High Court rejects s68 challenge against USD 26 million arbitral costs award

Summary

The English High Court has rejected a challenge to a substantial arbitral costs award under s68 of the Arbitration Act 1996 (the “Act”), finding that Article 28 of the LCIA Rules 2020 (“LCIA Rules”) constituted a free-standing regime for the award of costs which displaced the default statutory rules contained in s63(3) of the Act.  Even if the rules in s63(3) applied, any failure to comply with them would have been at most an erroneous exercise of power by the tribunal, not an excess of power which could give rise to a s68 challenge.

Background

A dispute arose between Genel Energy Miran Bina Bawi Limited (“Genel”) and the Kurdistan Regional Government of Iraq (“KRG”) arising out of the termination of two production sharing contracts.   The parties had agreed to arbitrate disputes under the LCIA Rules. 

In 2024, an arbitral tribunal made a partial award in KRG’s favour.  Subsequently, KRG’s counsel claimed legal and expert costs in the amount of USD 35.5 million but did so with extremely limited supporting information (for example making no attempt to allocate costs to particular workstreams or identify how much time was spent on particular items of work by individual fee earners).  Notwithstanding these deficiencies, the tribunal proceeded to award KRG some USD 26 million in respect of legal and expert fees, concluding that it had sufficient information to allow it to make a reasoned decision on costs and that, in any event, it was appropriate for it to do so given its familiarity with the proceedings. 

Genel sought to challenge the costs award in the English High Court for serious irregularity under s68(2)(b) of the Act, on the grounds that the tribunal had exceeded its powers by issuing an award which failed to comply with the requirement in s63(3)(b) to “specify the items of recoverable costs and the amount referable to each.” Notably, s63 is a non-mandatory provision of the Act and can therefore be contracted out of by parties. 

The decision

The High Court rejected the challenge on several grounds.  Any of the grounds discussed below would have been sufficient to defeat the challenge, but the judge gave detailed consideration to the issues raised given their potential relevance to arbitration practice.

First, s63(3) did not apply.  S63(1) of the Act provides that the parties are free to agree “what costs of the arbitration are recoverable” and s63(2) provides that the default rules set out in the remainder of s63, including s63(3), apply only “if or to the extent there is no such agreement”.  The parties had agreed that their dispute would be resolved in accordance with the LCIA Rules, including Article 28.3 which made provision for the award of legal costs by the tribunal “on such reasonable basis as it thinks appropriate”, affording the tribunal wide discretion. 

Dias J held that the correct approach was to determine what s63(1) of the Act required the parties’ agreement to cover in order for the default rules to be ousted, and then to construe the parties’ agreement to see whether or not the agreement did cover those matters, or whether it left a lacuna that was required to be filled by reference to the default rules.  Adopting that approach, Dias J concluded that Article 28.3 of the LCIA Rules provided for a “complete package” for the assessment of legal costs, which was sufficient to exclude the operation of the default rules in their entirety.   That approach accorded with commercial sense and the likely expectation of parties that the institutional rules which they had agreed would apply to their dispute would constitute a “watertight package” without the need for “ad hoc patching” of parts of the Act.   

In doing so, Dias J rejected Genel’s argument that the default rules would only be ousted where the parties’ agreement was inconsistent with those rules.  There was no conceptual limit on the nature or type of agreement that would be effective for the purpose of displacing the default rules, and no reason the parties could not agree on a procedure which partially or wholly replicated the contents of the default rules.  Such an interpretation would be inconsistent with the intention of the Act to provide a simple and straightforward framework which allows maximum flexibility for the parties to agree their own procedures.

Second, even if s63(3) had applied, non‑compliance would not amount to an excess of power by the tribunal but instead would merely have been an erroneous exercise of power.  

The court referred to Lesotho Highlands Development Authority v Impregilo SpA, in which the House of Lords highlighted the need to “focus intensely” on the power in question and emphasised that the erroneous exercise of an available power could not in itself amount to an excess of power.  The specific requirements applicable to a costs award set out in s63(3) were essentially descriptive and as “non-mandatory” provisions of the Act, were not fundamental to the exercise of the tribunal’s power to award costs.  Dias J also gave weight to the concern that if Genel’s position was accepted, it could open the floodgates to virtually any costs award being challenged under s68(2)(b) on the basis the tribunal (arguably) had not satisfactorily itemised the costs awarded, which was inconsistent with the objective of the Act to provide for one-stop adjudication.

To the extent the tribunal had not complied with s63(3)(b), there was at most an erroneous exercise of power.  While such error may in principle have been challengeable as an error of law under s69 of the Act, the parties had agreed to institutional rules which disapplied that option (by virtue of Article 26.8 of the LCIA Rules) and therefore the tribunal’s award could not be challenged on this basis.

Finally, and in any event, on the facts the judge found that the arbitral tribunal had complied with the requirements of s63(3).  The “items of recoverable costs” required to be specified in a costs award pursuant to s63(3)(b) referred only to the broad heads of cost identified as “costs of the arbitration” in s59 of the Act and not, as contended by Genel, the particular items of work performed by lawyers or experts.

Commentary

This judgment provides helpful clarity that Article 28.3 of the LCIA Rules provides for a free-standing cost assessment mechanism which is sufficient wholly to displace the non-mandatory default rules contained in s63 of the Act.  Other mainstream institutional arbitration rules, including the ICC Arbitration Rules and SIAC Rules, empower the tribunal to make costs awards in similar terms to the LCIA Rules and therefore the same result would be expected from a London-seated arbitration under those rules.

The decision also demonstrates the high bar to challenging an award on the basis of excess of power by the tribunal.  Where the tribunal unambiguously has a power – in this case, to award costs – it appears non-compliance with non-mandatory provisions of the Act describing the way in which the power is to be operated cannot constitute an excess of power.  By contrast, a challenge on that basis is more likely to be possible where the tribunal purports to exercise a power it does not have at all; for example, if the parties had agreed that they would bear their own legal costs regardless of outcome but the tribunal nevertheless made a costs award in favour of the successful party.

Finally, the judgment again emphasises the firmly pro-arbitration stance of the English courts and their determination to give effect to the procedure agreed by the parties with minimal judicial intervention.  The judge highlighted that in agreeing to London-seated arbitration, parties accept the principle of party autonomy (generally considered a key benefit of arbitration).  As noted by the judge, parties are also free to incorporate the default rules, or indeed alternative mechanisms, into their arbitration agreement to the extent they consider the position under the institutional rules to be insufficient. 

Given the potential for material costs awards with significant financial implications and the different approaches parties may take when advancing costs claims, the tribunal or parties may wish to set clear expectations at the outset of the arbitral process – for example in procedural orders or terms of reference – as to what level of detail should be provided in support of cost claims.