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Costs on discontinuance of ICSID arbitration where no clear winner
Practical Law UK Legal Update Case Report 4-503-0071 (Approx. 5 pages)
Costs on discontinuance of ICSID arbitration where no clear winner
by PLC Arbitration
| Published on 11 Aug 2010 • International |
In Piero Foresti and others v The Republic of South Africa (ICSID Case No ARB(AF)/07/1), an ICSID tribunal considered the question of costs on discontinuance of an ICSID arbitration.
Speedread
An ICSID tribunal has considered the appropriate costs order to make where the claimant investors had applied to discontinue their claim in respect of alleged expropriation of mining rights. The claimants made a request for discontinuance of the ICSID proceedings following an agreement between the parties whereby the respondent granted the claimants' operating companies new mining rights. The claimants argued that, although this did not provide full relief for their alleged injuries, it justified a decision not to proceed further with the arbitration.
Both parties asked the tribunal to award costs in their favour, each claiming that they were the "winning" party. The respondent argued that the claimants had not received anything in the arbitration and that the ICSID proceedings has been brought by the claimants as a tactical device. The claimants argued that their initiation of the arbitration had caused the respondent to give them, or their operating companies, new mining rights.
The tribunal dismissed the claimants' claims with prejudice, and ordered the claimant to pay EUR400,000 towards the respondent's costs, plus their own costs. The question of costs was a matter of discretion for the tribunal. Weighing up the various factors, although the claimants had abandoned some elements of their claim because they considered they had received new rights, they had, in fact, accepted less than they had lost in the first place. In the light of this and other factors, the tribunal considered that the claimants should make some contribution to the respondent's costs.
The award includes interesting discussion of the relationship between the Arbitration Act 1996 and the ICSID Additional Facility Rules, and serves as a warning to parties of the risks of failing to ensure that any compromise or settlement deals with costs.
Piero Foresti and others v Republic of South Africa (ICSID Case No ARB (AF) /07/1) (4 August 2010)
Background
Article 58 of the ICSID Arbitration (Additional Facility) Rules provides:
"(1) Unless the parties otherwise agree, the Tribunal shall decide how and by whom the fees and expenses of the members of the Tribunal, the expenses and charges of the Secretariat and the expenses incurred by the parties in connection with the proceeding shall be borne. The Tribunal may, to that end, call on the Secretariat and the parties to provide it with the information it needs in order to formulate the division of the cost of the proceeding between the parties,
(2) The decision of the Tribunal pursuant to paragraph (1) of this Article shall form part of the award."
Section 61 of the Arbitration Act 1996 provides as follows:
"(1) The tribunal may make an award allocating the costs of the arbitration as between the parties, subject to any agreement of the parties.
(2) Unless the parties otherwise agree, the tribunal shall award costs on the general principle that costs should follow the event except where it appears to the tribunal that in the circumstances this is not appropriate in relation to the whole or part of the costs,"
For further details on costs in ICSID proceedings generally, see Practice note, ICSID arbitration: a step-by-step guide: Costs.
Facts
In 2006, the claimants brought arbitration proceedings against the Republic of South Africa under the Italy and South Africa bilateral investment treaty (BIT) and the Belgo-Luxembourg and South Africa BIT. The seat of the arbitration was England. The claimants alleged that South Africa's post-apartheid mining rights legislation amounted to expropriation and breach of the requirement of fair and equitable treatment, in that it extinguished certain of their operating companies' mineral rights. In November 2009, the claimants sought the respondent's consent to discontinue the proceedings, arguing that although they had not been provided with full relief for their injuries, under an agreement reached in December 2008 (the Offset Agreement), the respondent had granted the claimants' operating companies new order mineral rights. Given that they had received partial relief and given the escalating costs of the arbitration, they sought to discontinue the proceedings. The respondent asked the tribunal to issue a default award in respect of fees and costs only. The respondent argued that:
- The tribunal had the power to issue a costs-only award without first evaluating the merits of the case under Article 48 of the Additional Facility Rules.
- The respondent was entitled to recover from the claimants all fees and costs in connection with the proceedings because the claimants had not received anything as a result of the arbitration, but merely received the same treatment as was the entitlement of other mining companies.
The claimants asserted that they were the "successful" party because their initiation of the arbitration had caused the respondent to enter into the Offset Agreement and grant the new rights. The respondent claimed costs totalling in excess of EUR5 million and the claimants claimed more than EUR4 million.
Decision
The tribunal ordered the claimants to contribute to the sum of EUR400,000 to the respondent's costs and bear its own costs.
It concluded that it could consider the question of costs by an exercise of its discretion. Applying Article 58 of the Additional Facility Rules, the tribunal noted that there was no agreement by the parties to "otherwise agree" the costs and fees in this case. The fact that the arbitration had an English seat and that the lex arbitri was English law did not amount to an agreement that Article 58 be displaced by section 61(1) of the Arbitration Act 1996. Section 61 only applies to the extent that the parties have not made their own arrangements by agreement. An agreement to arbitrate under the Additional Facility Rules was such an arrangement and would, therefore, displace the general principle set out in section 61(2) of the Arbitration Act 1996 that costs should follow the event.
In any case, had that section been generally applicable, it would not apply here where the tribunal was not mandated to rule upon the merits of the claim. Therefore, the question of costs had to be decided as an exercise of discretion, which is not limited by Article 58 of the Additional Facility Rules in any way. Nevertheless, the exercise of such discretion had to be the result of "rational consideration of relevant factors" (paragraph 105).
Here both parties considered themselves the winner. The fact that both parties had placed considerable weight on the extent to which they were successful reflected, at least, an underlying agreement that the degree of success of each party was a relevant factor to the decision on costs.
The tribunal concluded that, if a party is entitled to something which is improperly withheld, its remedy should be what it is entitled to and the costs incurred to obtain that entitlement. Conversely, a party should not have to bear the costs of defending its right to legitimately withhold something which it is entitled to withhold.
However, the tribunal decided that it could not rule on the extent to which the parties were, or were not, entitled to the various rights they claimed. It did, however, seek to define the boundaries within which success and failure were to be evaluated and make its own estimate of the degree of success of each party, within the confines of the arbitration. Factors it considered were:
- There was no real winner or loser here. The parties over many months had explored ways to fulfil their respective roles and had come to a point where their interests were so closely aligned that there was no advantage in pursuing the arbitration.
- Some elements of the claimants' claim were abandoned in return for an acceptable package in respect of other elements of the claim.
- The respondent's costs would have been smaller had the claimants demonstrated a willingness earlier in the proceedings to settle on a with prejudice basis (as opposed to a without prejudice basis).
- The effect on investment arbitration of possible approaches to costs. While the tribunal was satisfied that its approach here did not jeopardise the fair and efficient working of investment arbitration, it had not found any broad questions of policy to be of much help in deciding how to allocate costs.
- Approaching costs by looking at dates when proceedings might have been discontinued or costs might have been frozen was not necessarily the best approach; nor was considering the proportion of the "successful" claimants' claims, as that would require a view on the merits which the tribunal were not permitted to do.
- While the claimants had abandoned some elements of their claim, it was also true that in their eyes they had accepted less than they had lost.
In the light of these factors, the tribunal determined that the claimants should make a contribution to the respondent's costs, given that they had:
- Sought discontinuance of the claims.
- Abandoned some of their claims.
- Pressed ahead with the arbitration at a time when they were in a position to avoid the need for some parts of the parties' expenditure.
Comment
As noted by the tribunal, the approach adopted reinforces the view that, while a claimant in investment arbitration is, in principle, entitled to its costs in vindicating its legal rights, a respondent state cannot be expected to pick up the costs of abandoned claims. The case also demonstrates the difficulty in assessing costs where there is no real winner or loser, particularly where a tribunal is not mandated to make any decision on the merits of a claim. Further, the case serves as a reminder of the importance of carrying out regular reviews of a client's case from a costs as well as a merits perspective. Had the claimants here agreed to settle the case on a with prejudice basis earlier, or had the parties dealt with costs as part of their compromise, the outcome may have been different.