*Karl P. Sauvant, PhD*
*Resident Senior Fellow*
*Columbia Center on Sustainable Investment**
Columbia Law School - The Earth Institute, Columbia University
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* Formerly the Vale Columbia Center on Sustainable international Investment.
“The negotiations of the United Nations Code of Conduct on
Transnational Corporations: Experience and lessons learned” and K. P.
Sauvant and F. Ortino, *Improving the International Investment Law and
Policy Regime: Options for the Future are* available at
http://www.works.bepress.com/karl_sauvant/.
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*Columbia FDI Perspectives*
Perspectives on topical foreign direct investment issues
No. 152 July 20, 2015
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Adrian P. Torres ([log in to unmask])
*Cost allocation in ICSID arbitration: theory and (mis)application*
<http://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=1dfe684e84&e=dd153d6a25>
by
Matthew Hodgson*** <#14eb719296873e1b__edn1>
In their recent *Perspective*, James Nicholson and John Gaffney argued for
the “costs follow the event” (CFTE) cost-allocation approach to investment
arbitration, in contrast to the more traditional “pay your own way” (PYOW)
approach.[i] <#14eb719296873e1b__edn2> They countered an earlier
contribution by Baiju Vasani and Anastasiya Ugale,[ii]
<#14eb719296873e1b__edn3> principally on the basis that a CFTE rule would
encourage meritorious claims and discourage weak ones.
This contribution to the debate demonstrates that: (1) there is a third
approach to cost allocation, referred to here as the “relative success”
approach; (2) “relative success” is the dominant approach, but is
frequently misapplied in practice; and (3) there is a need for guidance on
costs in the International Centre for Settlement of Investment Disputes
(ICSID) arbitration rules.
There is no binary distinction between the CFTE and PYOW approaches.
Indeed, neither accurately reflects the reasoning of most ICSID tribunals.
The “relative success” approach apportions costs based on the success of
the parties on different issues in dispute. In a recent survey of public
ICSID awards,[iii] <#14eb719296873e1b__edn4> 38% of tribunals justified
their decision by reference to the relative success of the parties on
different issues in dispute — far more than the number following a CFTE
(17%) or a PYOW approach (5%).
Although special factors (e.g., party misconduct, unreasonable costs) may
justify deviation, the approach adopted should correlate with the actual
costs outcome: CFTE should normally lead to a fully adjusted costs order,
while PYOW should lead to an unadjusted costs order. “Relative success”,
conceptually linked to the CFTE approach by applying that approach to each
issue in dispute, should lead to a partial costs order, since one party
will typically succeed on most, but not all, key issues. The reality,
however, is quite different.
The survey results from the application of the CFTE approach are
unremarkable. As expected, many tribunals adopting this approach made a
fully adjusted costs order (46%), with a slightly smaller number awarding
only *some *(42%) or even *no* *costs* (12%) based on the particular
circumstances. Tribunals adopting a PYOW approach also had unsurprising
results: an unadjusted costs order was the predominant outcome (88%),
followed by a partial adjustment (12%).
However, in a substantial majority (65%) of cases, tribunals using
“relative success” made no costs adjustment; only one third (33%) made a
partially adjusted costs order. This is counterintuitive and suggests that
“relative success” is often employed as a shortcut to an unadjusted costs
order. It is tempting to interpret this as a convenient way to justify
preserving the status quo at the time of the award. This is supported by
the fact that the figure is higher (83%) when relative success is the only
reasoning adopted (i.e., without any reference to any special factors).
Moreover, tribunals frequently lapse into “relative success” reasoning even
when nominally applying the CFTE rule.[iv] <#14eb719296873e1b__edn5>
However, “relative success” is a distinct approach and, as such, should
lead to different costs outcomes from the CFTE approach in most cases.
“Relative success” has the appeal of charting a middle course between the
stark alternatives of the CFTE and PYOW approaches. It is open to
criticism, however. Aside from the apparent misapplication in practice
identified above, it remains a difficult, if not impossible, task to assign
particular costs to each issue. Further, it is not obvious that it is fair.
Should the appropriate test be whether the tribunal accepted every argument
advanced by the successful party, or that the arguments were reasonably
made? The CFTE rule already allows tribunals to penalize inefficient
conduct, including spurious arguments, since only reasonable costs may be
recovered.
Costs in investment arbitration are usually substantial.[v]
<#14eb719296873e1b__edn6> The allocation of costs involves policy
judgments, especially regarding the types of claims that should be
incentivized. There is a stark divergence in UNCITRAL and ICSID tribunal
approaches to costs.[vi] <#14eb719296873e1b__edn7> The absence of a default
rule means that ICSID tribunals adopt conflicting decisions. Some ICSID
tribunals have insisted that CFTE is the right approach,[vii]
<#14eb719296873e1b__edn8> others PYOW[viii] <#14eb719296873e1b__edn9> and
many others endorse “relative success”. Some 15% offered no reasoning at
all.[ix] <#14eb719296873e1b__edn10> The case for a default rule, or even
guidance, for predictability and consistency is compelling. Further debate
as to the appropriate approach should be a priority. The next revisions to
the ICSID arbitration rules present a good opportunity to begin this
process.
------------------------------
* <#14eb719296873e1b__ednref1> Matthew Hodgson (
[log in to unmask]) is a Senior Associate at Allen Overy LLP
Hong Kong. For a graphical presentation of the arguments below, see the
online version of this *Perspective*. The author is grateful to Christian
Campbell, John Gaffney, James Nicholson, and Anne van Aaken for their
helpful peer reviews. *The views expressed by the author of this
Perspective do not necessarily reflect the opinions of **Allen & Overy LLP,
**Columbia University or its partners and supporters. Columbia FDI
Perspectives (ISSN 2158-3579) is a peer-reviewed series..*
[i] <#14eb719296873e1b__ednref2> James Nicholson and John Gaffney, “Cost
allocation in investment arbitration: Forward toward incentivization,”
*Columbia
FDI Perspectives*, No. 123, June 9, 2014.
[ii] <#14eb719296873e1b__ednref3> Baiju S. Vasani and Anastasiya Ugale,
“Cost allocation in investment arbitration: Back toward
diversification,” *Columbia
FDI Perspectives*, No. 100, July 29, 2013.
[iii] <#14eb719296873e1b__ednref4> Matthew Hodgson and Chand Chopra, “ICSID
tribunals' reasoning on costs: A survey of 145 public ICSID awards up to 31
May 2014,” available at
http://www.allenovery.com/SiteCollectionDocuments/ICSID_Reasoning_on_costs_(revised).pdf
<http://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=5044122b7a&e=dd153d6a25>
[iv] <#14eb719296873e1b__ednref5> *See e.g.* *Rompetrol v. Romania*, ICSID
Case No. ARB/06/3, ¶298.
[v] <#14eb719296873e1b__ednref6> For average costs in treaty proceedings
through 2012, *see*
http://www.allenovery.com/SiteCollectionDocuments/Counting_the_costs_of_investment_treaty.pdf
<http://columbia.us6.list-manage1.com/track/click?u=ab15cc1d53&id=3b10fca1c9&e=dd153d6a25>
.
[vi] <#14eb719296873e1b__ednref7> UNCITRAL tribunals adjusted costs (at
least in part) in 69% of cases, compared with just 36% of ICSID tribunals, *see
supra* note 5.
[vii] <#14eb719296873e1b__ednref8> *See e.g.* *Gemplus v. United Mexican
States*, ICSID Case No. ARB/04/3, ¶17-20 – 17-24.
[viii] <#14eb719296873e1b__ednref9> *See e.g.* *Alasdair Ross Anderson v.
Costa Rica*, ICSID CaseNo.ARB/07/3, ¶62-64.
[ix] <#14eb719296873e1b__ednref10> *See* *supra *note 3, part 2D.
*The material in this Perspective may be reprinted if accompanied
by the following acknowledgment: “Matthew Hodgson, ‘Cost allocation in
ICSID arbitration: theory and (mis)application,’ Columbia FDI Perspectives,
No. 152, July 20, 2015. Reprinted with permission from the Columbia Center
on Sustainable Investment (www.ccsi.columbia.edu
<http://www.ccsi.columbia.edu>).” A copy should kindly be sent to the
Columbia Center on Sustainable Investment at [log in to unmask]
<[log in to unmask]>. *
For further information, including information regarding submission to the
*Perspectives*, please contact: Columbia Center on Sustainable Investment,
Alex Weaver, [log in to unmask]
*Most recent Columbia FDI Perspectives*
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- No. 151, Karl P. Sauvant, “We need an international support programme
for sustainable investment facilitation,” July 6, 2015.
- No. 150, Thomas Jost, “FDI in Russia in Difficult Times,” June 22,
2015.
- No. 149, John P. Gaffney, “When is investor-state dispute settlement
appropriate to resolve investment disputes? An idea for a rule-of-law
ratings mechanism,” June 8, 2015.
*All previous FDI Perspectives are available at *
*http://ccsi.columbia.edu/publications/columbia-fdi-perspectives/*
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*Other relevant CCSI news and announcements*
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Development Centre Centre, and the New Partnership for Africa’s
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assist African host governments to better plan, prepare for, negotiate,
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Oxford University launched a new online forum on New Thinking on Investment
Treaties, a series of short presentations by academics, practitioners, and
civil society on key topics in international investment law. *All
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- *On November 10-11, 2015*, CCSI will host the tenth annual Columbia
International Investment Conference at Columbia University in New York. In
light of the Sustainable Development Goals (SDGs) and multilateral
efforts to catalyze Financing for Development, this year's Conference will
look at steps countries have taken to reshape their International
Investment Agreements (IIAs). Building on UNCTAD's 2015 World Investment
Report, the Conference will identify the issues and processes for IIA
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Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
Ph: (212) 854-0689
Fax: (212) 854-7946
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