FEATURE


Taxing the Costs of International Arbitration Proceedings


 
When an arbitral tribunal’s jurisdiction is successfully challenged under section 10 of the International Arbitration Act, the Court may order the costs of the arbitration proceedings1 to be taxed. This presents a number of challenges which the Courts have yet to confront, leaving international arbitration practitioners with little guidance in this area. 

Introduction
 
Section 10 of the International Arbitration Act (“IAA”),2 allows a party to challenge an arbitral tribunal’s determination of its jurisdiction. Section 10(7) of the IAA further provides that, where the High Court or Court of Appeal makes a ruling or decision under section 10 that the tribunal has no jurisdiction, it may make an order of costs of the proceedings, including the arbitral proceedings.
 
Given that applications under section 10 of the IAA are rarely successful,3 there has been little discussion of how the costs of the arbitration proceedings should be dealt with by the Court under section 10(7) of the IAA. As will be seen, the issue is more complex than might first appear. 
 
May the Costs of the Arbitration be Taxed?
 
The first question is what sort of order the Court may make under section 10(7) of the IAA in order to provide for the costs of the arbitral proceedings.
 
The order that tends to be made under section 10(7) of the IAA is for the costs of the arbitration to be “taxed by the Registrar of the Supreme Court if not agreed”.4 However, there is room to question:
 
1. whether the Court has power to make such an order for taxation; and 
 
2. if so, the procedure to be adopted by the Registrar of the Supreme Court (the “Registrar”) in taxing the costs of the arbitration.
 
The answer to the first question is perhaps straightforward. Although section 10(7) of the IAA does not explicitly provide for the taxation of the costs of the arbitration, it clearly confers the power upon the Court to make an order providing for the costs of the arbitration proceedings. Under section 29 of the Interpretation Act,5 where a written law confers power on a person to do a thing, such powers should also be understood as conferring any other powers reasonably necessary to enable the doing of that thing. Accordingly, the fact that the Court has power to make an order providing for the costs of the arbitration should mean that it has the power to order the taxation of those costs, particularly since taxation is “an integral part of the court’s processes”.6 
 
The answer to the second question turns on whether Order 59 of the Rules of Court7 applies to an order under section 10(7) of the IAA providing for the costs of the arbitration proceedings. If it does, then the answer is clear: under Order 59, rule 12(1)(c), the Registrar has the power to tax “any other costs the taxation of which is directed by an order of Court”, and in taxing the costs of the arbitration proceedings the Registrar would simply adopt the procedure prescribed by Order 59.
 
The question, then, is whether Order 59 of the Rules of Court applies to an order under section 10(7) of the IAA. Order 59, rule 2(1) provides:
 
Where by virtue of any written law the costs of or incidental to any proceedings before an arbitrator or umpire or before a tribunal or other body constituted under any written law, not being proceedings in the High Court, are taxable in the High Court, this Order shall have effect in relation to proceedings for taxation of those costs as it has effect in relation to proceedings for taxation of the costs of or arising out of proceedings in the High Court. [emphasis added.]
 
The problem is that Order 59, rule 2(1) appears to specifically contemplate a situation where costs before an arbitrator are (1) “by virtue of any written law” (2) “taxable in the High Court”.
 
Technically, while section 10(7) of the IAA permits the High Court or Court of Appeal to make an order providing for the costs of the arbitration proceedings, it does not specifically state that those costs are “taxable in the High Court”. 
 
This is in contrast to, for instance, section 39(1) of the Arbitration Act (“AA”),8 which specifically provides that any costs directed by an award to be paid shall, unless the award otherwise directs, “be taxed by the Registrar of the Supreme Court within the meaning of the Supreme Court of Judicature Act (Cap. 322)”.9
 
However, if, as suggested above, section 10(7) of the IAA is to be interpreted in light of the Interpretation Act, then, glossed in this manner, costs of arbitration proceedings are indeed taxable in the High Court “by virtue of any written law”, although it seems somewhat unsatisfactory that such a circuitous route is required to arrive at the conclusion that Order 59 of the Rules of Court applies when the Registrar taxes the costs of arbitration proceedings. 
 
To What Extent is Taxation in the Registrar’s Discretion?
 
Typically, subject to the provisions of Order 59, the amount of costs to be allowed is in the discretion of the Registrar,10 which is to be exercised having regard to the principle of proportionality as well as all the relevant circumstances.11 
 
This is not appreciably different from how arbitrators are expected to approach the issue of costs under the applicable institutional rules. For instance, Article 38(5) of the International Chamber of Commerce (“ICC”) Arbitration Rules12 provides that, in making decisions as to costs, the arbitral tribunal “may take into account such circumstances as it considers relevant”.
 
However, the application of the Rules of Court and the principle of proportionality tends to result in significant sums being taxed off a Bill of Costs (“Bill”). Indeed it is quite possible for a successful litigant’s party and party (“P&P”) costs to be taxed down by more than 75%.13
 
Although undoubtedly frustrating to the individual litigant, such drastic discounts have been justified on the basis that there is a public interest in controlling the costs of litigation in order to ensure adequate access to justice.14 
 
By contrast, there is no similar public interest in controlling the costs of private arbitration.15 Perhaps as a result, in practice, successful parties in arbitration tend to recover a larger proportion of their costs as compared to successful parties in litigation. 
 
Hence, where an order is made by the Court under section 10(7) of the IAA that the costs of the arbitration proceedings are to be taxed by the Registrar, it is not obvious that the Registrar can tax those costs in exactly the same way as P&P costs would normally be taxed under Order 59 of the Rules of Court. In other words, even though Order 59 is the governing machinery by which the Registrar taxes the costs of arbitration proceedings, it is not obvious that Order 59 is well-suited to this exercise, since it is predicated upon the different principles which apply in a taxation of litigation costs. 
 
For instance, Order 59, rule 19 provides that the costs of more than two solicitors is not to be allowed unless so certified by the Court, and subject to the Court’s satisfaction that the use of two solicitors is reasonable. By contrast, in international commercial arbitration, it is quite common for a party to have more than two lawyers working on the dispute, particularly if it involves more than one system of law. 
 
In addition, given that international arbitration practitioners are not necessarily regulated by the Legal Profession Act,16 it is possible for the Registrar to be confronted with a Bill containing legal fees of a quantum or nature that would not typically be permitted in taxation, eg contingency fees. 
 
The issue is even more complicated if the reasonable costs of the arbitration have already been assessed by the arbitral tribunal. There is often no way for the Registrar to disagree with the tribunal’s assessment, since the Registrar has no realistic basis for doing so. For instance, how would the Registrar determine that the legal fees of a Russian law firm, denominated in roubles but paid in Danish krone, were unreasonable if the tribunal has already decided the fees were reasonably incurred and reasonable in amount?
 
Further, where the arbitral tribunal has already assessed the costs of the arbitration proceedings, the logic of the High Court’s decision in VV17 would seem to mean that the Registrar’s discretion to tax those costs is effectively curtailed. 
 
In VV, the plaintiffs claimed damages of just under $1 million from the defendant in an arbitration. In response, the defendant raised two defences and ten counterclaims amounting to $20 million. The arbitrator ruled at an early stage that he had no jurisdiction to consider the defendant’s counterclaims as independent claims.
 
At the conclusion of the arbitration, the arbitrator dismissed the plaintiffs’ claims and ruled that the defendant’s counterclaims did not need to be determined. The arbitrator decided that costs should follow the event, and he awarded the defendant costs amounting to $2.8 million (the “Costs Award”), the bulk of which was made up of legal fees.
 
The plaintiff applied to set aside the Costs Award under the IAA arguing, inter alia, that the Costs Award was so disproportionate as to be contrary to public policy under Article 34(2)(b) of the UNCITRAL Model Law on International Commercial Arbitration (“Model Law”).
 
The High Court was minded to consider the Costs Award disproportionate,18 and stated that the Costs Award would “likely” have been scrutinised for reasonableness if it had arisen out of a dispute in Court and had come before the High Court as a review of taxation proceedings.19
 
Nonetheless, the High Court drew a clear distinction between costs in civil litigation and costs in arbitration, doubting if the amount of costs awarded to a successful party in arbitration, no matter how unreasonable, could ever be said to be contrary to public policy.20 Accordingly, the Costs Award could not be challenged on that basis. 
 
Notably, VV was quite an extreme case. The defendant, in advancing 10 counterclaims, was putting forward an “exaggerated claim”,21 and senior counsel for the defendant was effectively claiming legal fees of $2,500 per hour on the basis of a 10-hour day.22 
 
Given the strong position laid down in VV that a tribunal’s costs award will not be readily interfered with under Article 34 of the Model Law, it would be surprising if the costs award could nonetheless be reduced upon a taxation ordered pursuant to section 10(7) of the IAA. What cannot be allowed through the front door should not be admitted through the back.
 
This is particularly so since the difference between the two situations turns solely on the fortuitous circumstance of whether a tribunal correctly establishes its own jurisdiction. 
 
Where the tribunal wrongly concludes that it has jurisdiction, and this is corrected by the Court under section 10 of the IAA, the matter cannot be remitted to the tribunal to decide the issue of costs since the tribunal has no jurisdiction. Thus, the only way the costs of the arbitration already incurred can be provided for is by the Court making an order under section 10(7) of the IAA.23 
 
However, the fact that those costs may have to be taxed should not mean that the tribunal’s assessment of costs is thereby open to re-evaluation, when, on the authority of VV, it would not have been under Article 34 of the Model Law had the tribunal correctly established its jurisdiction. 
 
This then begs the question of whether an order under section 10(7) of the IAA that the costs of the arbitration be taxed serves any useful purpose, if the reality is that the Registrar will not second-guess the tribunal’s assessment of reasonable costs. 
 
It might perhaps be argued that the solution to all these issues is simply for the Registrar, in taxing the costs of arbitration proceedings, to exercise his discretion so as to take into account the fact that in international arbitration the norm is for the successful party to recover more of his costs as compared to litigation.
 
However, there are five points to be made in response to this. 
 
First, it is not clear that there is such a “norm”. A valuable study on this issue by the ICC Commission has found that there is at least some notable variance in the practice of arbitrators in different countries.24 For instance, an international tribunal in Tunisia found that the fees claimed by the successful party (who was represented by an international law firm) were in line with the rates to be expected, but reduced the amount recoverable by 20 per cent to align the legal costs with those incurred by the unsuccessful party (who had retained a smaller firm). Similarly, in the Netherlands, arbitrators in practice award legal costs on the basis of fixed tariffs, irrespective of the actual costs incurred.25
 
Second, and related to the first, what is the content of this alleged norm? Is it that the successful party in international arbitration tends to recover all of his costs? Or 60 per cent more costs than compared to litigation? Or 20 per cent? 
 
Third, it is unclear how the Registrar is to be convinced of any norm, given that arbitral awards (which would be the main evidence of such a norm) are generally confidential and/or unreported. 
 
Fourth, whatever the content of any alleged norm, the point is that the Registrar simply has no basis for disagreeing with the arbitrator’s assessment of the costs of the arbitration, in which case there is a strong argument that the Registrar’s discretion has been wholly delegated to the arbitrator. 
 
Fifth, any alleged norm likewise does not take care of the costs of the taxation proceedings themselves, which are frequently heavily taxed down in “Section 2” of the Bill. This problem would only be exacerbated if the solicitors for the successful party are expected to research and produce published costs awards to convince the Registrar to exercise his discretion taking into account any supposed cost “norms” in international arbitration. As such, a party who successfully invokes section 10 of the IAA and is awarded costs of the arbitration proceedings by the Court may find that he is out of pocket, once the costs of the taxation proceedings in “Section 2” of the Bill have been taxed. This seems unjust. 
 
Costs in a Different Currency?
 
Taxation of the costs of the arbitration proceedings presents additional challenges when those costs are in a foreign currency.26 Quite apart from making it difficult for the Registrar to determine whether such costs are “reasonable”, it raises the issue of whether and how costs can be dealt with in a foreign currency.
 
It is well established that damages can be ordered in a foreign currency, to be converted into local currency at the date the plaintiff is given leave to levy execution,27 and there appears to be some authority that a costs order can likewise be expressed in a foreign currency.28
 
However, as a matter of practice and procedure, the Bill must be accompanied by a summary which, like the eventual Registrar’s Certificate, is composed electronically through the eLitigation platform,29 which only permits the inclusion of figures in S$. 
 
As such, it appears inevitable that the costs of the arbitration proceedings, even if they were incurred in a foreign currency, have to be taxed in S$,30 which raises the issue of what date of conversion should be adopted. 
 
In theory, the date of conversion ought to be the date on which the costs were incurred, but this is impracticable given that different costs will have been incurred on different dates. A convenient date is the date of the tribunal’s jurisdictional award or costs award (if there is one), but the more principled date would seem to be the date of the order under section 10(7) of the IAA, since that is the date the successful party’s entitlement to the costs of the arbitration proceedings crystallises.
 
Having said that, the reasonable costs which the successful party is entitled to are not finally quantified until the taxation hearing,31 and on that basis it might be said that the date of conversion ought to be the date of the taxation. However, this presents a problem if the taxation hearing is part-heard: it seems unacceptable that a party’s recoverable costs should fluctuate based on exchange rate movements in the intervening period.


Conclusion
 
As successful jurisdictional challenges under section 10 of the IAA have been rare, the practical implications of an order under section 10(7) of the IAA that the costs of arbitration proceedings be taxed have not yet been fully worked out. 
 
However, as the number of Singapore-seated arbitrations increases,32 it seems likely that section 10 of the IAA will be resorted to with greater frequency, and with more success. If section 10(7) of the IAA is to provide an effective means of providing for the costs of the arbitration proceedings, it will be necessary for the courts to enunciate just how any problems associated with the taxation of such costs may be overcome.


 
Colin Liew
    BA (Oxon)
    E-mail: colin.liew@spc.oxon.org
 
Notes

1 Unless otherwise specified, a reference to “arbitration”, “arbitration proceedings” or “arbitral proceedings” in this article should be understood as a reference to an “international arbitration” within the meaning of the International Arbitration Act, Cap 143A.

2 Cap 143A.

3 There appear to have been only two reported judgments in which applications under section 10 of the IAA were successful: International Research Corp PLC v Lufthansa Systems Asia Pacific Pte Ltd and another [2014] 1 SLR 130 (“Lufthansa”) and BCY v BCZ [2017] 3 SLR 357 (“BCY”).

4 Lufthansa at [72] and BCY at [98].

5 Cap 1.

6 Wentworth v Wentworth; Estate of George Neville Wentworth (1999) 46 NSWLR 300 at 316 per Santow J. See also Sandback Charity Trustees v North Staffordshire Railway Co (1877) 3 QBD 1 at 4 per Brett LJ: “The office of taxing costs is in the business of the Court itself”.

7 Cap 322, R 5.

8 Cap 10.

9 By contrast, the equivalent provision in the IAA – section 21(1) – provides that any costs directed by an award to be paid shall, unless the award otherwise directs, “be taxable by the Registrar of the Singapore International Arbitration Centre…”.

10 Order 59, rule 31(1) read with paragraph 1(1) of Appendix 1 to Order 59 of the Rules of Court. 

11 Order 59, rule 31(1) read with paragraph 1(2) of Appendix 1 to Order 59 of the Rules of Court.

12 As at 1 March 2017.

13 Lin Jian Wei and another v Lim Eng Hock Peter [2011] 3 SLR 1052 (“Peter Lim”). Of course, in all such cases, the costs that are taxed off are said by the Registrar or Court to have been “unreasonable” or “disproportionate”, but in truth such decisions are fairly subjective: it is not unusual for the Registrar, High Court and Court of Appeal in the same case to disagree between themselves as to what costs are “reasonable” and “proportionate”, as in fact occurred in Peter Lim.

14 Peter Lim at [77].

15 VV and another v VW [2008] 2 SLR(R) 929 (“VV”) at [31].

16 Cap 161.

17 [2008] 2 SLR(R) 929.

18 VV at [35].

19 VV at [29].

20 VV at [31].

21 VV at [35].

22 VV at [47].

23 Kingdom of Lesotho v Swissbourgh Diamond Mines (Pty) Limited [2017] SGHC 195 at [346].

24 ICC Commission Report, Decisions on Costs in International Arbitration (Offprint from ICC Dispute Resolution Bulletin, 2015, Issue 2). 

25 Ibid, p 48. 

26 This may occur when, for instance, the lawyers representing the party in the arbitration proceedings render invoices denominated in a foreign currency. 

27 Indo Commercial Society (Pte) Ltd v Ebrahim and another [1992] 2 SLR(R) 667, applying Miliangos v George Frank (Textiles) Ltd [1976] 1 AC 443.

28 Elkamet Kunststofftechnik GmbH v Saint-Gobain Glass France SA [2016] EWHC 3421 (Pat) at [11].

29 Paragraph 95(1) and (4) of the Supreme Court Practice Directions

30 This has been the author’s personal experience. 

31 Even if, as argued above, in practice these costs may well be the same as those assessed in the tribunal’s costs award (if there is one). 

32 In 2016, Maxwell Chambers recorded an 18% year-on-year increase in the number of arbitration cases heard as compared to 2015: Maxwell Chambers Expands To Boost Singapore’s Status as Dispute Resolution Hub, Ministry of Law Press Release, 5 January 2017. The SIAC recorded a 27% increase in the number of arbitration cases filed as compared to 2015: SIAC Announces All-Time Record Numbers for 2016, SIAC Press Release, 10 March 2017.