Costs in International Arbitration – Germany

This is the third article in Clyde & Co’s latest international arbitration series covering the topic of costs in international arbitration. In this piece, senior associate Anna Falk and associate Luca Thönes from our Hamburg office provide the legal perspective from Germany.

The question of costs is always pertinent when considering any form of dispute resolution. One of the main advantages of arbitration over state court proceedings is that the question of costs is subject to agreement by the parties. Hence, the parties can tailor their cost agreements specifically to their needs, which should ideally be done when an arbitration agreement is negotiated, by choice of specific institutional rules or bespoke costs provisions.  

In any event, the question of costs will arise when deciding on whether to pursue a claim and how to conduct the arbitration. The costs in every arbitration vary due to various factors such as the choice between ad-hoc or institutional arbitration, the number of arbitrators, the fees for the administration and the arbitral tribunal, and corresponding expenses such as lawyers’ fees, expert witnesses, travel expenses etc.

1. Award on costs by the arbitral tribunal

The power vested in an arbitral tribunal to award costs depends on the individual agreement with the parties.

If an institutional proceeding is chosen, the rules of the institution usually provide a framework for the award of costs (e.g. art 32 et seq. DIS-Rules, art. 37 et seq. ICC Rules 2021, art. 28 LCIA Rules). With over 100 years of experience, the Deutsche Institution für Schiedsgerichtsbarkeit (“German Arbitration Institute”, or ”DIS” for short) is the leading institution for arbitration in national and international commercial disputes in Germany and thus chosen as an example of a set of institutional rules used in Germany for the following overview.

According to art. 33 DIS Rules, the arbitral tribunal decides on the allocation of costs (art. 33.2 DIS Rules) and is entitled to do so at any given time during the course of the proceedings (art. 33.1 DIS-Rules). This includes any interim decisions on costs (e.g. following document production).

In ad hoc arbitration, the parties are well advised to address the issue of costs at an early stage by concluding terms of appointment including a fee agreement and cost schedule before the proceedings commence.

It should be noted that, in most jurisdictions, an arbitral tribunal is subject to the prohibition of judging in its own cause (nemo iudex in causa sua). The legal consequence is that an arbitral tribunal cannot decide on its own renumeration and, for instance, determine its own hourly rates or use any fee schedule it considers appropriate.

The German Federal Supreme Court has clarified that this principle does not prevent the arbitral tribunal from fixing the amount in dispute of the arbitral proceedings even though it thereby indirectly decides on the amount of its own claim for fees and reimbursement of costs in cases where they are calculated based on the amount in dispute. Such a determination of the amount in dispute only binds the parties among themselves and has no effect between the parties on the one hand and the tribunal or the individual arbitrators on the other hand.

If no agreement on costs has been reached between the parties, sec. 1057 Zivilprozessordnung (the German Code of Civil Procedure , or “CCP” for short) will apply. Sec. 1057 CCP reads as follows:

Section 1057 Decision on costs

(1) Unless otherwise agreed by the parties, the arbitral tribunal is to decide, in its arbitral award, on the share of the costs of the arbitral proceedings that each of the parties is to bear, including the costs incurred by the parties that were necessary to properly pursue their claim or defence. In this context, the arbitral tribunal will decide at its discretion while taking account of the circumstances of the individual case, in particular the outcome of the proceedings.

(2) Insofar as the costs of the arbitral proceedings are fixed, the arbitral tribunal is to also decide on the amount to be borne by each party. If the costs have not been determined, or should it be possible to determine them only after termination of the arbitral proceedings, the arbitral tribunal will rule on the matter by separate award.”

In essence, sec. 1057 para. 1 CCP provides that the arbitral tribunal is entitled to decide on the allocation of costs in its own discretion; pursuant to sec. 1057 para. 2 CCP it can also determine the amount of costs. However, it cannot decide on its own remuneration.

2. Recovery of costs

Under the CCP as well as in DIS-administered arbitrations, the arbitral tribunal is provided with broad discretion in allocating costs. Both frameworks merely require the tribunal to consider the outcome of the proceedings (sec. 1057 CCP, art. 33.3 DIS Rules). Therefore, the arbitral tribunal usually adopts a ‘cost follows the event’ approach, meaning that the unsuccessful party must pay the successful party's costs.

Under art. 33.3 DIS-Rules, the arbitral tribunal has discretion to decide how to allocate the costs while taking account of the individual circumstances of the case. This means that, besides the outcome of the case, the arbitral tribunal regularly considers the following factors relevant:

• The procedural conduct of the parties in terms of its necessity and reasonableness (i.e. consideration of possible guerilla tactics);
• The reasonableness of any costs incurred by the parties;
• The participation of the parties within the arbitration or any refusal thereof; and
• The security for costs such as the deposit and supplements, and the corresponding shares paid by each party.

During its latest rule revision, the DIS particularly emphasized that DIS arbitrations shall be conducted in a timely and cost-efficient manner. A separate schedule (Annex 3) with a list of measures for increasing procedural efficiency now forms part of the DIS Rules. Annex 3 entails a list of measures which shall be discussed between the parties and the arbitral tribunal at the first case management conference. The ultimate decision on which measures to apply rests with the arbitral tribunal. The extent to which the parties have conducted the arbitration efficiently shall also be considered by the arbitral tribunal in its decision on costs (see again art. 33.3 DIS Rules).

Both the CCP and the DIS Rules generally recognize the following costs as recoverable:

1. The arbitrator’s fees and expenses and (if applicable) the administrative fees of the institution

One of the benefits of opting for institutional arbitration is that the costs are usually foreseeable. The arbitrators’ fees as well as the administrative fees are generally fixed by the institution and often depend on the amount in dispute of the arbitration (see for example Annex 2 of the DIS rules). In a DIS arbitration, parties can estimate their costs before the start of the proceedings as the DIS website offers a preliminary cost assessment via a cost calculator [https://www.disarb.org/werkzeuge-und-tools/gebuehrenrechner]. Similarly, under the German Maritime Arbitration Rules (“GMAA”), the costs can be calculated here: https://en.gmaa.de/index.php/en/arbitration/costs-of-arbitration/fee-calculator.

2. The reasonable costs of the parties incurred in connection with the arbitration procedure

‘Reasonable costs’ regularly include the fees and expenses for outside legal representation, fees of experts, expenses of any witnesses as well as costs for translators and the costs related to an oral hearing (i.e. costs for hearing locations, court reporters, and travel expenses). Costs that have no direct connection to the claim or defense are not considered necessary for the proper pursuit of the claim or defense and are thus most likely not reasonable. Arguably the discretion under art. 32, 33 DIS Rules is wider than under sec. 1057 CCP, as the former only requires costs to be “appropriate”, whilst under the latter the costs need to be “necessary to properly pursue their claim or defense”. In practice, the terms are often interpreted similarly. Hence, the difference in wording seldom influences the determination of what is recoverable.

In state court proceedings in Germany, parties may only recover the fees determined by the official table of fees pursuant to the Rechtsanwaltsvergütungsgesetz (Lawyers’ Remuneration Act, or “RVG” for short), meaning that the fees may be capped at only a fraction of their costs. In international arbitration proceedings, hourly fees are generally considered reasonable. The argument being that internationally hourly rates are the standard, as opposed to state tariffs for lawyers’ fees.

3. Setting-aside of a cost award

In Germany, courts can only review arbitral awards, including awards on costs, based on very limited grounds, which are exclusively listed in sec. 1059 (2) of the CCP and match those set out in the New York Convention.

The court is not entitled to replace the arbitral tribunal's discretion in the allocation of costs with its own discretion. Against that background, it is difficult to imagine a decision on costs that would breach public policy or give rise to any other ground for setting aside an award.

The setting aside of the arbitral award – partially or fully – renders the decision on costs invalid, as the decision on costs is a subsidiary decision.

4. Security of Costs for the fees and expenses of the arbitral tribunal

Art. 35 of the DIS Rules states that the parties shall provide security for the fees and expenses of the arbitrators by paying a deposit fixed by the DIS. Although the DIS Rules in art. 35 differentiate between an “initial deposit” that is to be paid before constitution of the arbitral tribunal and a “deposit” that shall be fixed at a later stage of the proceedings, the DIS will, in practice, only fix the “full” deposit before the constitution of the arbitral tribunal in order to ensure that there are sufficient funds to pay the arbitral tribunal after the arbitration has been terminated. The deposit shall be paid by the parties in equal shares. If any party fails to pay its share of the deposit, the DIS may request the other party to substitute such payment and may refrain from constituting the arbitral tribunal until full payment has been made.

If neither the individual agreement of the parties nor the institutional rules provide for a possibility to demand security for the fees and expenses of the arbitrators, the arbitrators cannot demand such security. This is largely a theoretical issue as arbitrators rarely agree to be appointed without the possibility to demand security for their remuneration and costs.

Finally, an arbitral tribunal is in any case well advised to pay attention to any value added tax (“VAT”) applicable to its fees. Many institutional rules clarify that it is the parties’ obligation to reimburse the arbitral tribunal for VAT (or comparable taxes). In order to simplify the process, the institutions then often charge an additional amount in the process of collecting the deposit from the parties (i.e. the DIS charges a supplement of up to 20% of the fees, see Annex 2, para. 6.2) to cover any taxes or charges of the tribunal. Nevertheless, the arbitral tribunal should at the beginning of each arbitration make sure that either – in institutional arbitrations – such extra amount is collected in advance or, if no such rules exist, for instance in an ad hoc arbitration, take its own measures to ensure that any VAT added to its fees and expenses will be covered by the parties.

This series will continue next week with the position from England & Wales.