A party should consider the recoverability of legal costs before commencing litigation or arbitration proceedings. While most arbitration institutions recognise that legal costs are generally recoverable from the losing party, this cannot be said about Gafta, where such costs are generally unrecoverable. However, this is not an absolute rule.
In this article, we consider how to recover legal costs in Gafta proceedings.
The Gafta approach
Gafta is an arbitration institution that tries to move away from the policy of engaging lawyers to deal with disputes: this applies equally to arbitrators, who can often be experienced traders with no legal background, and to parties. The general rule, aimed at discouraging the involvement of lawyers, is therefore that legal costs cannot be recovered.
The logic behind this approach is simple. Firstly, the arbitration process without lawyers is cheaper. Secondly, it allows for a greater focus on the commercial substance of a dispute rather than on complex legal aspects.
What does Gafta 125 say?
Section 17 of Gafta 125 governs the engagement of lawyers and the recovery of legal costs. The provisions of this section are perhaps a little confusing, which makes them difficult to construe. Consider first what is set out unambiguously.
The general rule is that lawyers can only be engaged for the "written" part of the proceedings, not for the oral hearings; and no legal costs can be recovered:
If the parties do want to engage legal representatives for the oral hearing in the case of a dispute, they are to make a separate specific agreement:
This is where the complications begin. In full, clause 17.1 reads as follows:
The second sentence sets out that the tribunal/board of appeal shall determine whether legal costs are recoverable. Reading clause 17.1 in isolation, one might conclude that if there is an agreement to engage lawyers, then legal costs are recoverable. In our view, this is not the case.
Clause 17.4 states as follows:
Each party shall bear its own costs unless otherwise agreed. Thus, legal costs can only be recovered if the other party agrees to this.
Now, if one were to read paragraphs 17.1 and 17.4 in tandem, the following conclusion may be drawn: if the parties wish to engage legal representatives and recover legal costs, they are to conclude two separate agreements. The first one would suffice for engaging legal representatives under clause 17.1, and the second one would cater for the recovery of legal costs under clause 17.4.
There is an alternative view that a single agreement on the engagement of legal representatives is sufficient to recover legal costs. We do not share this approach, as if this were correct it would make clause 17.4 unnecessary and meaningless.
English barrister Richard Southern QC supports a similar view that two agreements are needed:
To avoid surprises in arbitration, if you want to recover legal costs from the losing party in Gafta, this should be explicitly stipulated in the contract. A provision that the parties agree to be represented by legal representatives by itself may not be sufficient to recover legal costs.
Which amount of legal costs can be recovered?
There is no limit to the costs that may be recovered if the parties have agreed that recovery is possible. The main rule in this context, however, is that the legal costs incurred must be reasonable. The arbitrator(s) will determine the reasonableness of costs, which depending on the particular circumstances may include:
- the necessity for lawyers to be engaged in resolving the dispute
- the complexity of the case
- the ratio of the disputed amount to the amount of legal costs
- the number of hours lawyers have spent on a particular task
Fortior is an international law firm specialising in English litigation, arbitration, and dispute resolution in shipping, international trade and investment law. Fortior’s team consists of English solicitors and lawyers qualified in multiple jurisdictions (New York, Switzerland, Malta, Italy, Georgia, Ukraine, Kyrgyzstan).