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THE CHARTERED INSTITUTE OF ARBITRATORS

EAST ANGLIA BRANCH

The following are the notes of a talk given by Harold Crowter, principal of Harold Crowter Associates, the then Chairman of the Chartered Institute of Arbitrators, to an evening meeting of the East Anglia Branch at the Jarvis Hotel, Hatfield on 25 February 1999.

DETERMINATION OF RECOVERABLE COSTS IN ARBITRATION

Statutory basis in arbitration

The Arbitration Act 1996 provides as follows:-

(1) The parties are free to agree what costs of the arbitration are recoverable.

(2) If or to the extent there is no such agreement, the following provisions apply.

(3) The tribunal may determine by award the recoverable costs of the arbitration on such basis as it thinks fit.

If it does so, it shall specify-

(a) the basis on which it has acted, and

(b) the items of recoverable costs and the amount referable to each.

(4) If the tribunal does not determine the recoverable costs of the arbitration, any party to the arbitral proceedings may apply to the court (upon notice to the other parties) which may-

(a) determine the recoverable costs of the arbitration on such basis as it thinks fit, or

(b) order that they shall be determined by such means and upon such terms as it may specify.

(5) Unless the tribunal or the court determines otherwise-

(a) the recoverable costs of the arbitration shall be determined on the basis that there shall be allowed a reasonable amount in respect of all costs reasonably incurred, and

(b) any doubt as to whether costs were reasonably incurred or were reasonable in amount shall be resolved in favour of the paying party.

(6) The above provisions have effect subject to section 64 (recoverable fees and expenses of arbitrators).

(7) Nothing in this section affects any right of the arbitrators, any expert, legal adviser or assessor appointed by the tribunal, or any arbitral institution, to payment of their fees and expenses.

To complete the picture, it also necessary to consider Sections 59 and 64 of the Act.

(1) Unless otherwise agreed by the parties, the recoverable costs of the arbitration shall include in respect of the fees and expenses of the arbitrators only such reasonable fees and expenses as are appropriate in the circumstances.

(2) If there is any question as to what reasonable fees and expenses are appropriate in the circumstances, and the matter is not already before the court on an application under section 63(4), the court may on the application of any party (upon notice to the other parties)

(a) determine the matter, or

(b) order that it be determined by such means and upon such terms as the court may specify.

(3) Subsection (1) has effect subject to any order of the court under section 24(4) or 25(3)(b)(order as to entitlement to fees or expenses in case of removal or resignation of arbitrator).

(4) Nothing in this section affects any right of the arbitrator to payment of his fees and expenses.

Summary of position on determination of recoverable costs under English Law

• In determining the recoverable costs of the parties, the arbitrator will determine the amount of money each party is entitled to receive from the other in costs
• The parties are free to come to an agreement as to what costs of the arbitration are recoverable; the majority of recoverable costs applications will be resolved by agreement
• The arbitrator has power to determine the recoverable costs, but is under no compulsion to do so; the default position is however, determination of recoverable costs by the arbitral tribunal
• The court has no power to determine the recoverable costs unless the arbitrator does not do so himself. In other words, the court is there only as a backstop
• In the event that the court does have power to determine the recoverable costs, it may order recoverable costs to be determined by other means of its choosing (other than by the arbitrator or by court)
• If the arbitrator does not himself determine the recoverable costs, whoever acts as the taxing officer, acts as a delegate of the arbitrator
• Whoever determines the recoverable costs, whether arbitrator, court or some other person or body, is bound to apply the basis of determination of recoverable costs prescribed in the award allocating costs as between the parties.
• Courts will generally determine recoverable costs under Order 62 of the Rules of the Supreme Court (or its successor from 26 April 1999).
• In any determination of recoverable costs, the arbitrator or the court cannot fix the recoverable amount at an figure higher than the amount, if any, that the arbitrator has set as the limit of recoverable costs under Section 65 of the Arbitration Act 1996.

The mechanics of determining recoverable costs

Determination will only occur if the parties are unable to agree the amount of the recoverable costs within the parameters ordered in the award. In the majority of cases the costs will be agreed. If costs cannot be agreed either as a global settlement or on the basis of consideration of inter-parties submissions, the arbitrator will be asked to commence the process of determination.

Arbitrator’s order for directions

After the award on the substantive issues, any party whose costs, in principle, are recoverable from the other party, either in whole or in part, will apply to the arbitrator for directions for the process of determination if no inter-parties’ agreement has been reached. After hearing both parties, usually by written representations, or exceptionally at a meeting called for the purpose, the arbitrator will set a timetable for the procedure to be followed. The following will be typical arbitrator’s order for directions in a case where part of the claimant’s and part of the respondent’s recoverable costs are to be determined:-

• Not later than (date) each party shall submit their respective bills of costs and a copy thereof to me and upon receipt of bills of costs from both parties I shall thereafter immediately serve each party with a copy of the other’s bill.
• Not later than 28 days from service of the respective bills of costs each party shall serve on the other a notice of objection to the bill of costs of the other party, setting out in detail the basis of objection to each amount challenged.
• Not later than 14 days from service of the respective Notices of Objection each party may serve a notice in reply.
• There will be a hearing on determination of recoverable costs with a time estimate of 2 days to be held at my offices on (date). I will assess the bills on an item by item basis.
• I will publish a partial award on determination of recoverable costs with costs of the process of determination of recoverable costs reserved for a final award on determination of recoverable costs. All awards will be reasoned.
• Costs in the determination of recoverable costs process.
• Liberty to either party to apply.

Bills of costs

Each party will then prepare its own bill of costs. Unlike court procedure, there is no set format for the bill of costs in arbitration. The bill of costs must set down the work done, when it was done and who did it. The fees of counsel must be set out, including the brief fee and any refreshers. The fees of experts are usually claimed as disbursements, but as expert’s fees are often so significant in arbitration, they too must be set out in detail as described above. All other disbursements and expenses will be set out.

The bill of costs will show the hourly or daily rates claimed for each person identified on the bill of costs and if the rates have changed during the period the case has been running, the dates of change must be shown.

Solicitors often charge at an hourly rate agreed with their client which is subject to a percentage uplift for what is known as "care and control" or "care and conduct". The percentage uplift will be 50%-60% on a simple case to perhaps 100% on a complex case. In a solicitor’s bill of costs, the percentage uplifts claimed for each type of work must be identified.

The amounts claimed in a bill of costs may not necessarily be identical to the amounts invoiced to the client, but it is a valid objection to a bill of costs to establish that the total amount claimed is in excess of the amount invoiced to the client. In other words, no party can recover more than he has actually paid or is legally due to pay. This is true on an item by item basis as well as overall. This is known as the "indemnity principle".

Notices of objection

There are a series of common objections to bills of costs:-

• the hours spent are excessive
• work has been duplicated between fee earners
• the hourly rate claimed is too high
• the mark up for care and control is too high
• the cost of counsel is not justified
• the cost of leading counsel (QC) is not justified
• part of the work was unnecessary
• the costs claimed were not incurred on matters in respect of which the party who has prepared the bill was successful in costs
• the indemnity principle has been breached

Notices in reply

Notices in reply respond to the notices of objection.

Method of presentation of bills of costs

As I have said there is no set format for bills of costs in arbitration. Solicitors will commonly produce a bill of costs that is indistinguishable from the type of bill presented in court to the Taxing Master. I will explain how such a bill is set out.

The first section will deal with the solicitors’ own costs.

Solicitors’ hourly expense rates

This section of the bill will identify the fee earners involved whose time is claimed in the bill of costs. Their expense rates will be identified as a rate per hour.

The rates charged for each letter sent and what are known as "routine" or short telephone attendances will be set out; they are at normally at 10% of the hourly rate. For example the hourly expense rate might be say £120.00 per hour; in such case letters would be charged at £12.00 each and routine telephone attendances also at £12.00 each.

Interlocutory attendances

Solicitors’ time dealing with his own client - attendances

After a description of the work done in taking instructions and liaising with the client, the number of letters sent to the client will be identified and charged at the rate identified for letters sent, depending on which fee earner wrote the letter.

There will then be a list of dates and times of telephone attendances with the client; these will be telephone calls of at least 12 minutes duration and shown to the nearest 6 minutes (or tenth of an hour). The time spent for each fee earner will be totalled and multiplied by the hourly expense rate. Routine or short telephone attendances will be enumerated for each fee earner and charged at the unit rate I have discussed above.

Finally under this section of the bill, there will be set out individual attendances / meetings between the fee earner and the client, with a brief description, each to the nearest 6 minutes and charged at the hourly expense rate.

Other attendances

The same type of information will be supplied as own client attendances as above, in connection with solicitors’ time in further sections of the bill, namely:-

• dealing with the solicitors for the other party
• dealing with the arbitrator
• dealing with counsel and counsel’s clerk

Addition for care and control

All of the previous sections are then added together and sub-totalled. To this total is then added a percentage uplift for care and control. This percentage uplift is likely to be at least 50%; in most cases an uplift of 60% will be justified and in an extreme case perhaps 100% uplift may be appropriate. The percentage uplift reflects the weight and complexity of the work involved, any exceptional urgency, amounts in issue and the use of counsel. The allowance for care and control is intended to cover a solicitors’ general overhead, general supervision of subordinate staff, commercial profit, local travelling expenses, postage, telephone and fax costs and local couriers. Also covered is the costs of preparing a bill of costs by a costs draftsman.

Conferences with counsel

The time spent by solicitors in conference with counsel will be itemised separately.

Attendances at hearings

This time will also be shown separately. Sometimes where the case is being conducted by counsel at the hearing, the solicitors’ hourly rate will be reduced.

Preparation

This is usually the most extensive part of the bill of costs, certainly as far as amount of money is concerned. It covers all of the time of the solicitor that is properly recoverable, and is not covered in the sections dealing with attendances, conferences or attended hearings.

Generally the work done on each fee earning day will be described. The time claimed is obtained from detailed contemporaneous attendance notes drawn up by each fee earner each day and put into the files. As before, each portion of time is recorded to the nearest 6 minutes. The time claimed is totalled up and multiplied by the individual hourly expense rates.

Travelling and waiting

Travelling and waiting time is itemised separately.

Determination

The party having its bill determined is generally entitled to its costs of the determination process. This section of the bill may be held over until after the arbitrator has made his partial award on determination and before he comes to deal with the costs of determination.

Disbursements

Solicitors’ disbursements will include fees paid to counsel and experts. The claim will be supported by invoices, receipts and as much analysis in support of the amount claimed as is available.

Expenses

Most expenses are not claimable as they are deemed to be included within the solicitors’ overheads. However claims may be made for travelling expenses, search fees, oath fees and the like.

Bill to be signed

The whole bill will be totalled, the arithmetic checked and the bill signed by a partner of the firm of solicitors.

Other forms of bills of costs

Although I have described the way a solicitor will usually draw up a bill of costs, the arbitrator is not bound by any set format. There is nothing to prevent a purely chronological bill.

Representation by non-legally qualified representatives

Non-legally qualified representatives’ fees are normally recoverable on determination - see Piper Double Glazing -v- DC Contracts [1994] 1 WLR 777, providing that not more is recovered than would be recovered if a solicitor had done the same work.

Documents required to be lodged with a bill for determination

Both the arbitrator and the other party will be provided with copies of counsel’s receipted fee notes and those from experts. Any documentary evidence in support of amounts claimed in respect of experts will also be provided.

Many of the documents in support of amounts claimed may be privileged, such as solicitors’ correspondence, file notes, attendance notes and the like. Invoices rendered by solicitors will also be relevant but equally privileged.

The other party is generally not entitled to look at any privileged documents, but it is standard practice for all relevant documents, including privileged ones, to be put before the arbitrator conducting the determination.

Arguments can arise concerning the contents of privileged documents and it may sometimes be appropriate for such documents or part of them to be disclosed to the paying party. The authority for this is Goldman -v- Hesper [1988] 3 All ER 97, where at pp 102/103 Taylor LJ said this:-

"It is therefore clear that there is now a statutory requirement on a claimant for costs to disclose privileged documents to the court. Normally, where prejudice exists it applies to protect disclosure not only to the opposing party, but also to the court. So the rule clearly makes inroads into that general protection. It follows that once a party puts forward privileged documents as part of his case for costs some measure of their privilege is temporarily and pro hac vice relaxed. In most cases, Hobhouse J observed [in Pamplin -v- Express Newspapers Ltd [1985] 2 All ER 185, [1985] 1 WLR 689], no problem would arise on taxation about privilege. However, when the problem does arise the taxing officer has the duty of being fair to both parties: on the one hand, to maintain privilege so far as possible and not disclose the contents of a privileged document to the paying party unnecessarily; on the other hand, he has to see that that party is treated fairly and given a proper opportunity to raise a bona fide challenge. The contents of documents will almost always be irrelevant to considerations of taxation, which are more concerned with time taken, the length of documents, the frequency of correspondence and other aspects reflecting on costs. In my judgment, the approach adopted by Stevenson J in Hobbs v Hobbs and Cousens [1959] 3 All ER 827, [1960] P 112 was too rigid and uncompromising. There may be instances in which taxing officers may need to disclose part, if not all, of the contents of a privileged document in striking the appropriate balance. He will no doubt use all his expertise and tact in seeking to avoid that situation wherever he can. I do not envisage it occurring, except very rarely. Of course it is always open to the claimant not to rely on privileged documents which he regards as peculiarly sensitive."

If the privileged documents are not lodged with the arbitrator, they must be brought to any hearing on determination and be available for inspection to the arbitrator.

Hearing on determination of recoverable costs

At this hearing the parties are usually represented by costs draftsmen, who are specialists in presenting bills of costs and objections to them.

The presentation to the arbitrator is by oral submissions supplementing the written bills of costs, objections and replies. There is no oral evidence at hearings on recoverable costs, save in the most exceptional circumstances. Only those elements of the bills of costs that are in dispute are covered.

Each bill of costs, where there is a dispute, is examined item by item. Usually the hourly rates will be covered first as they will apply to many items in the bills of costs. Unlike a typical hearing on the substantive issues, the arbitrator will make his decision immediately on each point argued before him and will explain his decision and where necessary his reasoning orally and extemporarily. After hourly rates, the arbitrator will consider argument on all other items page by page and item by item, giving his decision on each point after he has heard both sides.

Thus at the end of the hearing on determination of costs, each party and the arbitrator will be able to work out exactly what amount has been allowed as the recoverable costs.

Principles of determination

I am going to cover just four areas of principle, the first only in passing. There are many other interesting areas that would justify much more extensive treatment.

Questions of doubt

On the usual basis of determination, which is on the "standard basis", any doubt as to whether an amount is properly allowable or not, is exercised in favour of the paying party.

The indemnity principle

The successful party’s entitlement by an award of the arbitrator to recover all or part of his costs from the other party is only a right to a (partial) indemnity against the costs he has incurred with his own solicitors. He is not entitled to recover any costs that he is not or will not be obliged to pay out himself. This is what I refer to as the "indemnity principle". It is well established law, the prime 20th century English authority being Gundry -v- Sainsbury [1910] 1 KB 645.

Thus if a solicitor agrees with his client that no costs will be charged, the client cannot recover anything in respect of solicitors’ costs in a determination.

In another English High Court case, Commissioners of Customs and Excise -v- Valerian Raz and Portcullis (1994) - The Times 5 December 1994, it was held that where there was a conditional fee agreement between a tax payer and a tax consultant providing that the consultant’s charges would equal costs received on a successful VAT appeal, the indemnity principle was infringed and there could be no order for costs against the Commissioners.

More recently the Court of Appeal has reinforced the indemnity principle in The General of Berne Insurance Company -v- Jardine Reinsurance Management Limited and others [1998] 1 WLR 1231. - This case was concerned with the legal interpretation of Section 60(3) of the English Solicitors’ Act 1974 which is in the following terms - "A client shall not be entitled to recover from any other person under an order for payment of any costs to which a CBA (Contentious Business Agreement) relates, more than the amount payable by him to his solicitor in respect of those costs".

At first instance it was decided that providing the indemnity principle was not breached overall, in that the total amount claimed on determination did not exceed the total amount paid or payable by the client, then the client could recover on determination hourly expense rates including uplift exceeding those rates charged by its own solicitor under a CBA.

The Court of Appeal decided that this approach was wrong and that a receiving party could not recover on taxation more than it had paid or was payable viewed both on an item by item basis and overall.

Interest

Even though costs may have been incurred many months or years before the determination, the successful party cannot claim interest on the costs it has incurred and which are recoverable on determination for the period prior to the date of the award in which those costs were awarded. The award is the trigger which starts interest running from the date of the award until date of payment - see the English decision in Hunt -v- RM Douglas (Roofing) Ltd [1988] 1 AC 398.

The costs of determination

The normal rule is that the receiving party, namely the party whose bill is being assessed, is entitled to receive his costs of the determination process from the paying party - see the House of Lords decision in Donald Campbell & Co. -v- Pollak [1927] AC 732. However even this can be complicated by the paying party making an offer to settle the bill of costs at an amount higher than the amount of recoverable costs awarded by the arbitrator.

A party wishing to protect its position in costs in connection with the costs of determination of the recoverable costs will usually make a Calderbank offer (an offer expressed to be "without prejudice save as to costs of determination of recoverable costs").

If the offer is rejected and the determination proceeds to a determination by the arbitrator, significant costs may be incurred in a large case. If the amount of the offer proves to be less than the sum awarded on determination then the receiving party is justified in rejecting the offer and will obtain its costs of determination in the normal way.

However if the offer is equal to or greater than the sum awarded on determination, then the paying party will be entitled to argue that the determination process has proved to be a waste of time; the offer should have been accepted; nothing more has been gained by continuing with the determination.

In connection with the substantive issues in the case the arbitrator, in similar circumstances, would award costs to the wining party up to the date of the offer plus the costs of considering the offer and all costs incurred thereafter, whether by the winning or losing party would be paid by the winning party, because it should have accepted the offer when made.

When dealing with offers in connection with determination of costs, similar considerations apply as to Calderbank offers to settle the substantive issues in the arbitration as discussed above, but with one significant exception. The arbitrator will normally deprive the successful party of his costs of determination from the time when he should have reasonably accepted the offer to settle the amount of recoverable costs. However, it is only in exceptional circumstances that an arbitrator will order the successful party to pay any of the costs of the unsuccessful party even from the date when the offer to settle should have been accepted - see Chrulew and others -v- Borm-Reid & Co (a firm) [1992] 1 All E.R. 953. I quote from part of the judgment of Mr Justice Waller:-

"This brings me to the final aspect. On this review there is a claim not only to have the costs of the determination disallowed including the determination fee, but for the defendants to have their costs. ............. It is in this area that the distinction between determination and ordinary litigation is once again important. The expectation at the conclusion of a determination is that normally the party whose bill is being taxed will be entitled to his costs and there is not an expectation that the 'winner' will receive an order for costs, i.e. that someone who succeeds in taxing the bill down will necessarily be entitled to his costs of attending the determination. There may well be circumstances in which the failure to accept a Calderbank offer is so unreasonable that an order for costs will be made under Ord 62, r 27(2) in favour of the party who has successfully obtained a lowering of the bill as presented. But in circumstances such as the present, where the Calderbank offer has been beaten by only a very small amount, I do not think that the principle of King v Weston-Howell [1989] 2 All ER 375, [1989] 1 WLR 579, as applied in litigation generally, should apply to determination proceedings.

"In the circumstances of a case such as this, it seems to me that a proper exercise of the discretion would be to disentitle the plaintiffs from the costs of the determination proceedings including the fee as from a date when they should reasonably have accepted the Calderbank offer, i.e. seven days after 20 July 1990. No point has been made that the determination fee here would only have been abated. In those circumstances the appropriate exercise of the discretion would have been, and should be, to disallow the costs of the determination proceedings including the determination fee. No order is made that the plaintiffs should pay the defendants costs of the determination."

On the basis of the extract from the judgment that I have quoted above, it is clear that the test is whether the receiving party’s failure to accept the Calderbank offer is so unreasonable that an order for costs should be made in favour of the paying party who has successfully obtained a lowering of the bill as presented. If the arbitrator is of the view that the failure of the receiving party to accept the Calderbank offer is unreasonable to a significant degree, he may be justified in ordering the receiving party to pay the paying party’s costs of determination from the date when the Calderbank offer should have been accepted.

In circumstances where the arbitrator is not persuaded that rejection of the Calderbank offer on determination was unreasonable to a significant degree, the effect will often be that from the date the offer should have been accepted, the arbitrator will make no award as to the parties’ costs of determining the recoverable costs. Denying the receiving party their costs follows the normal Calderbank principles and denying the paying party their costs from the date the offer should have been accepted follows the reasoning in Chrulew.

It is because of the possibility of offers to settle the costs, that the arbitrator refers to a partial award on determination in his order for directions on determination of recoverable costs. The arbitrator’s final award on determination will deal with the costs of determination. That award will bring the whole arbitration to an end.

25 February 1999