Setting arbitrators' fees: an international survey.

• Author: Gotanda, John Yukio

ABSTRACT

This Article examines the compensation policies of international arbitrators. Specifically, the Article details the results of a survey of individuals who practice in the area of international arbitration.

Initially, the Article describes the different methods of calculating the fees of the arbitral tribunal, discussing the relative advantages and disadvantages of each method. The study concludes that most arbitrators calculate their fees using a time-based method, except when the arbitral institution requires that their fees be determined under the ad valorem method.

Next, the Article examines arbitrators' policies regarding cancellation and commitment fees. Survey results highlighted confusion about whether arbitrators were prohibited by a jurisdiction's laws or ethical rules. In addition, many commentators debate the propriety of such fees. The survey results reveal that most arbitrators do not charge cancellation or commitment fees. While practitioners in certain jurisdictions more routinely charge these fees, charging such fees is not widespread in continental Europe or the United States.

The Article then addresses the implications for U.S. arbitrators who are considering the adoption of cancellation and commitment fees. Although most arbitral institutions do not explicitly permit such fees, institutional guidelines are broad enough to allow for such fees. Furthermore, because arbitrators are not fiduciaries in the same manner as lawyers who are employed by clients, the policy behind the ban on nonrefundable special retainers would not be served by applying it to prohibit arbitrators from charging cancellation or commitment fees. Finally, the Article argues that none of the rules or codes governing the conduct of arbitrators in international arbitrations expressly prohibit the payment of cancellation or commitment fees. As a result, if such fees are reasonable, the Author contends that they should be permissible.

1. INTRODUCTION

   In international commercial arbitrations, the fees of the arbitral tribunal can be considerable.(1) For example, a dispute involving $100 million and a panel of three arbitrators appointed under the Rules of the International Chamber of Commerce (ICC) could result in arbitrators' fees totaling $780,000.(2) Despite the significant amounts involved, little is known about the process for remunerating arbitrators in international disputes. Indeed, there has been relatively scant commentary on the methods for determining the arbitrators' fees and the types of fees that they may charge, such as cancellation or commitment fees. Yet, these fees have been quite controversial and the subject of much debate in the international arbitral community.

   In spring 2000, the author undertook a survey of arbitrators around the world to determine how they calculate their fees and what types of fees they charge. In particular, the survey sought to determine: (1) the methods that are used to determine the arbitrators' remuneration, (2) whether the practice of charging cancellation or commitment fees is widespread, and (3) the reasons that arbitrators cite for charging or not charging particular fees. The results were surprising.

   What the survey found is that most arbitrators base their fees on the amount of work performed, except when an arbitral institution, such as the ICC, sets their fees based on a percentage of the amount in dispute. In addition, the survey revealed significant variations among jurisdictions on the question of whether arbitrators charge cancellation or commitment fees. For example, it is common practice to charge cancellation or commitment fees in the United Kingdom, while it is unusual to do so in other European countries and in the United States. In general, the survey respondents were often unsure about whether cancellation or commitment fees were prohibited by a jurisdiction's laws or ethical rules; and there was considerable debate among respondents over whether arbitrators should be allowed to charge these fees.

   This Article examines arbitrators' fees. Section II describes the methods for determining the remuneration of an arbitral tribunal and the types of fees that arbitrators may charge, with particular emphasis on the practice of charging cancellation and commitment fees. Section III discusses the methodology of the survey and its results. Section IV focuses on its implications in the United States, and predicts that the charging of cancellation and commitment fees will become more prevalent in the United States.

2. OVERVIEW

   Under some systems, it is common for individuals to serve as arbitrators on an unpaid basis.(3) This practice is rare, however, in international commercial arbitrations.(4) As a general rule, arbitrators in international arbitrations are entitled to be compensated for their work by the parties who appointed them, unless they waive their fees.(5)

   The process for determining the fees of the arbitrators depends initially on whether the method of arbitration is institutional or ad hoc. In arbitrations conducted under the auspices of an arbitral institution, the governing body often fixes fees of the tribunal.(6) By contrast, in ad hoc arbitrations, the parties negotiate directly with the arbitrators regarding their fees.(7) While the type of arbitration may dictate the process used to set the arbitrators' fees, there are various methods available to calculate the fees. In addition, many arbitrators have recently begun charging cancellation or commitment fees.

   1. Methods of Calculating the Fees of the Arbitral Tribunal

   In general, there are three methods of calculating the fees of arbitrators in international commercial arbitrations: (1) the ad valorem method; (2) the time-based method; and (3) the fixed fee method.

   1. Ad Valorem Method

      Under the ad valorem method, the fees of the arbitrators are based upon the amount in dispute. Typically, the arbitrators' fees represent a percentage of the total amount in dispute.(8) This method is commonly used by arbitral institutions to assess both administrative fees and the fees of the arbitrators.(9) The ad valorem method has the advantage of providing the parties with a reasonable degree of certainty in estimating the arbitrators' remuneration. Its main drawback, however, is that the fees may be fixed without reference to the actual amount of time that the arbitrators work on the case. As a result, the fees awarded may seem too high or too low.(10)

      The ICC is an example of an arbitral institution that utilizes the ad valorem method but also permits some flexibility.(11) Under the ICC Rules, the International Court of Arbitration (ICC Court) frees the arbitrators' fees according to a scale of costs and fees.(12) The scale provides a range of maximum and minimum arbitrators' fees that are calculated based on the amount in dispute. The ICC Court may fix the fees of the tribunal at any figure between the range established by the fee schedule, taking into account "the diligence of the arbitrator[s], the time spent, the rapidity of the proceedings, and the complexity of the dispute...."(13) To illustrate, under the ICC scale, a dispute involving $1 million will result in each arbitrator receiving between $11,250 and $53,500, while a dispute involving $100 million will result in each arbitrator receiving between $61,750 and $260,000.(14) The ICC Rules also provide the ICC Court with the discretion to "fix the fees of the arbitrators at a figure higher or lower than that which would result from the application of the relevant scale should this be deemed necessary due to the exceptional circumstances of the case."(15) In practice, however, the ICC Court rarely deviates from the scale.(16)

   2. The Time-Based Method

      Under the time-based method, the fees of the arbitrators are determined according to the amount of hours or days spent on the arbitration. They may also be determined by a combination method, where a daily rate is charged for hearing days and an hourly rate is charged for work performed outside of the hearings. The time-based method has the advantage of compensating the arbitrators based on the actual amount of work performed. Its main drawback is that it does not provide an incentive for efficiency.(17)

      The time-based method is typically used in ad hoc arbitrations. It is also the system used by some arbitral institutions, such as the London Court of International Arbitration (LCIA) and the American Arbitration Association (AAA). Under the LCIA Rules, the LCIA Court determines the costs of the arbitration, including the fees of the arbitrators, in accordance with its Schedule of Fees and Costs.(18) The LCIA's Schedule of Fees and Costs provides:

      The Tribunal's fees will be calculated by reference to work done by its members in connection with the arbitration and will be charged at rates appropriate to the particular circumstances of the case, including its complexity and the special qualifications of the arbitrators. The Tribunal shall agree in writing upon fee rates conforming to this Schedule of Fees and Costs prior to its appointment by the LCIA Court. The rates will be advised by the Registrar to the parties at the time of the appointment of the Tribunal, but may be reviewed annually if the duration of the arbitration requires. The fee rates shall be within the following bands: 800 [pounds sterling] to 2,000 [pounds sterling] per normal working day and 100 [pounds sterling] to 250 [pounds sterling] per hour for periods less than or in addition to a normal working day. However, in exceptional cases, the rates may be higher or lower, provided that, in such cases, (a) the fees of the Tribunal shall be fixed by the LCIA Court on the recommendation of the Registrar, following consultations with the arbitrator(s), and (b) the fees shall be agreed expressly by all parties.(19) With regard to compensating the arbitrators, the AAA International Rules provide:

      Arbitrators shall be compensated...