Once you know what “costs” means, the harder question becomes: who pays, and how much? In Part-II of this series, Datuk Professor Sundra Rajoo unpacks the four universally accepted principles governing cost assessment reasonableness, and three dimensions of proportionality and then examines the philosophical fault lines that divide international arbitration practice. Should the loser always pay? Should each party bear its own costs? Or does the answer depend on the nature of the dispute, the parties’ conduct, and the tribunal’s discretion? This part navigates those questions with reference to leading case law from England, Singapore, Hong Kong, Australia, and international investment tribunals.

Universally Accepted Principles on Reasonableness and Proportionality in Costs Awards

Across common-law arbitral seats, an overlapping consensus has emerged regarding the principles governing the reasonableness and proportionality of costs.

While institutional rules and legislative formulations vary in emphasis and formulation, tribunals consistently apply four foundational criteria:

(1)        the reasonableness of costs incurred for effective legal representation;

(2)        proportionality to the complexity and technicality of the dispute;

(3)        proportionality to the scope and number of issues raised; and

(4)       proportionality to the monetary value of the dispute. These principles function both as constraints on cost awards and as devices facilitating tribunal discretion in response to case-specific circumstances.

Reasonableness of Costs for Effective Representation

The reasonableness requirement embodies a normative judgment that costs should reflect the necessities of proper advocacy rather than tactical escalation or inefficiency. Tribunal assessment of reasonableness typically examines, amongst others:

(1)        the nature and complexity of tasks undertaken;

(2)        the seniority, experience, and hourly rates of counsel;

(3)        the presence or absence of duplication of effort among counsel;

(4)        the reasonableness of expert fees relative to market rates; and

(5)        the degree of adherence to procedural timetables.^[1]

English jurisprudence has long enforced this standard through evolving case law. The Court of Appeal in Danilina v Chernukhin [2018] EWCA Civ 1802, endorsed the proposition that arbitrators possess a broad “margin of appreciation” in evaluating whether costs incurred were reasonably necessary in light of the dispute’s demands.  Appellate or supervisory courts should intervene sparingly on this question.^[2]

Singapore’s High Court in VV v VW, articulated a parallel principle when it acknowledged that while a costs award may be challenged if it is “patently unreasonable” or “shocking to the conscience,” the threshold for intervention is exceedingly high. That said, the tribunals retain significant latitude to assess the necessity of costs incurred during proceedings.^[3]

Proportionality to Dispute Complexity

Complexity justifies elevated levels of legal and expert resourcing. Factors commonly examined include:

(1)        the technical or specialised nature of the subject matter;

(2)        the presence of multi-jurisdictional or conflicts-of-laws issues;

(3)        the volume and density of documentary evidence;

(4)        the requirement for expert evidence from multiple disciplines (engineering, economics, accountancy, science);

(5)        the number of parties and their procedural postures; and

(6)        the number and sophistication of legal issues raised.^[4]

Tribunals in England, Singapore, and Hong Kong routinely recognise that a multimillion-dollar engineering dispute spanning three continents and requiring expert evidence from five disciplines justifies considerably higher legal costs than a straightforward breach-of-warranty claim involving discrete contractual interpretation.

The ICC’s 2015 Commission Report on Costs affirms this principle as near-universal among institutional practices.^[5].

Proportionality to Scope of Issues Raised

Where parties raise numerous peripherals or ultimately unsuccessful issues, tribunals increasingly exercise discretionary authority to impose costs consequences through issue-based allocation, percentage reductions, or adverse costs orders for unnecessary interlocutory steps.

The LCIA Rules 2020 explicitly authorise this approach: Article 28.4 empowers tribunals to consider “any conduct which unnecessarily increases the cost or duration of the arbitration” when determining cost allocation.²⁰

This principle operates as a behavioural incentive, discouraging parties from engaging in strategic pleading in raising numerous frivolous claims merely to impose costs burden on opponents, knowing that recovery is unlikely but hoping to increase the unsuccessful opponent’s total expenditure.

Where a claimant raises twenty numbered claims but succeeds only on three, tribunals increasingly adjust the cost award to reflect this partial success, rather than awarding full indemnification.

Proportionality to Dispute Value

A foundational axiom especially in commercial arbitration, is that costs should remain proportionate to the quantum in dispute. This principle prevents absurd outcomes where a party’s costs exceed the claim value by multiples, rendering the arbitration economically irrational.

Tribunals commonly consider:

(1)        whether costs exceed the claim value;

(2)        the efficiency of pleadings and document production relative to the sums at issue;

(3)        the economic rationale for particular procedural steps; and

(4)        whether a party’s costs escalation was driven by legitimate complexity or tactical overkill.

The ICC Commission on Arbitration has pointed out that in a significant proportion of surveyed awards, tribunals reduced claimed costs on the basis that they were disproportionate to the claim value, even where the successful party had technically prevailed on merits.^[6] 

Competing Philosophical Approaches in International Arbitration

International arbitration reflects an enduring tension between traditional autonomy-driven models and contemporary efficiency-oriented frameworks.

This philosophical divide manifests acutely in the distinct cost-allocation regimes applicable to commercial arbitration versus investment treaty arbitration, each responding to different legitimacy concerns and policy objectives.

The Efficiency-Driven Paradigm and Rise of Tribunal Authority

Over the past two decades, arbitral institutions and national legislatures have progressively emphasised efficiency, proportionality, and tribunal authority as central to arbitration’s comparative advantage over litigation.

Key institutional developments include:

(1)        mandatory proportional procedure provisions requiring allocation of resources commensurate with claim value and complexity;^[7]

(2)             tribunal authority to curtail excessive discovery, repeated oral hearings, and voluminous written submissions; temporal discipline through enforced procedural timetables; and

(3)        progressive refinement of tribunal authority to sanction dilatory or obstructive conduct through adverse cost orders.

Singapore and Hong Kong have been institutional leaders in this domain, promoting efficiency as a competitive advantage for their arbitral seats.

The SIAC Rules emphasise early case management, with the tribunal convening at the earliest opportunity to establish a realistic timetable and procedural roadmap. The HKIAC similarly promotes proactive tribunal engagement to prevent procedural sprawl.

England has encouraged tribunals to adopt civil-procedure-inspired guidelines ensuring proportionality, balancing the traditional common-law enthusiasm for full factual development against contemporary concerns regarding cost escalation.

The justification for this efficiency-driven paradigm is economic and institutional:

(1)        excessive costs undermine arbitration’s utility for smaller disputes and developing-country parties;

(2)        procedural proliferation dilutes the autonomy benefits that arbitration promises relative to litigation; and

(3)        uncontrolled cost escalation makes arbitration inaccessible to parties of limited means, potentially violating principles of equal access to justice.

Investment Treaty Arbitration: A Distinct Philosophy

Investment treaty arbitration has historically operated under a substantially different cost-allocation philosophy, animated by distinct policy concerns.

Early ICSID Convention practice adopted the “American rule”. Each party bearing its own costs regardless of outcome, motivated by concerns that imposing costs liability on unsuccessful claimants (particularly smaller investors or developing-country entities) would create barriers to access to justice. In so doing, it would disproportionately protect powerful host states from accountability.^[8]

However, this approach has undergone substantial revision since the 2010s. ICSID and UNCITRAL tribunals increasingly adopt a modified “loser pays” approach, particularly where:

(1)        claims are manifestly without legal merit;

(2)        jurisdictional arguments fail;

(3)        a party’s conduct substantially increases procedural costs;

(4)        a state is burdened with defending frivolous or speculative claims; or abuse of process is established.^[9]

The shift reflects a maturation of investment arbitration jurisprudence and growing concerns about frivolous claims, abusive treaty-shopping, and excessive costs imposed on respondent states.

Tribunals have come to recognise that unlimited cost-shifting in favour of unsuccessful claimants creates moral hazard: speculative investors have insufficient incentive to conduct rigorous pre-filing analysis, leading to a proliferation of questionable claims.^[10].

Read Part 3: Institutional Rules, Soft-Law Frameworks & India’s Law Commission →

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References

[1]     ICC Commission Report on Costs (2015), finding that reasonableness assessments routinely include consideration of “the work performed,” “the seniority of the persons involved,” and “whether the work done was of a type and in a quantity and quality that could be considered necessary and appropriate.”

[2]     See, Danilina v Chernukhin [2018] EWCA Civ 1802; [2018] EWHC 173 (Comm), where the High Court examined whether costs of a complex shareholder dispute involving multi-jurisdictional issues and extensive documentary evidence were reasonably incurred, ultimately deferring substantially to the tribunal’s assessment.

[3]     See, VV v VW [2008] 2 SLR(R) 929, per Phang J.A., emphasising that “the whole point of arbitration is to allow parties to manage their disputes in the way they see fit, and to that end, the courts should not interfere with costs unless the costs are manifestly unreasonable.”

[4]     CIArb, “International Arbitration: Costs, Duration and Damages – A Study of Awards” (2011), noting that complex technical disputes often justify greater deployment of expert resources than conventional commercial disputes.

[5]     International Chamber of Commerce, Commission on Arbitration, “Decisions on Costs in International Arbitration” (Report No. 2015), p. 19, noting that “the complexity of the case is a particularly important factor when determining the reasonableness of costs claimed by the parties.” ²⁰LCIA Rules, 2020, Art. 28.4.

[6]     ICC, “Decisions on Costs” (2015), at 21–24, reporting that proportionality reductions were applied in approximately 18% of awards reviewed, with disproportionality to claim value being the most commonly cited rationale.

[7]     See SIAC Rules, 2016, Rule 19.1 (embodying a proportionality principle requiring procedures “to be cost-effective and capable of being completed within an appropriate timeframe”); LCIA Rules, 2020, Art. 14 (similar).

[8]     UNCITRAL, “Dispute Settlement: Investor-State” (UNCTAD/IIT/2011/3, 2012), explaining that early ICSID practice reflected “a policy concern about ensuring meaningful access to investment arbitration for investors from developing countries.”

[9]     See, e.g., Philip Morris Asia Ltd v Australia (UNCITRAL, PCA Case No. 2012-12, Award on Jurisdiction and Admissibility, December 17, 2015), where the tribunal found abuse of process and ordered the investor to bear 50% of the respondent state’s legal costs, despite the respondent’s ultimate success on jurisdiction.

[10]    See, Rusoro Mining Ltd v Venezuela (ICSID Case No. ARB(AF)/12/5, Final Award, August 22, 2016), at paras. 655–680, where the tribunal awarded costs to the successful claimant, recognising that costshifting operates as a discipline on frivolous or economically irrational claims.