Key takeaways
Non-mandatory provisions of Arbitration Act 1996
These may be, but are not necessarily, trumped by institutional arbitral rules.
LCIA costs rules
These are complete of themselves and so exclude statutory default costs rules.
Costs schedules
These should be sufficiently particularised and itemised when submitted.
This dispute highlights that when parties agree that their disputes will be resolved in arbitration under institutional rules, the institutional rules may trump non-mandatory provisions of the Arbitration Act 1996 (1996 Act).
The question will be whether, on their true construction, the institutional rules cover the matters otherwise provided for in the 1996 Act and to what extent they replace the default rules.
In this case, the Court found that LCIA costs rules ousted the provisions under the 1996 Act relating to recoverable costs. The two sets of rules did not operate in tandem.
The Court emphasised that parties can always expressly incorporate into their agreement default rules under the 1996 Act if they believe that the institutional rules in question are inadequate. Alternatively, they can expressly exclude any institutional rules, in which case the default rules under the 1996 Act apply.
Arbitration Act 1996
The following sections of the 1996 Act were relevant to the dispute:
“Costs of the arbitration
59.(1) References in this Part to the costs of the arbitration are to –
(a) the arbitrators' fees and expenses;
(b) the fees and expenses of any arbitral institution concerned, and
(c) the legal or other costs of the parties.”
……..
“The recoverable costs of the arbitration
63.(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.
"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…"
The background facts
A dispute arose under two Product Sharing Contracts for oil and gas reserves in the Kurdistan Region of Iraq. A two-week LCIA arbitration took place in February 2024. The Tribunal issued a Partial Final Award in December 2024, finding that the Kurdistan Regional Government of Iraq (KRG) had validly terminated the Contracts and dismissing the counterclaim brought by Genel Energy Miran Bina Bawi Ltd (GEMBBI) for repudiation.
In subsequent costs proceedings, KRG as the successful party claimed over US$35.5 million in respect of legal and expert fees over the roughly two-and-a-half year period of the arbitration. However, KRG did not submit schedules containing a detailed breakdown of the costs. It only provided:
(a) A total aggregate figure for each category of fee earner (not even each individual fee earner) over the entire life of the proceedings, with the total hours spent by each such category and the range of hourly rates applied within each category
(b) The total aggregate figure charged in each month by all fee earners; and
(c) The total aggregate fees and expenses charged in each month by each expert.
There was no allocation of costs to particular workstreams and no information to show how much time was spent on any particular item of work by any individual fee earner.
GEMBBL argued that the information provided was insufficient to enable the Tribunal to make any reasoned award on costs that complied with the requirements of subsections 63(3)(a) and (b) of the 1996 Act (Specificity Provisions) and that it should therefore decline to do so and instead direct that the assessment of costs be referred to the Court under section 63(4) of the 1996 Act.
The Tribunal rejected this submission, holding that the provisions of section 63 of the 1996 Act had been displaced by the agreement of the parties to arbitrate under the LCIA Rules 2020 (Rules) and, specifically, by Article 28(3) which gave it the power to decide the amount of Legal Costs (as defined in the Rules) "on such reasonable basis as it thinks appropriate."
Despite the paucity of material available, the Tribunal concluded that it had sufficient information to reach a reasoned decision on the costs claimed and that in any event, it was appropriate for it to undertake the assessment itself given its familiarity with the proceedings.
The Tribunal determined that the costs claimed were not reasonable. It applied a general reduction of 20% to the legal fees and 50% to the fees of one of the experts resulting in a total costs award in excess of US$26 million. The Tribunal also made an award in respect of KRG's disbursements and Arbitration Costs (as defined in the Rules).
Under the Rules, the parties agreed to exclude any appeal on a question of law. Nonetheless, GEMBBL sought to challenge the Tribunal's award of costs in relation to legal and expert fees for serious irregularity under section 68(2)(b) of the 1996 Act on the grounds that the Tribunal had exceeded its powers by issuing an award which failed to comply with the requirement in section 63(3) to "specify the items of recoverable costs and the amount referable to each”.
The Commercial Court decision
Relationship between s.63 and Article 28
The Court considered whether the power exercised by the Tribunal in determining legal and expert costs derived from section 63 of the 1996 Act or from Article 28 of the Rules or from a combination of the two and, in particular, whether the Tribunal was bound to comply with the Specificity Provisions.
Pursuant to section 4(3) of the 1996 Act, the parties can oust its non-mandatory provisions, including by agreeing to the application of institutional rules. Therefore, parties can agree that institutional rules should govern matters that would otherwise be covered by the default rules in the 1996 Act.
Mere agreement to institutional rules did not per se oust all non-mandatory provisions of the 1996 Act. Furthermore, a particular institutional rule might not in fact amount to an agreement on a relevant matter.
The Court decided that Article 28 of the Rules provided a complete mechanism for the assessment of legal costs such that it excluded the operation of the default costs rules of section 63 of the 1996 Act in their entirety.
The Article 28 regime was capable of standing on its own without the need for any supplementary rules contained in the 1996 Act. To apply the non-mandatory default rules alongside Article 28.3 would be fundamentally inconsistent with the parties' agreement that the Tribunal should have a discretion to assess costs on such reasonable basis as it thought appropriate because that would, by definition, constrain the exercise of such discretion.
Therefore, the Specificity Provisions did not apply.
Even if this were wrong, the Court decided that any non-compliance with the Specificity Provisions would not amount to an excess of power challengeable under section 68 of the 1996 Act. This was not a serious irregularity. If anything, it was an erroneous exercise of power that was challengeable as an error of law and the LCIA Rules excluded appeals on a point of law.
The section 68 challenge was, therefore, dismissed.
Comment
As the Court noted, those signing up to institutional rules expect a complete procedural regime rather than one which may be supplemented by statute when there are already sufficient mandatory safeguards in the 1996 Act.
It is good practice, when submitting costs schedules, to itemise named fee earners, their charge out rates, categories of work undertaken and hours spent for each category. Had a better itemised schedule been presented when legal costs were assessed by the arbitrators, an appeal might well have been avoided.
The Commercial Court’s decision highlights the importance of understanding how LCIA rules may displace non mandatory provisions of the Arbitration Act 1996 – particularly when it comes to costs. Careful drafting, strategy and procedural awareness can make a significant difference in high value disputes.
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