Costs in arbitration: Sealed offer / offer without prejudice save as to costs


Published: 5 September 2005

Always when dealing with disputes in arbitration (or litigation), the parties should also consider the costs aspect. This in order to decide whether the matters should be proceeded with, and in the affirmative whether the costs position may be protected in any way.

In the London arbitration 15/2005 (2005) 670 LMLN discussed in Legal News 07/05 published on 23 August 2005, the costs aspects and especially “sealed offer” were also considered.

Prior to discussing the above arbitration further, some general comments regarding costs should be mentioned.

Probably it is well known that arbitrations (and litigations) are not cheap, and some disputes might be more expensive to handle than others. Especially, disputes regarding the vessel’s performance have turned out to be very expensive. Not merely will arbitrators have to be appointed and paid for and each party will have to instruct and pay solicitors and probably counsel, when dealing with technical matters as performance claims various experts will also have to be instructed and paid for.

Although all the details of the above arbitration were not mentioned in the report, it seems to be clear that at least each party had to instruct and pay for nautical experts and meteorological experts, but possibly other experts might also have been involved in connection with the handling of this matter.

The total costs of this arbitration were not mentioned in the report either, but surely even if the arbitration merely lasted one day (possibly it lasted more), the total costs involved might have been disproportionate with the amount in dispute which was approx. USD 134,000. Thus, it would most probably have been in the joint interest of the parties involved if the matter had been settled amicably at an early stage. By doing so, at least the parties would not have had to discuss, settle or obtain an award on costs (which is not cost free either).

It may be argued by the successful party that costs will have to be paid by the unsuccessful party eventually, and thus that these aspects should not be considered to be important when considering the overall dispute. There are, however, at least two points worth mentioning to such an argument. Firstly, it is never possible for a party to predict with 100% certainty that that party will succeed eventually and secondly, whereas it is correct that pursuant to English law the general rule is that costs follow the event, still even if a party has been successful on a general basis, merely approx. 2/3 of the recoverable costs will be awarded, inter alia with the effect that 1/3 will remain unrecoverable.

The various specific costs mentioned above would be considered to be recoverable costs, but some costs may not be recoverable. One set of costs which may frequently be overlooked by the parties, but which are not recoverable, are the costs incurred by way of the parties’ own management time which may indeed be substantial in some cases.

Although the general rule is that costs follow the event, a tribunal has a discretion to depart from this general rule, but only in exceptional circumstances, and here it is important to add that the discretion on costs is that of the tribunal and not of the courts. The court merely has power to remit the award to the tribunal if it is satisfied that the tribunal has misdirected itself in the exercise of its discretion.

There is however one scenario where usually the tribunal will use its discretion to depart from the general rule and that is in connection with “sealed offers” or “offers without prejudice save as to costs”.

The purpose of making a “sealed offer” or “offer without prejudice save as to costs” is to seek to protect the party’s position as to future costs in circumstances where the offer is not accepted, but the ultimate award is less than the sum offered. As a general rule, such an offer must amount in substance to everything which a tribunal would order, ie it should amongst others also include interest and costs.

Turning to London arbitration 15/05, the owners claimed USD 134,374, but were only successful in the amount of USD 47,996.91. In this matter the tribunal had been sent a sealed envelope on behalf of the charterers offering in effect to pay the owners a balance of around USD 69,000 and pay compound interest at 5%. The tribunal will not open the sealed envelope with the offer until they have decided the main dispute, and thus it is only in connection with their decision on costs that the sealed offer becomes relevant and important.

If the owners had accepted the charterers’ offer, the owners would have received a balance of around USD 69,000 being approximately half of the sum claimed, but very importantly more than they were awarded eventually. Moreover, the rate of compound interest at 5% as offered by the charterers was higher than the percentage awarded by the tribunal which was merely compound interest at 3.5%.

In this matter the offer was sent on a certain date, and the tribunal did allow the owners a week (sometimes more and usually 3 weeks are allowed) to consider the offer with the effect that the tribunal ordered the charterers to bear their own and the owners’ costs of the reference from the commencement of arbitration until one week after they had advanced the offer, BUT ordered the owners to bear their own and the charterers’ costs of the reference thereafter until the end of the arbitration including the hearing, ie until the award was issued.

Thus as you will see from the above “sealed offers” or “offers without prejudice save as to costs” might be a valuable weapon in a party’s armory.