Arbitral institutions: what will it cost me?

Posted on 09 December 2015

Choosing an arbitral institution – does it matter?

In the high pressure environment of commercial negotiations, the dispute resolution clauses in a draft agreement are often overlooked, at least until late on in the process. Parties on the brink of a deal are not normally inclined to worry unduly about disputes arising. The choice of litigation or arbitration is not always considered in detail. 

When the parties opt for arbitration, they also need to decide which arbitral institution, if any, will administer a future dispute. In the context of English law contracts, the most popular choices are the LCIA (the London Court of International Arbitration) and the ICC (the International Chamber of Commerce). When transactional lawyers call their arbitration colleagues and ask which arbitral institution should be designated, the standard response is that LCIA and ICC areboth sensible choices, so it's probably not worth worrying about. There is some truth in that, but the reality is a little more complicated.

Most if not all parties engaged in arbitration seek to keep costs to a minimum. Those same parties are often surprised to learn that the LCIA and the ICC have entirely different fee structures for work done by the arbitrators and the institution itself. The LCIA charges on an hourly rate basis. The ICC charges a percentage of the sum in dispute. In very simplistic terms, a high value but straightforward dispute may be better suited to LCIA arbitration, with low value complex disputes better suited to ICC arbitration.

With so many institutions to choose from, each with their own methods of calculating costs, it is surprising to note how little comparable cost information exists. With that in mind, it is refreshing to see that the LCIA has recently carried out a comprehensive analysis of all the arbitrations carried out under its auspices in the period 1 January 2013 to 15 June 2015. The complete report can be found here.

The LCIA calculated that the mean costs of a LCIA arbitration – by which we mean the costs of the arbitrators but not the fees of the parties' representatives – is US$192,000, with the median costs of a LCIA arbitration put at US$99,000. The authors of the report suggest that the median figure is the more significant. This comes as no surprise – the LCIA is keen to portray itself as better value for money than its competitors and it has chosen to emphasise the lower figure.

On a related theme, the authors of the report assert that in respect of disputes below US$1 million, the costs of arbitration under the LCIA Rules and the ICC Rules are comparable, whereas in respect of disputes over US$1 million, LCIA costs are lower. The more cynical reader will no doubt be sceptical and reluctant to place too much reliance on the report, mindful perhaps of the aphorism usually attributed to Mark Twain: "lies, damned lies and statistics".

In any event, the LCIA should be applauded for attempting to bring some clarity to debate. One hopes that other arbitral institutions will now follow suit and carry out their own costs analysis. It is essential that commercial parties enter into contractual relations with all necessary information at their fingertips, including the likely costs of resolving any dispute should the worst happen.