A Kiss for Arbitration Costs Allocation – Vol. 23 No. 3-4

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Author: James H. Carter*

Published: January 2013

Description: Professor Hans Smit was a man of many talents, and his colleagues in the international arbitration community were fortunate to know him in diverse professional roles. He was at various times arbitrator, advocate, teacher and wise counselor, and he also served on occasion as an expert witness on matters of Dutch law and on issues of international arbitral procedure. I benefitted from experience with Professor Smit in all of those contexts, including in the somewhat daunting role of a competing expert witness.

The issues on which we offered differing opinions arose approximately a decade ago from an international commercial arbitration that had taken place before a tribunal sitting in New Jersey under the auspices of the American Arbitration Association’s International Centre for Dispute Resolution applying the AAA’s Commercial Arbitration Rules. The prevailing party in the arbitration received a multi-million dollar damages award, but that party then failed to pay the attorney fees of its counsel. When counsel sued their client, the prevailing arbitration party, in a state court for the fees, the client counterclaimed on the basis of alleged legal malpractice because of counsel’s failure to obtain an even larger damage recovery. The basic issue in that regard was whether counsel negligently missed an opportunity to recover an award of costs, consisting primarily of its counsel fees, for their client and, if so, whether a court could determine after the fact what if any proportion of those fees the arbitrators would have awarded if timely requested to do so.

Professor Smit and I offered written opinions for the opposing parties in the malpractice action. We addressed the extent of the opportunity available for the tribunal to have awarded attorney fees as an element of costs under the applicable rules and state law in the context of the facts of the arbitration. Questions arose, too, about whether the three American lawyer arbitrators would have been inclined to exercise such authority as they had to award attorney fees as costs. We expressed differing views about the predictability of whether the tribunal actually would have awarded a specific dollar amount of costs had it been asked to do so, were it inclined to include attorney fees in a costs award. The quantum of fees issue required consideration of the fact that the prevailing arbitration party had been awarded a large portion, but not all, of the damages it had sought. In those circumstances, Professor Smit stated that the prevailing, if not universal, custom in international arbitration was for a costs award to “follow the event” and be made in proportion to the extent of the prevailing party’s success and for an award of attorney fees to be included as “costs” and calculated by …

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*Senior Counsel, WilmerHale, New York.