FAI award dealing with specific cost allocation provisions in the arbitration clause

Background

Arbitration agreements sometimes stipulate that one of the parties shall be solely responsible for the costs of the arbitration irrespective of the outcome of a dispute. Such provisions may occasionally be found, for instance, in managing director agreements or shareholders’ agreements. An arbitral tribunal must respect any such provision if found valid and binding on the parties. Nonetheless, the claimant who intends to commence FAI arbitration proceedings is required to pay the filing fee in accordance with Article 7 of the FAI Rules and Article 1 of Appendix II thereto even if the applicable arbitration clause provides that it is the respondent party that shall be ultimately responsible for the costs of the arbitration in the relationship between the parties. In such case, the claimant may request that the arbitral tribunal order the respondent to compensate for the filing fee that the claimant has paid in connection with the commencement of the arbitration (see Mika Savola: Guide to the Finnish Arbitration Rules, 2015, pp. 57-58).


Case comment

A sole arbitrator appointed by the FAI Board recently rendered a final award in a case where the arbitration clause contained specific provisions on the cost allocation between the parties. The main dispute concerned an allegedly unlawful termination of a managing director agreement and related compensation claims that Mr X had brought against company Y in which X had previously served as managing director. The arbitration clause set out in the agreement read as follows: “Disputes that may arise out of this Agreement shall, if the parties fail to reach an agreement by negotiation, be finally settled by arbitration in accordance with the Arbitration Rules of the Finnish Central Chamber of Commerce. The arbitration shall be held in Helsinki by one (1) arbitrator and the arbitral proceedings shall be conducted in the English language. The Company shall pay the fee of the arbitrator.

Apart from his main claims for compensation, X requested that the arbitral tribunal order Y, alone, to bear both the sole arbitrator’s fee and the administrative fee to be charged by FAI based on the above-quoted provision according to which “the company shall pay the fee of the arbitrator”. Y, in turn, requested that the arbitral tribunal either set aside or adjust said provision on the basis of Section 36 of the Finnish Contracts Act so that Y would not be liable to pay the costs of the arbitration in the relationship between the parties.

The sole arbitrator first noted that Y had failed to put forward any compelling arguments why the provision in question should be set aside or adjusted. In fact, the provision could not be considered exceptional or unduly burdensome to Y, as similar provisions were quite frequently found in arbitration clauses used in managing director contracts. Further, the sole arbitrator pointed out that the main dispute that constituted the subject-matter of the arbitration proceedings – namely the allegedly unlawful termination of a managing director agreement and related claims for compensation – was exactly the type of dispute in view of which parties typically agree to insert specific cost allocation provisions in their arbitration clause. Therefore, the sole arbitrator found the provision valid and binding, and ordered Y to bear the arbitrator’s fee in the relationship between the parties.

However, the sole arbitrator reached a different conclusion with respect to the administrative fee to be charged by FAI. He noted that the cost allocation provision in the arbitration clause only mentioned the arbitrator’s fee, without making any reference to the administrative charges of the arbitration institute (in this case, FAI) under whose rules the dispute was to be settled. In the sole arbitrator’s view, it was reasonable to interpret the wording of the cost allocation provision to the effect that Y had not agreed to assume any payment liability for such administrative charges irrespective of the outcome of a dispute, and that X must have understood that. Consequently, having regard to the fact that both X and Y had partly lost their case on the merits, the sole arbitrator ordered each of them to pay half of the FAI administrative fee in the relationship between the parties.


Conclusions

The sole arbitrator’s findings are well-motivated and unsurprising. As mentioned, contractual provisions governing the allocation of arbitration costs between the parties are generally valid and binding under Finnish law, and FAI arbitrators tend to respect them. However, when drafting arbitration agreements, parties should pay close attention to the formulation of such provisions in order to ensure that they will indeed be applied as the parties intended. For example, if the parties to a managing director contract are in agreement that a company shall assume liability for all of the costs of the arbitration regardless of the outcome of the proceedings, they are well-advised to spell out in the arbitration clause that this undertaking covers not only the arbitral tribunal’s fees and expenses but also any administrative fee to be charged by FAI.


Reported by Mika Savola
Chair, FAI Board

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