Editors’ Note: This is the first in a series of posts we are running from individual members of the Academic Forum of the UNCITRAL Working Group III on Investor-State Dispute Settlement Reform, in parallel with UNCITRAL WG III’s ongoing sessions this week in New York. These posts at EJIL:Talk! are meant to summarize more detailed concept papers prepared by various Academic Forum members. This first post synthesizes the concept paper prepared by Academic Forum Working Group I (members: Catharine Titi, Julien Chaisse, Marko Jovanovic, Facundo Perez Aznar, and Gabriel Bottini), with assistance from Olga Puigdemont.
The Academic Forum on ISDS proposed the preparation of a concept paper (the “Paper”) on the issue of excessive costs and insufficient recoverability of cost awards, in support of the State delegations deliberating ISDS reform issues during the UNCITRAL WGIII sessions to take place in New York City the week of April 1st, 2019. The concept paper indicates sources considered by Working Group 1.
The Paper addresses the issue from four different angles. First, it deals with fees. On the one hand, it examines party costs (fees and expenses of counsel, experts, and witnesses) and, on the other, tribunal costs (fees and expenses of arbitrators and arbitral institutions, including secretariat services for ad hocarbitrations). Second, it addresses the issue of the length of proceedings and its impact on costs, including the impact of document production on the length/cost analysis. Third, the paper delves into the issue of insufficient resources to bring or defend against an investment claim. In so doing, it assesses the role of third-party funding (“TPF”) and contingency and conditional fee arrangements. Fourth, with respect to the issue of insufficiency of resources or unwillingness to pay a cost award, the Paper examines the availability or lack thereof of mechanisms to secure prompt payment of an award on costs. This includes a reference to the impact of TPF and security for costs.
For the purposes of this post, I summarize the issue of (i) excessive fees, and (ii) insufficient recoverability of cost awards, focusing in particular on how it is impacted by TPF.
A 2017 study found that average party costs were USD 6,019,000 for the claimant and USD 4,855,000 for the respondent, while average tribunal costs were USD 933,000. Another 2017 study shows that the average cost for an ICSID annulment applicant is USD 1.36 million and USD 1.45 million for a respondent.
Investment arbitration is a remedy that involves significant costs. For the claimant-investor incurring these costs may be perfectly rational, particularly if the investment is a large one and the investor perceives that no other effective remedy is available. For the respondent State, however, these costs will normally be higher than if the dispute had been processed through its national courts only. The figures also show that party costs are by far the largest portion of arbitration costs. Yet it would be wrong to conclude that only the parties can do something about party costs. These costs are also influenced not only by the manner in which the arbitration is conducted, where the role of the arbitral tribunal is fundamental, but also more generally by the way in which the arbitration process (including any available remedies against the arbitral award) is structured.
Under the reform scenario consisting of improving the current investor-State arbitration system, it is unlikely that the amount of fees and expenses of counsel, experts, and witnesses will be regulated in arbitration rules, other than by the broad discretion conferred upon the arbitrators by the most prevalent institutional rules to not only consider the outcome but also all other relevant circumstances of the case for the determination of the final allocation of costs.
However, measures aimed at reducing the proceedings’ length or more directly the lawyers’ work could help reduce party costs within the current system. These measures could include: i) limiting the length of all the parties’ written submissions; ii) preventing/discouraging extensive document discovery by not granting discovery requests that are not warranted; iii) discouraging the submission of certain expert reports (such as international law experts, except in special circumstances) and generally the attendance of experts and witnesses at hearings if not necessary; iv) discourage the submission of legal authorities that are publicly available or of the same document by more than one party; v) apportioning costs; or vi) dismissing frivolous claims early in the procedure.
Apportionment of costs between the disputing parties is of the utmost importance. ICSID tribunals are, roughly, evenly divided as to whether they require the “losing party” to pay the costs (i.e. “loser pays” or “costs follow the event” approach) or require each party to pay its own costs and half of the arbitral tribunal costs (i.e. “pay your own way” approach) (Commission, J. and Moloo, R., Procedural Issues in International Investment Arbitration (2018) Oxford University Press, para. 10.47). However, the majority of UNCITRAL tribunals (perhaps reflecting the difference in the applicable provisions on costs allocation) have applied some form of the former approach by entering adjusted costs orders.
It seems preferable not to adopt a specific rule or presumption on costs, but rather to grant tribunals discretion to allocate costs in light of the circumstances of the case. Nonetheless, arbitral rules should require tribunals to take into account, in the exercise of such discretion, certain criteria and to provide reasons explaining these criteria when distributing costs. Under ICSID’s most recent reform proposal, the following factors would have to be considered when allocating the costs of the proceeding: “(a) the outcome of the proceeding or any part of it; (b) the parties’ conduct during the proceeding, including the extent to which they acted in an expeditious and cost-effective manner; (c) the complexity of the issues; (d) the reasonableness of the costs claimed; and (e) all other relevant circumstances.” Another factor that could be expressly mentioned would be the reasonableness of the amount claimed. This could serve to discourage unreasonably high claims, even by parties having meritorious claims. Aside from arbitral rules, further guidance on costs could be included in investment treaties.
With regards to the second reform scenario, in principle, replacing ad hocannulment committees or set aside proceedings with a standing appellate body should not by itself impact party costs. Its impact will depend on the design of the appellate mechanism, including the level of review, whether the second instance can amend the award and thus avoid the possibility of resubmission. Further, in the long run, to the extent the appellate mechanism brings more consistency, costs may be reduced by reducing the time counsel for the parties need to address fundamental issues (because the appellate body has a clear position on these issues), which would further reduce counsel’s work.
It is unclear whether the creation of a multilateral court itself (reform scenario 3) would have an impact on how much parties are spending on counsel and expert fees. Yet a MIC could issue procedural rules or over time develop practices that could limit the extent to which parties resort to experts. It is unclear whether reform scenario 4 would provide a viable solution to this concern.
Insufficient Recoverability of Cost Awards
Third-party funding raises serious concerns as to the liability for and recoverability of the costs of proceedings. Given that the third-party funder is not a party to arbitration, it cannot be directly awarded the costs of proceedings nor can it be obliged to pay adverse costs to the other party. Nevertheless, its indirect, financial influence on the proceedings may affect the costs allocation and recovery. As far as costs allocation is concerned, if the funded party prevails, it is normally due to pay a certain percentage of the award on damages to the funder. However, a recent case from the realm of commercial arbitration allows a different scenario to be envisaged. In Essar v. Norscot (2016 EWHC 2361 (Comm)), an ICC arbitration conducted in London, the sole arbitrator qualified the amount due to the funder as “other costs of proceedings”, i.e. the costs of obtaining litigation funding, and awarded it as a special item to the party funded. Though this scenario has not (yet) been replicated in investment arbitration, it should be recognized as a potential concern. On the other hand, as far as the recoverability of the costs of proceedings is concerned, this concern becomes particularly acute in cases where the funded party is impecunious, so the award on costs, which is not binding upon the funder, cannot be enforced on the party’s (non-existent or insufficient) assets.
In order to reduce or eliminate the concerns arising from third party funding in investment arbitration, the improvement of IA should be aimed at decreasing the need for this financing method, enhancing the recoverability of the costs of proceedings and, overall, at a clear regulation of this concept. An improvement to the current system could be achieved through a system of legal aid in ISDS. This mechanism would be available only to impecunious parties, third party funding would still find its place with parties who wish to preserve their liquidity and avoid engaging their assets in the proceedings.
With regards to impecunious parties, a classical approach would be to rely upon security for costs orders. At the same time, more detailed rules or guidelines on examining the requests for security for costs should be included in arbitral rules to prevent the abuse of that tool and avoid the undue increase of the overall costs of proceedings. Insurance mechanisms could also be used to cover awards on costs.
Efforts already made to create guidelines and soft rules for third party funding, as useful as they may be, still remain fairly fragmentary as they apply only to some TPF-related issues or to some institutional arbitrations. Here, drafting more detailed and harmonized rules on third party funding at the international level might prove helpful in clarifying certain basic principles.
Bearing in mind that the concerns arising from third party funding are not necessarily linked to the characteristics of the review mechanism (if any), the introduction of an appeal instance does not seem likely to bring about any meaningful change.
With regards to the problem of the need to have recourse to third party funding before a MIC could be resolved in two ways. First, being a permanent international judicial structure, the MIC could set the court fees so that they do not represent a real obstacle to access to justice for parties experiencing financial difficulties. Second, in the same way as in reform scenario 1, the MIC could establish a mechanism of legal aid that could contribute to reduce the need for third party funding. Given its permanent and centralized judicial structure, the MIC could adopt rules providing systemic answers to the cost-related problems of TPF. Finally, the MIC’s constitutive instrument could provide that any award on costs would be binding on the third-party funder. Here, enforcement against the funder’s assets would not appear problematic as long as these assets are located in a State party to the MIC.