Arbitrators' Discretion In Awarding Costs: Are There Any Limits?

Costs in international arbitration are more than a mere afterthought – they can decisively shape the outcome and consequences of a dispute. While arbitrators are typically granted wide discretion in allocating costs, this discretion raises important questions:

What principles should guide arbitrators in awarding costs?
Should they have broad discretion, or should there be clearer rules to ensure predictability?
And to what extent should considerations such as party behaviour and efficiency impact cost decisions?

These questions were at the heart of the recent Paris Arbitration Week (PAW) 2025 webinar hosted by Aceris Law, titled "Arbitrators' Discretion in Awarding Costs: Are There Any Limits?" moderated by Nina Jankovic of Aceris Law. The session featured a distinguished panel of independent arbitrators:

Anne K. Hoffmann (Hoffmann Arbitration) – a distinguished independent arbitrator with over two decades of experience in international commercial and investment arbitration. Ms. Hoffmann is dual-qualified in Germany and England & Wales and has practised across the globe in both civil law and common law jurisdictions. During that time, she worked at leading law firms in London, Geneva and Dubai before focusing on her practice as an independent arbitrator.
Nina Lauber-Thommesen (Lauber-Thommesen Arbitration) – an independent Norwegian arbitrator based in Geneva, Switzerland, with many years of valuable experience as an arbitrator, counsel to parties and tribunal secretary in international commercial arbitrations. Before starting her own practice in 2023, Ms. Lauber-Thommesen was Counsel at Lévy Kaufmann-Kohler, a leading international arbitration boutique based in Geneva, Switzerland. She has participated in over fifty international arbitrations under various rules.
Brooks W. Daly (Brooks Daly Arbitration) – an esteemed independent arbitrator with a wealth of experience in international arbitration. He has served as Deputy Secretary-General and Principal Legal Counsel at the Permanent Court of Arbitration in The Hague, overseeing numerous arbitration cases involving states and private parties. His extensive background includes acting as an arbitrator in various complex disputes across multiple jurisdictions.
William Kirtley (Aceris Law) – a founding partner of Aceris Law LLC and a seasoned arbitrator with significant experience in international arbitration. He has acted as arbitrator and counsel in numerous arbitrations under various institutional rules. His practice encompasses a wide range of sectors, with a focus on commercial and investment disputes.

The Cost Conundrum: Lack of Uniformity and Arbitrators' Discretion in Awards on Costs

Before diving into the details of arbitrators' discretion, it is crucial to acknowledge the core challenge underlying the issue: there is no universal rule or consistent practice governing cost allocation in arbitration. Unlike many areas of substantive law harmonised through international conventions or model laws, the question of who should bear the costs of arbitration remains unsettled across jurisdictions and institutional frameworks.

Two dominant approaches emerge in global arbitration practice:

"Costs Follow the Event" – often applied in UK common law jurisdictions and favoured in international arbitration, this principle holds that the losing party should pay for the costs of the arbitration. It reflects the rationale that the prevailing party should not be penalised for enforcing its rights. This rule also finds support in many European civil law systems, where the "loser pays" principle is embedded in procedural codes.
"Each Party Bears Its Own Costs" (The American Rule) – prevalent in jurisdictions such as the United States, China, Indonesia, and Japan, this rule dictates that each party covers its own legal fees and expenses, regardless of the outcome. This approach is often justified on the grounds of promoting access to justice and not discouraging parties from pursuing legitimate claims.

In reality, arbitrators often operate in a space where no explicit guidance is provided by the arbitration agreement or institutional rules. As a result, cost decisions can vary widely. Some arbitrators align strictly with one of the two dominant models; others adopt a contextual approach, factoring in party conduct, efficiency, reasonableness, and proportionality.

This wide latitude can be both a strength and a source of unpredictability.

Setting the Legal Framework: The Role of the Applicable Law in Awards on Costs

Kicking off the discussion, Anne K. Hoffmann emphasised the importance of analysing the applicable law when allocating costs. Ms. Hoffmann highlighted that the arbitration agreement and the underlying contract are primary considerations when making cost decisions. The procedural law is also crucial, although the substantive law governing the contract is less frequently examined unless particularly relevant. Ms. Hoffmann noted that in jurisdictions where cost issues have been contentious and subject to court decisions, arbitrators should be aware of relevant jurisprudence to ensure cost decisions are legally sound.

Mr. Daly emphasised the importance of arbitrator discretion in cost allocation, noting that a highly structured legal analysis is not typically expected by parties. This discretion is informed by modern procedural rules and the lex arbitri, which generally empower arbitrators to follow their discretion. Mr. Daly noted that pleadings usually do not include a formal legal analysis of costs but rather anticipate the use of discretion in light of procedural norms and case specifics.

Party Conduct: A Costly Misstep?

Ms. Lauber-Thommesen and Mr. Kirtley discussed how party conduct can impact cost allocation, particularly procedural misconduct and inefficiency:

Impact of Conduct: Ms. Lauber-Thommesen stated that party conduct is often considered in cost allocation, especially when institutional rules permit it. This may include misconduct or inefficient behaviour being cited in cost decisions.
Case Management: Ms. Lauber-Thommesen emphasised that addressing party conduct from the outset of proceedings can help manage expectations and encourage cooperative behaviour.
Examples of Misconduct: Mr. Kirtley shared examples such as bad faith tactics, frivolous claims, and non-compliance with document production. He noted that tribunals increasingly deny cost awards to prevailing parties as a sanction for such conduct.
Procedural Orders: Ms. Hoffmann mentioned that she includes a standard provision in procedural orders indicating that party conduct will be considered in cost decisions. This prevents surprises and ensures parties understand potential consequences.

The "Loser Pays" Principle vs. the American Rule

Ms. Hoffmann explained that the "loser pays" rule is a common starting point, under which the unsuccessful party bears the costs. However, this is often adjusted to reflect relative success.

Ms. Lauber-Thommesen discussed how costs can be apportioned based on the parties' success on individual issues, not just the final outcome. This is particularly common in civil law jurisdictions. Ms. Lauber-Thommesen noted that civil law jurisdictions like Germany favour proportional cost allocation based on relative success, while common law jurisdictions like England typically award costs to the prevailing party.

The panel also touched on civil vs. common law influences:

Civil law jurisdictions (e.g., Germany and Switzerland) often favour proportional cost allocation.
Common law jurisdictions (e.g., England) tend to award costs to the net winner.

The discussion also highlighted contrasting expectations between civil law and American lawyers:

American lawyers often enter international arbitrations expecting that each party will bear its own costs, in line with the "American Rule" prevalent in U.S. litigation. As a result, they may be less focused on detailed cost tracking or making a case for cost recovery.
English and civil law lawyers, on the other hand, generally assume that cost awards will follow success and, therefore, place greater emphasis on documenting costs, proportionality, and reasonableness throughout proceedings.

These differing assumptions can create misalignments in expectations, especially in mixed legal teams or cross-border disputes, adding another layer of complexity to cost decisions in arbitration.

Reasonableness and Proportionality in Legal Costs

Mr. Kirtley and Ms. Lauber-Thommesen addressed how arbitrators assess the reasonableness and proportionality of legal costs.

Assessing Reasonableness: Mr. Kirtley explained that arbitrators consider hourly rates, team composition, and hours worked in evaluating cost reasonableness, especially in light of case complexity and importance.
Proportionality: Mr. Kirtley highlighted the need to weigh costs against the stakes of the dispute. He cited a notable example where both parties spent USD 300,000 on a USD 30,000 dispute – a red flag for disproportionate spending.
Disparity in Costs: Ms. Lauber-Thommesen explained that a disparity in party spending is not inherently unreasonable. Arbitrators should avoid second-guessing commercial choices regarding legal representation.

The Institution's Role: Oversight or Hands-Off?

Mr. Brooks Daly was invited to reflect on the role of arbitral institutions. While institutions cannot usurp the tribunal's substantive decision-making power, institutional review of draft awards can help clarify decisions on costs and ensure that computations in costs awards accurately reflect the tribunal's decisions.

Third-Party Funding and Arbitrators' Discretion In Awarding Costs

Ms. Lauber-Thommesen and Ms. Hoffmann addressed third-party funding issues, including the recoverability of funded costs and the need for transparency:

Funded Costs: Ms. Lauber-Thommesen noted that where claimants have an obligation to repay the funder, such funded costs may be considered recoverable, even if not yet payable.
Success Fees: She added that recovery of the funder's success fee or premium is less straightforward. Generally, such costs are not recoverable, though exceptions may arise in cases where funding was necessitated by the opposing party's conduct.
Disclosure: Ms. Hoffmann stressed the importance of disclosing third-party funding to ensure transparency and facilitate conflict checks. She mentioned she usually tried to include this in procedural orders.

Are There Limits to Arbitrators' Discretion in Awarding Costs?

Ms. Lauber-Thommesen, Ms. Hoffmann, and Mr. Daly discussed the boundaries of arbitrator discretion in cost decisions.

Reasoning: Mr. Daly emphasised that arbitrators must provide reasoned decisions on costs unless parties agree otherwise.
Party Agreements: Ms. Hoffmann highlighted that arbitrators must respect agreements between the parties on cost allocation, including specific provisions in arbitration clauses or procedural rules.
Mandatory Laws: Ms. Lauber-Thommesen reminded attendees that mandatory laws at the seat of arbitration may impose additional limits on arbitrators' discretion and must be considered in cost decisions.

Closing Thoughts: The Art of Cost Decisions

The webinar concluded with a reminder that cost decisions remain a blend of legal precision, pragmatic judgment, and procedural fairness. While arbitrators enjoy flexibility, they must walk a careful line, balancing efficiency, transparency, and enforceability.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.