealed offer is the arbitral equivalent of
the Part 36 offer, which is discussed further below.
15 For this purpose, a time limit for the acceptance of the offer must
be stipulated in the sealed offer. In the case of a Part 36 offer,
the time limit for acceptance without needing the permission of
the court (which is the relevant time for the operation of this rule
under the English Civil Procedure Rules, Rule 36.20), is stipulated
to be 21 days (see the English Civil Procedure Rules, Rule 36.11).
Costs awards in international arbitration and the use of sealed offers to limit liability for costs
10
16 With respect to Hong Kong, see Ord. 22, Ord. 73 (Rule 11 et seq.)
and Ord. 62 (Rules 2 and 5) of the Rules of the High Court which
apply in Hong Kong. See also Chinney Construction Co. Ltd. v
Po Kwong Marble Factory Ltd. [2005] 3 H.K.E.C. 1042, which
concerned an appeal from the award of an arbitral tribunal arising
from the tribunals treatment of a Calderbank offer. The court
in Chinney Construction conrmed that arbitral tribunals could
and should consider Calderbank offers in the exercise of their
discretion on costs.
With respect to Australia, see, e.g., Part 42 (Divisions 1 and 3)
and Part 20 (Division 4) of the New South Wales Uniform Civil
Procedure Rules 2005. See also Decor Ceilings Pty. Ltd. v
Cox Constructions Pty. Ltd. [2006] S.A.S.C. 85 (Supreme Court
of South Australia, March 27, 2006, Besanko J.), which again
concerned an appeal from the award of an arbitral tribunal arising
from the tribunal s treatment of a Calderbank of fer. The court
in Decor Ceilings conrmed that the discretion available to an
arbitrator when considering the costs of the arbitration is a broad
one and the making of a Calderbank offer is a relevant factor
in the exercise of this discretion. With respect to Canada, see,
e.g., Rule 49 of the Rules of Civil Procedure of Ontario and Prince
Edward Island and Rules 41A and 63 of the Civil Procedure Rules
of Nova Scotia.
17 See the judgment of Lord Donaldson M.R. in King v Thomas
McKenna [1991] 1 All E.R. 653 at 661-662.
18 Where there are no counterclaims, the tribunal will most likely
assume that the offer has been made by the respondent since
a reverse offer (i.e., an offer from the claimant to compromise
its own claims for a lesser sum) will rarely be made in
international arbitration.
19 Mustill and Boyd, Commercial Arbitration (2nd ed., 1989), p. 395.
20 Mustill and Boyd, Commercial Arbitration (Companion to
2nd ed., 2001), p. 206.
21 The CPR also apply in the county courts and the Civil Division
of the Court of Appeal.
22 This is a non-mandatory provision of the Arbitration Act 1996
and the parties may agree that different principles should apply
(see ss. 4 and 62 of the Act), although [A]n agreement which
has the effect that a party is to pay the whole or part of the costs
of the arbitration in any event is only valid if made after the
dispute in question has arisen (see s. 60 of the Act, which is a
mandatory provision).
23 See John Tackaberry Q.C., Part 36, Part 44 and Calderbank
Letters: Important Keys to Successful Dispute Resolution
(October 2001), Society of Construction Law, at www.scl.org.uk.
This paper also contains a more detailed discussion on the
subject of Calderbank offers as used in England.
24 In the case of a Part 36 of fer, the time limit for acceptance
without needing the permission of the court (which is the relevant
time for the operation of this rule under the CPR, Rule 36.20)
is stipulated to be 21 days (see the CPR, Rule 36.11). If a Part 36
offer is accepted after the permitted time period, different rules
will apply.
25 It was held in Tramountana Armadora SA v Atlantic Shipping Co.
SA [I978] 1 Lloyds Rep. 391 at 398, that where a sealed offer
is not accepted and the claimant ultimately recovers no more
than he would have done by accepting the offer: Prima facie,
the claimant should recover his costs up to the date of the offer
and should be ordered to pay the respondents costs after that
date. However, this would be the case only where the claimants
recovery is for more than a nominal amount. If the recovery is
triing and did not justify the proceedings, the claimant may well
be deprived of all of its costs (as may be the case where there
has been no sealed offer).
26 The offeree is generally considered to be entitled to its costs
up to the date of the offer, therefore, where the offer does not
make specic mention of costs, it may nevertheless be assumed
to be inclusive of costs. It is for this reason that a sealed offer
which does not specify what is proposed in relation to costs
may be considered uncertain and have little weight attached to
it, because where a global sum is offered in respect of both the
claims and costs, it will be impossible to work out the amount
offered in respect of the claims themselves.
27 Derains & Schwartz, above fn. 2, p. 373.
28 Art. 61(2) of the ICSID Convention also contains the following
provision on costs incurred by the parties: In the case of
arbitration proceedings the Tribunal shall, except as the parties
otherwise agree, assess the expenses incurred by the parties in
connection with the proceedings, and shall decide how and by
whom those expenses, the fees and expenses of the members
of the Tribunal and the charges for the use of the facilities of the
Centre shall be paid. Such decision shall form part of the award.
Costs awards in international arbitration and the use of sealed offers to limit liability for costs