It was a privilege to have John Sims, a past Chairman of the Chartered Institute, address us on recoverability of costs. John took a highly practical approach to this knotty subject, rather than confound us with technical jargon, effectively providing us with an aide-memoire of points to consider when determining costs.

The 1950 Act implies a mere assumption that costs would be taxed and settled by the Arbitrator. Under the 1996 Act (AA96), nothing has apparently changed, despite there being a formal definition of costs. The Arbitrator is expected to behave as if he were the Taxing Master of the High Court, under rules whereby solicitors charge their clients. There is however a different emphasis.

Recoverable costs are to be determined by the arbitrator; only if the tribunal does not, may the parties apply to the Court for recovery of costs: see ss.28(2) and 63(4). The 1996 Act does not provide that the parties can determine costs, but it is implied that the parties are expected to make every effort to agree on costs. This is made clear under ss.63(1) and (2), whereby parties are free to agree what costs are recoverable. Only if they do not agree, has the tribunal powers to make a determination. They include a new power, that of limiting recoverability to a specified limit under s.65.

S.59 gives guidance on what costs entail:

We were reminded that s.60 of AA96, based on s.18(3) of the 1950 Act, prohibits the parties to agree on recoverability of costs before the dispute actually arises; this has been vigorously supported by John Sims who, as a member of the DAC on the Arbitration Bill, ensured this clause was retained in the Act! If this clause is struck out as part of the contract, it leaves the whole business of cost recoverability open to abuse, particularly within the construction industry.

This clause is closely linked to s.65, the power to limit recoverable costs. Together, they discourage the ruthless and more powerful party from extending expenditure to such a level that the less financially secure party may give up through fear of being unable to sustain a costs order.

Following a dispute arising, the parties can agree the extent of recoverability; if they do not agree, s.63 conveys powers on the arbitrator to determine costs. The arbitrator, in determining costs, must specify what costs are recoverable and on what basis. Costs are determined under the terms of reasonableness. Sub-section 63(5) is almost a word-for-word transcript of the standard basis of costs in litigation. The word "taxation" does not appear in AA96, hence it is not subject to High Court Rules, although it would be sensible to know what those rules are.

If there is any doubt as to the reasonableness of the arbitrator’s decision, the parties can apply to the Court to determine reasonable costs.

However difficulties can arise when there are three arbitrators over their fees. Each arbitrator will agree his costs with his own party, but the other party may object to these. The arbitrator would be wise to agree on his own fees before accepting the appointment, and the court may reduce these fees under s.28(1) and (2). The parties may also pay into court, the court then being responsible for paying reasonable fees. The key issue here is "reasonableness"; "a party who never agreed to the appointment (by another party) of an exceptionally expensive arbitrator should not be held jointly and severally liable for that arbitrator’s exceptional fees", by reason of unreasonableness.

Should non-lawyers fees be assessed on the same basis as lawyers? John Sims thinks not. The parties’ costs should be based on what they have actually paid on invoices. There should be a detailed allocation of costs, although the actual production of bills to support the arbitrator’s costs is considered going too far. The arbitrator should look in detail at what has been spent and why, preferably by reviewing a schedule of costs provided, and decide the reasonable level of these costs.

Costs Analysis.

Matters to provide food for thought when considering the reasonable-ness of costs:

Should time claimed be reduced? Should the work which was completed have been done more quickly if more efficient and effective procedures were in place?

Should a more junior person, paid less, have completed a certain activity in order to reduce the costs? If so, it would be appropriate to reduce the value of the costs claim accordingly.

Are the rates claimed reasonable? Is the company a London firm or a provincial one? Is it reasonable to employ a London solicitor for a claim on a job in Manchester against a party from Warrington, when the arbitration is held in Birmingham?

Is it reasonable to allow the costs of an expert advising solicitor? Note that this is different from the use of an Expert Witness, which could be an appropriate cost. Does the solicitor have to go to the best expert in the world, who may charge exorbitant rates, when the answers to queries could easily have been provided by a lesser expert?

Are travelling expenses reasonable? Was the meeting really necessary, or could the business have been achieved using the telephone? Should travelling time be charged? John Sims cited the example of a party living in the Bahamas who made numerous first class air journeys to and from London. The party had their costs reduced by £1m, as it was deemed unreasonable for them to have so many journeys, when they could have stayed in London!

Was it really necessary to make 20 copies of all documents? Where did all those copies go?

Is the work connected with the Arbitration or is it more relevant to the contract?

A lively debate followed:

A. During the preliminaries the arbitrator should ask the parties whether he should consider costs. However, he must guard against awarding something that is not covered by his terms of reference!

A. The parties should agree during the preliminaries by whom they are to be represented. The Tribunal has the power to allow the party to subsequently appoint counsel and he always has the powers to determine which costs and the limit of those costs in advance.

A. Reasons should be given, unless it is an agreed award or the parties have agreed to dispense with reasons (see s.52(4) & 63(3)(a)). In any adjustment, the adjustment must be clearly stated and why. The entitled costs are based on what would not have taken place had the arbitration not gone ahead.

A. One might expect the paying party to contest this and the parties to provide evidence.

One wonders whether the effort in detailed analysis of costs should not be proportional to the value of the claim or the of the costs in relation to the claim; the higher the value, the more detailed the analysis?

Richard joined the Branch in January 1998. He is a Chartered Engineer and a serving officer in the Royal Engineers as Major in command of a Field Support Squadron at Maidstone. He has been a staff instructor at the Royal School of Military Engineering in Chatham. He also has an MSc in Construction Law and Arbitration from Kings’ College, and has completed all the Chartered Institute of Arbitrators Part 2 examinations and the Arbitral Award examination and is itching to do one for real!

Richard is taking his squadron to Bosnia in September 1998 for 6 months, where he will be responsible for the formation of construction contracts, and maybe even a bit of dispute resolution! The Editors look forward to further dispatches from him.