Question 3
v) Arbitrator's discretion as to costs
The following notes identify some of the principal matters to be addressed by the arbitrator when considering the issue of costs. It must be noted that the topic is much wider than this brief outline.
Costs under the 1954-1998 Arbitration Acts
Procedural Matters
The topic of costs is one which has provoked considerable controversy in recent times in the context of arbitration. The legal principles surrounding the awarding of costs in arbitration have consistently mirrored those in litigation, and although the arbitrator is afforded considerable powers in awarding costs however the accepted practice and rules surrounding the exercise of these powers are extremely complex.
The ordinary rule as to costs in the Courts is the ‘loser pays' maxim, ‘costs follow the event' which is specifically required under Order 99 rule 4 of the Rules of the Superior Courts 1986 states that “the costs of every issue of fact or law raised upon a claim or counterclaim shall, unless otherwise ordered, follow the event.” This means that the successful claimant should, in the absence of special circumstances be awarded recoverable costs which are to be borne by the unsuccessful party. Its function is to act as a deterrent and to encourage settlement thereby promoting efficiency in the system.
Nevertheless, arbitration is not litigation and it is not intended, or not always intended, to follow the court rules. Arbitrators are thus not bound to apply the Rules of the Court. Nor are they therefore obliged to apply the provisions of Order 99, rule 4 with respect of costs.
This is reflected in section 29 of the Arbitration Act 1954 states that the costs of the reference and award are to be in the discretion of the arbitrator “…who may direct to, and by whom, and in what manner, those costs or any part thereof shall be paid...”
In the exercise of his discretion, the arbitrator must iterate proper grounds or reasons for deviating from the general rule as to costs. These reasons must be connected to the case which any Court would deem proper and not capricious whims of the arbitrator.
At the outset, in addressing the issue of costs, the arbitrator must observe the provisions of the arbitration agreement. This is important in the context of Section 30 of the 1954 Act, which notes that a provision in an arbitration agreement to the effect that any party shall pay all or any part of his own costs of the reference or award shall be void. This provision however does not apply to an agreement to submit to arbitration a dispute which arises before that agreement was made.
A failure by an arbitrator to make an award on courts will result in the courts remitting the award to the arbitrator to rectify his initial failure. In addition, where the final award is silent on costs, the parties may apply within 14 days of the publication of the substantive award to the arbitrator to request him to make an award as to costs and the arbitrator has a statutory duty to make an award as to costs on foot of such an application.
Arbitrator's Discretion
The arbitrator must act “judicially” when exercising his discretion as to costs in the same manner as a court exercises its discretion. In essence, the proposition amounts to a requirement that the arbitrator must not act capriciously, nor fetter his discretion by adopting a predetermined or inflexible rule in relation to costs. His determination must be based on factors connected with the case, and he must further allow the parties an opportunity to address him or her on the issue of costs.
One of the ingredients of the duty to act judicially is that the arbitrator must afford the parties an opportunity to make submissions to him on the issue of costs. If the arbitrator fails to offer such an opportunity, or indeed pre-judges the issue of costs, the award is liable to be set aside or remitted to the arbitrator on the basis that he failed to act judicially in relation to costs. This failure was clearly illustrated in Lynam & Sons v Leonard and Donnelly Limited (No.1) where having heard Counsel address him on the issue of costs, the arbitrator then proceeded to take from his pocket and read his award on costs, which he had pre prepared prior to the hearing and listening to the submissions of the parties. The arbitrator in his (pre prepared) award directed the parties to bear their own costs of the reference. Kenny J, in remitting the arbitrator's award as to costs to the arbitrator for reconsideration, held:
“I am certain that the general principles which should govern the award of costs were discussed before the arbitrator on the 6th of February but he seems to have decided what award he would make before he heard counsel and in the circumstances I cannot be satisfied that he exercised a judicial discretion or that he applied the general rule that the costs should be awarded to the successful party unless there are special circumstances which justify a different result.”
Discretion as to “costs follow the event”
If the arbitrator departs from the general rule that “costs follow the event”, the arbitrator must do so on a reasoned basis, and crucially must indicate the factors on the basis of which its discretion is being exercised. In Horan v Quilter , Denham J. noted that “The usual order in arbitration is that costs follow the event. Thus it is similar to the position in courts of law. If there is a departure from the usual order then it should be clear and reasons should be given”.
This rigid interpretation of the principle that costs should follow the event is illustrated by the case of Office and Industrial Cleaners Ltd v John Paul Construction Ltd, a case which involved a challenge to an arbitrator's award. McGovern J. set aside the order of the arbitrator in relation to costs, reiterating that the if the normal rule that costs follow the event is to be departed from, then reasons must be given:
“I am satisfied in this case that the parties agreed that the arbitrator would give an unreasoned award. However, I do not accept that this also means an arbitrator is thereby excused from giving reasons for his order on costs … The second error which was made by the arbitrator in this case was failing to give any reasons for departing from the usual order as to costs. The arbitrator has a discretion as to how to deal with costs, but he must exercise this discretion judicially. The usual order is that costs “follow the event”. So if the arbitrator is going to depart from this rule, he should set out clearly his reasons for doing so. By failing to do so in this case, it seems to me that the arbitrator has misconducted himself and the Court should intervene and set aside the award insofar as it deals with costs”.
The courts however will only interfere with the award of an arbitrator as to costs if the arbitrator misconducted himself in the proceedings or otherwise have placed an error of law on the face of the award. Thus, an award of costs which complies with the above noted ordinary rules of the courts as to costs and furthermore acts in accordance with the rules of fair procedure and natural justice unlikely to attract inspection by the Courts regardless of whether or not they would have decided the matter differently.
In conclusion, arbitrators can depart from the ordinary rule as to costs, and indeed penalise a successful party on costs because of their “contribution to a protracted hearing.”
Keane CJ in that case remarking that the power to penalise an un-cooperative participant on costs is extremely important to arbitrators to ensure compliance with their orders and directions.
Secondly, if departing from the ordinary rule as to costs it is advisable to iterate reasons for the departure in the award, as failure prevents the Court from determining whether the arbitrator acted with good reason, and will face the possibility of the award being remitted to the arbitrator, or set-aside.
Arbitrators should not be afraid to depart from the ordinary rule if either party is uncooperative in the arbitration but if departing, reason must be valid (cite BH)
under the 2010 arbitration act regime
A number of concerns have been raised regarding the changes introduced under the Arbitration Act 2010. A common feature of many arbitration agreements in the U.S, Section 21 of the Arbitration Act 2010 essentially harmonises the treatment of costs in domestic and international arbitration and accommodates the practice of party autonomy to agree on the question of costs.
Where the parties cannot agree, the arbitrator can determine how costs are to be apportioned.
Under the previous framework, parties could agree in advance for each party to bear its own costs. Section 30(1) provided that any provision in an arbitration agreement to the effect that the parties or any party thereto shall in any event pay their or his own costs of the reference or award or any part thereof shall be void, and this Part shall, in the case of an arbitration agreement containing any such provision, have effect as if that provision were not contained therein.
Further, Section 30(2) provided that nothing in subsection (1) invalidates any such provision as is mentioned in subsection (1) when it is part of an agreement to submit to arbitration a dispute, which has arisen before the making of that agreement.
From an analysis of the above provision, and that contained in section 21 of the 2010 Act, which states that “the parties to an arbitration agreement may make such provision as to costs of the arbitration as they see fit”, it is arguable that the latter provision is open to abuse and does not recognise the reality of practical commercial life. If a stronger party to the contract put in a term stipulating that each party to the arbitration would bear their own costs, this may act as a disincentive to arbitration. An example illustrates the point.
Construction arbitrations involving sums under €150,000 represents the majority of arbitrations in Ireland. These arbitration tend to be complex, involving disruption and long delays and costs. If a contractor agrees to a provision in his contract providing that each party bear their own costs, then this would result in a situation where a contractor, who may have a genuine strong claim against the employer is left with a net loss following a successful arbitration. It thus encourages the employer to delay proceedings and indeed escalate costs, leading to situations where, the stronger party knows that the value of the contract (and as a consequence the dispute) is relatively small and that the absence of a costs award in the contractors favour will probably provide a large disincentive to taking part in what may well be an economically futile arbitration.
This stance appears to be a fundamental objection to arbitration which goes against the spirit of the New York Convention and its recognition of the parties' agreement to arbitrate. It is submitted that prohibiting a party from making an agreement on costs or interest would not prevent the stronger party from forcing a weaker party to agree to an arbitration clause. If parties decide that a certain section should not have effect, that agreement should be sacrosanct. A further argument came from proponents of international arbitration who have stated that an agreement that each party bear their own costs is common internationally and that the omission of such an option in Ireland would be detrimental to Ireland's position as a destination for international arbitration.
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