Counting the cost of arbitration

08 December 2005

Sarah Walker

If the first question a lawyer is asked is "are we going to win?" it is generally closely followed by "how much will it cost".

Arbitration in England is much praised for its various virtues of confidentiality, limited appeal-ability, providing a means whereby parties may avoid unfriendly courts and the portability of any awards given. As much as it is praised, however, it receives criticism in equal measure for what parties see as its inherent cost over and above litigation in the national courts. Although cost is not the sole determining factor in deciding the most appropriate means of arbitrating a dispute, it is certainly one of them.

In arbitration, unlike court litigation, the parties pay for their "judges" and their "court". These can be termed the costs of the proceedings and include all the fees and expenses of the Arbitral Tribunal, as well as venue costs.

In addition, the parties may choose to pay fees for an arbitral institution, varying between such institutions as the International Court of Arbitration ("ICC"), the London Court of International Arbitration ("LCIA") and the American Arbitration Association ("AAA").

When selecting arbitration provisions at the time of contract, the parties may, of course, choose not to proceed under the auspices of any arbitral institution and opt instead for an "ad hoc" arbitration. Whilst there is an obvious immediate saving of administrative fees, parties do not always enjoy the considerable benefit of tried and tested institutional rules (save in the case of ad hoc arbitrations conducted under the UNCITRAL rules) nor, where the ICC is involved, the comfort of its claim to a measure of quality control on the awards of its Tribunals.

As in court litigation (and pending any orders by the Tribunal in favour of a successful party), the parties bear the costs of their respective legal teams, experts and lost management time.

Counting the cost of your "Judges"

In ad hoc arbitrations, there are no prescribed rules for calculating fees (save that, for arbitrations conducted under UNCITRAL Rules, there is a provision that the fees should be reasonable in the circumstances of the case). Generally, parties will agree a prescribed hourly or daily rate with the Tribunal which, in the London arbitration market, can range anywhere between £200 and £600 (US$350 and US$1,100) per hour for each arbitrator. For a dispute which turns out to be lengthy, Tribunals can prove costly.

The LCIA charges between £150 and £350 per hour for its Tribunal members. This equates to a possible combined rate for a three member Tribunal of £950 (US$1,700) per hour (or a daily rate for the Tribunal of US$12,000). Comparing LCIA arbitration with its ad hoc cousin, the benefits of the ad hoc route are that parties choose their procedure and have greater flexibility in the choice of Tribunal, although some users consider the additional cost a high price to pay for such freedom. AAA works on the basis of individual rates. As with ad hoc arbitrations, therefore, a party embarking on an AAA administered arbitration may have difficultly in predicting the ultimate cost of its Tribunal.

By contrast to the above, the ICC fixes Arbitrators' fees according to a sliding scale determined by the sum in dispute. For a US$1 million dispute, fees range from 0.75% to 3.5% of that sum per arbitrator. On a best case scenario, this amounts to US$7,500 per arbitrator and, at worst, US$35,000. Based on a three person Tribunal, there is a potential exposure of between US$22,500 and US$105,000. The ICC Tribunal rate may initially appear costly, although ICC arbitrators often complain that a lengthy dispute can be uneconomic for them, when compared to the remuneration for conducting an ad hoc or AAA arbitration.

A party using the ICC benefits from certainty of cost. As is the nature of such things, the purchase of such certainty may ultimately prove more expensive than paying an hourly rate.

Counting the cost of your administrative support

Administrative fees in institutional arbitration are levied in accordance with the rules of each particular institution. These can be divided, generally speaking, into those institutions that base administrative fees on the value of the dispute and those that base them on time spent.

As with its Arbitrators' fees, the ICC largely determines administration fees according to a sliding scale based on the sum in dispute (although some nominal provision is made for the speed a dispute is dealt with, time spent and complexity). A Claimant submitting a claim to the ICC pays a registration fee of US$2,500. The sliding scale starts with a percentage fee for disputes with a value of between US$50,000 and US$100,000 of 3.5% of the value of the dispute. The scale progresses to disputes up to US$1 million at a rate of 1.15%, and culminates with a fee cap of US$88,000 for all disputes over US$80,000,000. By way of example, a dispute in the sum of US$1 million would incur administrative expenses of US$14,000. Like the ICC, AAA calculates its fees on an ad valorem basis, with disputes up to US$1 million incurring an initial registration fee of US$6,000 and an additional administration fee of US$2,500.

In contrast, the LCIA calculates its administrative fees largely on the basis of time spent by its administrative staff, with an initial registration fee of £1,500 (around US$2,650) and an additional fee of between £100 and £200 per hour. The LCIA would need to undertake just over 30 hours of administration to equal the ICC fee for the same dispute. In reality, its administrative fees are often nowhere near that level.

On the face of it, the LCIA appears the better value option. Users should be aware, however, that studies seem to show that ICC arbitrations are significantly shorter than in cases where the Tribunal's fees are calculated on a time basis. Whilst there is a significant upfront cost associated with the ICC, it is not necessarily more expensive in the long run. The ICC would also argue that the "review" of awards it undertakes sets it apart.

Counting the cost of your legal and expert representation

In the usual course of events, the greatest cost element of all is that of legal and expert representation. This is not a cost particular to arbitration and, generally speaking, the costs of professional representation in English High Court first instance litigation (i.e. not appealed) can be much the same as those in arbitration. Given this element is not particular to arbitration, it is of less relevance to this discussion.

Counting the Real Cost of Arbitration

To determine the least costly arbitration route, it is necessary to undertake an analysis of the various possibilities discussed above. For present purposes, let us ignore the legal and expert representation/venue costs and concentrate on the costs of the Tribunal and the institution (if any).

We must make a few key assumptions; the first, that we have a dispute in the sum of US$1 million and the second, that it will take a total of one week of Tribunal time to deal with procedural matters and one week for the substantive hearing. We will also assume that any arbitral institution involved will take 20 hours of administrative time to deal with the case.

The comparison makes interesting reading:

Ad hoc/ Institution Tribunal Fee (US$) Registration Fee (US$) Administrative Fee (US$) Total (US$)
Ad Hoc 19,000 per day None None 190,000
ICC 105,000 2,500 14,000 121,500
LCIA 12,000 per day 2,650 7,000 129,650
AAA 19,000 per day 6,000 2,500 198,500

For this particular dispute, it appears the ICC or the LCIA may be the least costly choices. Of course it must be recognised that, as the value of any dispute increases, so do the fees for institutional arbitration conducted on an ad valorem basis. For example, in a US$30 million dispute which takes the same amount of time as a US$1 million dispute, the costs of the proceedings increase for an ICC arbitration but not for ad hoc. It is easy, once a dispute has arisen, to make the above comparison. Given that the parties may make their choice as to arbitral forum at the time of contract, however, they are generally not able to anticipate accurately the value of any dispute which may arise.

Opting for ad hoc arbitration over institutional arbitration (and avoiding administration fees) does not always produce an ultimate cost benefit to the parties. Neither should parties underestimate the benefit that the weight of institutional administration can bring; an ad hoc arbitration may well take significantly longer without the administrative support of the ICC or LCIA. Furthermore, what the parties save in administration fees, they may well lose in commitment or cancellation fees. (It is often surprising to arbitration practitioners from continental Europe that in English arbitrations provision is often made for commitment or cancellation fees in the event parties cancel hearings.)

Whether parties opt for ad hoc or institutional arbitration, consensus is that arbitration as a means of resolving disputes entails an additional cost over and above that of national court proceedings. In the grand scheme of things however, and given the well publicised benefits of arbitration, users often see this as a small price to pay.