Rising Legal Costs Claimed by States in Investor-State Arbitrations: The Test of ‘Reasonableness’ in Philip Morris v. Australia

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The Final Award Regarding Costs in Philip Morris v. Australia recently became public this July 2017 (although dated as of 8 March 2017), in (somewhat surprisingly) redacted form, signed by arbitrators Professor Karl Heinz-Bockstiegel (President), Professor Gabrielle Kaufmann-Kohler (Co-Arbitrator) and Professor Donald Mc Rae (Co-Arbitrator). Reasons were not given for the redaction of virtually all monetary amounts from the Final Award Regarding Costs, and the actual numerical figure of costs awarded to Australia was likewise redacted.  The Financial Times reported, however, that legal costs and fees that Australia claimed against Philip Morris will likely run to AUD $50 Million, or approximately USD $37 Million. For sure, according to the redacted Final Award, the figure that Australia claimed as legal costs and fees incurred defending against Philip Morris is much higher than the maximum legal fees and costs that have been claimed by the United States (USD $3 Million) and Canada (USD $4.5 Million) (Final Award Regarding Costs, para. 74.).

Assuming that the reported USD$37 Million/AUD$50 Million claim of Australia for legal costs and fees is correct, these would amount to almost 1% of Philip Morris’ USD $4.2 Billion claim against Australia, quite in contrast to around 1/10 of 1% of legal fees that Russia was ordered to pay (around USD$60 Million in legal fees) in the famous US$50 Billion Yukos arbitration.  Clearly, the alleged Australian US$37 Million claim for legal fees and costs against Philip Morris would be a staggering outlier against a trend observed in the last five years of ICSID arbitrations, where: “a study of ICSID arbitrations concluded between FY2011 and FY2015 reveals that costs incurred, on average, by claimants were US$5,619,261.74, and US$4,954,461.27 by respondents.”  This post examines the Philip Morris v. Australia tribunal’s reasoning on legal costs and fees to identify variables and considerations deemed relevant by the tribunal in reaching its conclusion awarding full costs to Australia (with the caveat that the exact figures of the costs are redacted from the Final Award).  After all, rising legal costs and fees should be a concern for largely self-regulated international lawyers, whose duties of professionalism include “avoiding unnecessary expense or delay” (The Hague Principles on Ethical Standards for Counsel Appearing before International Courts and Tribunals, Principle 2.3).  

The obvious disproportion of legal costs aside between the Philip Morris v. Australia and Yukos v. Russia cases (and of course factoring in the substantive legal differences between these arbitrations), it is worth looking at the arbitral reasoning behind the acceptance of rising costs claimed in investor-State arbitrations by a State (such as the supposed “higher than the US or Canada maxima” claimed by Australia against Philip Morris), and not just those traditionally sought by investors (where the average costs of litigating investor-State arbitration cases has been reported at around USD$5 million).  The Philip Morris v. Australia tribunal employed a test of ‘reasonableness’, following UNCITRAL Rule Article 40(2), in granting Australia’s claim for legal fees and costs:

“…Taking into account the complexity of issues of domestic and international law relevant in this procedure, particularly for a government team usually not engaged in such disputes, the Tribunal does not consider that any of these costs claimed by the Respondent were unreasonable and should not have been incurred. In making this assessment, the Tribunal also takes into consideration the significant stakes involved in this dispute in respect of Australia’s economic, legal and political framework, and in particular the relevance of the outcome in respect of Australia’s policies in matters of public health.” (Final Award Regarding Costs, para. 100)

To recall, the nearly seven years of proceedings in Philip Morris v. Australia resulted in the dismissal of the claim in the Tribunal’s December 2015 Award on Jurisdiction and Admissibility, which famously found that Philip Morris committed  “abuse of rights” by instituting the arbitration against Australia since “the corporate restructuring by which the Claimant acquired the Australian subsidiaries occurred at a time when there was a reasonable prospect that the dispute would materialise and as it was carried out for the principal, if not sole, purpose of gaining Treaty protection.” (Award on Jurisdiction and Admissibility, para. 588).  Philip Morris did not claim costs, so there was no issue of cost allocation between the parties.

Australia sought reimbursement for the fees and expenses of its expert witnesses and fact witnesses, travel costs, and for the legal expenses incurred for services rendered by “(i) the legal fees for services rendered by Australia’s counsel team, (ii) the legal fees for services rendered by the Australian Government Solicitor (“AGS”), and (iii) the costs of certain legal services provided by the Office of International Law (“OIL”).” (Final Award Regarding Costs, para. 79).  The AGS “does not receive any government funding… [it is] a statutory corporation “operating on a commercial and competitive basis to provide a full range of legal and related services.” Since 1 July 2015 AGS ceased to be a statutory corporation and was consolidated into the Attorney-General’s Department, but “continues to operate on a commercial and competitive basis in the marketplace.” (Final Award Regarding Costs, para. 81), and the AGS lawyers charge in a “fee-for-service” time-billed basis (para. 83.) – a fairly unique arrangement for a statutory corporation that emulates billing arrangements in private law firms.

To determine the ‘reasonableness’ of Australia’s claimed costs, the Philip Morris v. Australia tribunal took into account “jurisprudence in comparable cases, particularly in cases in which governments claimed their costs, as well as, more importantly, the specifics of the case at hand” (Final Award Regarding Costs, para. 96).  The Tribunal explicitly presumed in this case that “the present case has been one in which the volume of work and time involved in the presentation of the Parties’ cases considerably exceeded what is usual in NAFTA and other investment arbitrations.” (Final Award Regarding Costs, para. 98).  The Tribunal noted the preparation of “voluminous Memorials” and “a substantial body of evidence, including several expert opinions on public health”, along with “detailed briefs on key procedural questions” (Final Award Regarding Costs, para. 99).  The Tribunal further stressed that “the present dispute proceeds under the Treaty between Australia and Hong Kong, under which Australia had never been a respondent and for which it had no pre-existing in-house expertise through a pre-constituted legal team familiar with the dispute settlement method and the issues involved. The Tribunal, therefore, considers it justified that the Respondent hired outside counsel to help its own legal team in this procedure. The fees and costs claimed for these outside counsel do not go beyond what is usual in other investment cases and are thus deemed reasonable by this Tribunal.” (Final Award Regarding Costs, para. 100).  Otherwise put, the Tribunal deemed the legal costs and fees claimed by Australia to be reasonable because of the supposedly extraordinary nature and complexity of the case, the fact that Australia became a respondent for the first time in investor-State arbitration and found itself constrained to engage outside counsel.

While one certainly appreciates the Tribunal’s considerations for reasonableness, the inherent subjectivity of these factors obviously punts the issue of self-regulating costs for international lawyers back to States themselves.  Some States, such as Ireland, have transparent procurement rules for retaining external/foreign legal counsels and managing costs. Some States, such as the United States and Canada (as noted by the Philip Morris tribunal), purposely cultivate in-house professional teams  and departments well-equipped to represent their respective States in anticipated international proceedings. However, this is hardly the norm for the rest of the world.  Selection of foreign counsel by public bidding or other forms of procurement can hardly be a uniform practice in all States – some of whom might prefer selection and engagement of foreign counsels to be done outside the procurement process, due to the sensitivity and confidentiality of information involved in inter-State or investor-State arbitrations. Where this is the case – and if States perceive now that investor-State tribunals are likely to award full cost recovery anyway for State respondents as was done here in Philip Morris v. Australia – there may be fewer structural incentives for government decision-makers to manage their legal costs prudently, transparently, and with appropriate fiscal auditing in the course of investor-State arbitrations. In this sense, States may – inadvertently or otherwise – thus be part and parcel of fueling the “arbitration boom” derisively attributed to private sector firms and financiers.

Finally, and well beyond the particulars of the Philip Morris v. Australia case, it is always important to invite scrutiny into States’ uses of public funds in investor-State disputes, especially when one recalls States’ continuing obligations to fulfill economic, social, and cultural rights owed to their populations. While it may rightly be pointed out that States who are respondents to investor claims are duty-bound to defend against the sovereign claim, government decisions on how (or to what costs) the State defends against claims are just as much public policy decisions that involve the use of public funds as many other domestic measures.  These public policy decisions are no less immune from ICESCR compliance requirements owed to State’s domestic constituencies.   In Australia’s case, the system may well have been indeed structurally amenable to incurring that level of legal costs for one investor-State arbitration, but it may not be the same system of incentives or accountability structures for such uses of public funds in other States.

One can thus wonder whether States are as ready to practice ‘austerity’ in managing legal costs when facing international disputes, as they are ready to practice ‘austerity’ when there is an economic crisis draining urgent public funding elsewhere.  There are public policy and fiscal spending priorities to consider when State decision-makers engage foreign counsel to represent them in investor-State arbitrations, and one wonders whether ICESCR/human rights lawyers have considered the issue given the impacts of these cases on public funds. After all, the government decision-makers who make the initial decision to litigate (rather than settle) might not be as mindful of the commitment of public funds, when the conclusion and enforcement of investor-State arbitrations might very well take place after their political terms have expired.  They may be less mindful of any political backlash on fiscal spending for disputes at the outset as they are with the political need to defend the State from the claim, and thus ‘pass the buck’ (pun intended) by the time legal fees and costs fall due at the costs recovery phase of the arbitration.

For these reasons, domestic populations should also be mindful of the legal costs that their States may incur in sovereign representation, especially when these are not disclosed for public auditing. As the Organization for Economic Cooperation and Development reported in 2013 (OECD 2013 Report):

“(i) costs are high and some reform efforts are underway to try to reduce them; and

(ii) rules for allocating these costs among the parties are very flexible and are a source of uncertainty for both claimants and respondents.

….legal and arbitration costs for the parties in recent ISDS cases have averaged over USD 8 million with costs exceeding USD 30 million in some cases….

The largest cost component is the fees and expenses incurred by each party for its legal counsel and experts. They are estimated to average about 82% of the total costs of a case. Arbitrator fees average about 16% of costs. Institutional costs payable to organisations that administer the arbitration and provide secretariat services – such as ICSID, the Permanent Court of Arbitration (PCA), or the Arbitration Institute of the Stockholm Chamber of Commerce (SCC) – are low in relative terms, generally amounting to about 2% of costs.” (OECD 2013 Report, p. 19).

At the very least, given the uncertain subjective test of ‘reasonableness’ for legal costs as articulated in Philip Morris v. Australia,  it does not appear that States’ risk appetites for incurring these costs would be easily constrained by current norms of international investment law.  It is up to vigilant State constituencies to ensure their States’ fiscally prudent use of the services of international counsels.

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