The concept of costs budgeting originates from English civil procedure. In the so-called Jackson reform cost budgeting was a key issue and composed of the following elements:
- The parties prepare and exchange budgets for the litigation and, if necessary as the case proceeds, amended budgets.
- The judge states the extent to which those budgets are approved.
- The judge manages the case so that it proceeds within the approved budgets.
- Any request to increase the approved budget requires a party to convince the judge why such increase is reasonable and necessary in the circumstances.
- At the end of the litigation, the recoverable costs of the winning party are assessed in accordance with the approved budget.
In the English Civil Procedure Rules the detailed provisions governing the budgeting process are laid down in Rules 3.12-3.18 and Practice Direction 3E. The court is provided with wide powers of intervention, such as revise a party’s costs budget or issue a costs capping order.
The main advantages of costs budgeting can be summed up as follows:
- It gives parties more transparency regarding costs.
- It limits costs to a level proportionate to the sum in dispute.
- It facilitates settlement negotiations, as the parties are in a better position to assess the financial impact of the litigation.
- It will also serve as an incentive for parties to keep their submissions concise and to the point.
Considering that arbitration is consistently striving to become more cost efficient, it begs the question: Does costs budgeting have a role to play in arbitration?
In most jurisdictions, the broad power of a tribunal to determine their own procedure would include the power limit the amount of recoverable costs. Section 65 of the English Arbitration Act 1996 even specifically empowers the tribunal to limit the recoverable costs of the arbitration to a specified amount. Equally, most arbitral rules leave arbitrators with a wide discretion when it comes to the allocation of costs such as they would be empowered to impose budgets.
Although arbitrators have the power to engage in costs budgeting, they tend to be reluctant to impose procedures on costs without the consent of the parties. The ICC Commission Report on Decisions on Costs in International Arbitration has found that arbitrators are unlikely to take the initiative and issue budget orders as part of their general case management powers. Indeed, it appears difficult to consolidate the English-style approach requiring significant intervention from the tribunal with arbitral proceedings that are characterized by party autonomy and procedural flexibility.
The arbitrator should rather take the role of a facilitator when it comes to costs budgeting. The arbitrator could draw the parties’ attention to the option of costs budgeting and invite them to consider agreeing on a cap for costs for all or part of the arbitral proceedings. This is, for example, provided for in the rules of the Belgian arbitration centre (CEPANI), which expressly invite arbitrators to draw the parties’ attention to the possibility of making an agreement of party costs.
Considering the potential advantages of costs budgeting, arbitrators should bring the issue to the parties’ attention when discussing Procedural Order No. 1 or the Terms of Reference. Equally, the parties themselves may take the initiative and ask the arbitrator to uphold an agreed costs budget.
Unfortunately, in practice the option of costs budgeting is often overlooked at the outset of an arbitration. Considering the advantages of costs budgeting (transparency and control of costs), this needs to change. The parties as well as the arbitrators should discuss the option of costs budgeting. It is in the interest of both parties to determine whether there is a shared view as to the amount of costs that should be spent on a particular dispute. This will allow the parties to better manage the financial aspects of their dispute.