COSTS AND INTERESTS OF ARBITRATION: AN ENGLISH LAWS PERSPECTIVE WITH REFERENCE TO VIETNAM

Tony Nguyen – Sr Partner of EPLegal

This article provides a brief explanation of the principles of costs allocation in arbitration from English law and Vietnamese law perspective, which will help the tribunals and parties determine or submit their costs allocation in these respective jurisdictions. It also gives a brief introduction of interests in arbitration from a comparative perspective.

  1. What costs shall be allocated?

Under Section 59 of the Arbitration Act 1996 the costs include the following: (a) the arbitrators’ fees and expenses, (b) the fees and expenses of any arbitral institution concerned, and (c) the legal or other costs of the parties.

In practice, the following costs are well-established in international arbitration:[1]

(a) The fees of the arbitration tribunal (“Tribunal”) and, in institutional arbitration, the fee and disbursements payable to the institute which administrates the arbitral proceedings (normally be fixed and stated by the arbitral institute);

(b) The reasonable travel and other expenses incurred by the arbitrators;

(c) The reasonable costs of expert advice and other assistance (e.g. translation, court reporting) required by the arbitral tribunal;

(d) The reasonable travel and other expenses of witnesses to the extent such expenses are approved by the arbitral tribunal;

(e) The reasonable legal and other costs incurred by the parties in relation to the arbitration;

(f) Any fees and expenses of the appointing authority at the request of the parties.

There has been a discussion on whether the overhead costs of the parties (e.g. in-house counsels and witnesses) participating in the arbitration process should be counted as costs in arbitration, but rarely the parties submit these costs to the tribunal for allocation. The main focus is usually on the legal fees and other professional fees (such as fees for the delay, quantum and legal expert advice) spent by the parties, as in the majority of cases the parties are not in agreement on this when the quantum of the costs are inter-played with the allocation of costs principles.

The Vietnamese Law on Commercial Arbitration (the “LCA”) only provides a restrictive definition for arbitration fees (but not necessarily costs) which include the following:[2]

(a) Remuneration and travel and other expenses for arbitrators;

(b) Fees for expert consultation and other assistance at the request of the Tribunal;

(c) Administrative charges;

(d) Fees for appointment of the arbitrator (paid to the appointing authority) in ad-hoc arbitration at the request of the disputing parties;

(e) Charges for use of other services provided by the arbitral centre.

Legal fees and fees for other professional advice (such as technical/legal expert) engaged by the parties normally form the biggest portion in the costs of international arbitration. Unfortunately, the LCA provides no references to legal fees and other professional fees engaged by the parties (but not necessarily at the request of the Tribunal). This is a critical gap in the LCA that needs to be fulfilled in future developments.

Despite the above doctrinal gap, practices in Vietnam Arbitration Centre (“VIAC”), the largest arbitral institution in Vietnam, indicate that VIAC arbitrators generally accept that principles applicable for arbitration fees as defined by the LCA can also apply to the legal fees and fees for experts appointed by the parties.

  1. General principles of costs allocation

From the English law perspective, the Tribunal has full discretionary power to decide on costs as they see fit. Unless otherwise stated, the costs shall be determined on a standard basis. The Civil Procedural Rules (the equivalence to Vietnam’s Civil Procedural Code) interpreted the term “standard basis” as follows:

  • The Tribunal only allow costs that are proportionate with the reported issues. Any costs that are disproportionate with the amount claimed shall be waived or reduced even if such costs are reasonable or necessary; and
  • If there are doubts regarding whether the costs incurred are reasonably and adequately or even whether such claims are reasonable and proportionate with the matter or not, the Tribunal shall consider in favour of the paying party.
  1. Exceptions

The following matters will allow the Tribunal to depart from applying the general principles and instead exercise its discretionary power to allocate costs on an indemnity basis:

  • The Claimant overinflates the amount claimed;
  • Unacceptable conduct by either party;
  • The successful party has lost on a distinct issue that is time-consuming;
  • Sealed envelope offers or otherwise referred to as the Part 36 offer. This means that if the successful party refused an offer that is equal to or more than the monies awarded to him, any costs incurred from the time the offer is put forth onwards shall be borne by the Claimant.

Where the fees are assessed on an indemnity basis, the Tribunal would only consider the reasonableness instead of proportionality. Besides, where there are doubts on whether the costs have reasonably incurred or not, the Tribunal will consider in favour of the payee.

In both above-mentioned scenarios, the Tribunal shall not allow any costs that are deemed unreasonable.

  1. What if the parties had prior agreements on costs?

Normally, the Tribunal will follow the parties’ agreement on costs allocation, but the Tribunal will also consider any compulsory provisions that may limit the parties’ freedom to enter into such agreement. For example, under English laws, the parties are only able to agree on who will bear their costs after a dispute has arisen. Hence, if the arbitration clause in the substantive contract provides that each party are to be responsible for their expenses, this agreement will not be valid.[3]

An important question in this regard is whether the matter of costs allocation in arbitration is a procedural issue (as opposed to a substantive one) and shall be governed by the laws of the seat of arbitration. If it is a matter of substance, then the governing law of the substantive contract shall apply to determine the costs issues. In recent SIAC cases involving Vietnamese parties, though the Vietnamese law may be regarded as the laws governing the substantive contract, the Tribunals tend to apply general principles of costs allocation in international arbitration.

In a recent ICC matter seated in Vietnam, the sole arbitrator accepted reference to foreign precedents to allocate the costs following a party’s proposal, even though the seat of arbitration in Vietnam. The LCA provides that the Tribunal has the wide power to allocate costs, thus, the Tribunal would base their reasoning on any reasonable principles, unless the law of the seat of arbitration has a mandatory provision to obstruct it.

  1. Interests

The consideration concerning whether the calculation of the interest falls within either the procedural or substantive law. In principle, once the interests clause is clearly stated in the contract, it would become the rights and obligation of both parties to act, thus, such clause shall be governed by the substantive law of the contract and mandatory restrictions may apply to the determination of interest.

Under English law, the parties are free to agree on the powers of the Tribunal as regards the award of interest, including whether simple or compound interest is applicable.[4]

Under Vietnamese laws, interests may be capped by the law.[5] Consider a SIAC case where the contract provides that the violating party shall be obligated to pay the late payment interests of 21%, and the governing law of the substantive contract is Vietnamese. The Tribunal found this agreement was not in line with the Civil Code (the law of the seat), which does not allow penalty interest to go beyond 20% and adjusted the late payment interest to 20% accordingly.

  1. Conclusion

The principles of costs in international arbitration are rather straightforward and logical ones. Since there will be costs incurred throughout the arbitration proceedings, such fees are to be allocated amongst the parties and are recoverable on a reasonable basis. In general, the unsuccessful party shall bear the costs of the arbitration and legal (and other associated) costs to the successful party. However, the Tribunal have broad power, albeit on justifiable grounds, to depart from this principle of costs and to allocate costs as a tool to reflect the parties conduct in the arbitration proceedings. Concerning the interests, it is a matter of substantive law and though the parties are free to agree on interests, there may be restrictions under the substantive law that will limit the parties autonomy.

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[1] See for example UNCITRAL Rules (2013) Article 40.
[2] Article 34 LCA.
[3] Section 60 Arbitration Act 1996.
[4] Section 49 Arbitration Act 1996.
[5] Article 357.2 and Article 468 Civil Code 2015.

 

Please click the link below to read our legal analysis: English version | Vietnamese version

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