Originally from Dispute Resolution Journal

Should a losing party in an arbitration proceeding have to pay for the legal costs of the winning party? Should an arbitrator have the authority to include payment of legal costs in an award? Murray Smith addresses these questions within the context of international commercial applications that vary from country to country.

There is little hard data available on the subject of costs awarded in international commercial arbitration cases. Most modern arbitration statutes provide for costs to include legal fees but it is not at all clear that full legal costs are awarded in most cases. An informal survey indicates that many North American arbitrators are overly influenced by litigation precedents and only award full legal fees and other party expenses on rare occasions. At the same time, there is anecdotal evidence that some of the most experienced international arbitrators from the United States commonly award legal fees and, indeed, believe that this represents a major reason to choose arbitration over litigation for the resolution of international commercial disputes.

This article will examine the principles underlying the award of costs in international arbitration and propose a common approach in allowing legal fees and other expenses of the parties to be covered by an award.

Costs Jurisdiction

In most jurisdictions, it is axiomatic that costs will follow the event. It was not always so. Costs were unknown at common law although entitlement to costs was recognized early on in equity.

In 1743 Lord Hardwicke held that common law courts had no inherent jurisdiction to order costs but that courts of equity had such authority “from conscience and arbitrio boni viri, as to the satisfaction on one side or other on account of vexation.”1 A literal interpretation of this Latin maxim is that courts in equity had authority to order costs as part of their inherent jurisdiction to give judgment as an honest man would. In that case the court ordered costs in respect of those matters upon which the applicants prevailed.

According to the English Court of Appeal in Andrews v. Barnes,2 the amount of costs was not fixed in equity and a court exercising its equitable jurisdiction to order costs had a wide discretion “not only as to the circumstances under which costs were to be awarded, but apparently as to the measure and fullness of the costs.”