Terms Of Appointment Including Remuneration

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INTERNATIONAL ARBITRATION PRACTICE GUIDELINETerms of Appointment includingRemunerationChartered Institute of Arbitrators

Chartered Institute of Arbitrators12 Bloomsbury SquareLondon, United KingdomWC1A 2LPT: 44 (0)20 7421 7444E: info@ciarb.orgwww.ciarb.orgRegistered Charity: 803725The Chartered Institute of Arbitrators is a learned society that works in the publicinterest to promote and facilitate the use of Alternative Dispute Resolution (ADR)mechanisms. Founded in 1915 and with a Royal Charter granted in 1979, it is a UKbased membership charity that has gained international presence in more than 100countries and has more than 14,000 professionally qualified members around theworld. While the Chartered Institute of Arbitrators has used its best efforts inpreparing this publication, it makes no representations or warranties with respect tothe accuracy or completeness of its content and specifically disclaims any impliedwarranties of merchantability or fitness for a particular purpose.All rights are reserved. No part of this publication may be reproduced, stored in aretrieval system or transmitted in any form or by any means, electronic, mechanical,photocopying, recording or otherwise, without the prior permission in writing of theChartered Institute of Arbitrators. Enquiries concerning the reproduction outside thescope of these rules should be sent to the Chartered Institute of Arbitrators’Department of Research & Academic Affairs.

TABLE OF CONTENTSMembers of the drafting committeeIntroduction . 1Preamble . 1Articles and commentariesArticle 1 — General principles . 2Commentary on Article 1 .2Article 2 — Terms of remuneration . 5Commentary on Article 2 .5Conclusion . 12Endnotes . 13

MEMBERS OF THE DRAFTING COMMITTEEPractice and Standards CommitteeTim Hardy, ChairAndrew BurrBennar BalkayaCiaran FahyJo DelaneyKaren AkinciLawrence W. NewmanMohamed S. Abdel WahabMurray ArmesNicholas GouldRichard TanShawn ConwaySundra Rajoo, ex officioWolf Von Kumberg, ex officio

Terms of Appointment includingRemuneration

Terms of Appointment including RemunerationIntroduction1. In arbitrations administered by an arbitral institution, the institution willhave its own practices and procedures for managing the arbitrationincluding the arbitrators’ terms of appointment and remuneration.However, in arbitrations where the terms of appointment are notmanaged by an arbitral institution, arbitrators will need to address theseissues themselves. Notwithstanding that an arbitration agreementprovides for an ad hoc arbitration, many arbitral institutions will, for afee, undertake the management of the administrative aspects of thearbitration, including arranging the terms of appointment, if the partiesagree to the institution fulfilling that role.12. This Guideline sets out the current best practice relating to agreeingterms of appointment and remuneration in international commercialarbitrations which are not administered by an institution including:i. when to raise the issue of the arbitrators’ terms of appointment;ii. how to record them; andiii. what provisions to include.Preamble1. In ad hoc arbitrations it is widely accepted that once an arbitratoraccepts an invitation to act, this creates a contractual relationshipbetween the parties and the arbitrator.2 Even if the parties and thearbitrator do not enter into a written contract, there is nevertheless acontractual relationship. Recording the terms of the appointment inwriting is good practice to reduce the chances of misunderstandings andto avoid unwanted complications if a dispute arises.2. In international arbitrations, there will often be three arbitrators, witheach party appointing one arbitrator and the party-appointed arbitratorsselecting a presiding arbitrator. There is no universally acceptedstandard form or content required for terms of appointment. This1

Chartered Institute of ArbitratorsGuideline summarises the key issues arbitrators should consider whendiscussing their terms of appointment and identifies the terms mostcommonly included.Article 1 — General principles1. Arbitrators should seek to agree with the parties the basis of theirappointment before or immediately after accepting an appointment,bearing in mind the terms of the arbitration agreement, includingany arbitration rules and the law of the place of arbitration (lexarbitri).2. The terms of appointment should be recorded in writing and shouldaddress the nature of the appointment, arrangements for thearbitrators’ remuneration and any other material terms agreed withthe parties.3. Once agreed, the terms of appointment may be amended only if allthe parties and the arbitrators agree to the amendment.Commentary on Article 1Paragraph 1Early discussion of terms of appointmenta) Before accepting an appointment, arbitrators should determine, based onthe information available to them, whether (1) they are free of conflicts;(2) they comply with any requirements as to experience andqualifications; and (3) they are able to devote sufficient time to deal withthe arbitration.3 At the same time the arbitrator should consider, takinginto account the lex arbitri and/or local practice, when is the appropriatetime to inform the parties of the terms of appointment includingproposed remuneration.b) The timing is important because in some jurisdictions a discussion ofthese issues prior to the constitution of the tribunal may be considered to2

Terms of Appointment including Remunerationgive rise to an appearance of bias and/or lack of independence whichcould lead to a later challenge to the appointment.4 In these jurisdictions,once the tribunal is constituted, the practice is for the presiding arbitratorto assume responsibility for discussing the terms of appointment for allof the arbitrators with all of the parties after consultation with the othermembers of the tribunal.c) In other jurisdictions it is common practice, before the appointment isaccepted, for a prospective arbitrator to discuss with the party appointingthem the terms of appointment including proposed remuneration andreach agreement with that party on those terms. In these jurisdictions aparty-appointed arbitrator may typically agree terms of appointmentwith the appointing party without consulting with the other party or theother arbitrators. In that case it is good practice to disclose the agreedterms to the other arbitrators as well as the other party at the earliestopportunity. Ideally the terms of appointment for all three arbitrators,which may be different for each arbitrator, should later be recorded inone document agreed with all parties once the tribunal has beenconstituted (see Article 1.2 below).d) In light of the above, before proposing any terms, arbitrators should takecare to establish whether the lex arbitri and/or local practice provide thatthe discussion of the terms of their appointment is subject to any specificrequirements or limitations.Recalcitrant party or partiese) In an attempt to frustrate an arbitration a party may seek to obstruct ordelay the appointment of the tribunal by refusing to appoint an arbitratoror to participate in the appointment process, including to agree thearbitrators’ terms of appointment. Many arbitration rules and nationallaws allow for an arbitral institution or the local court to remedy thesituation.3

Chartered Institute of ArbitratorsParagraph 2Recording the terms of appointmenta) It is advisable to have a written record of the terms of appointment toavoid later misunderstandings and disputes. Depending on thearbitrators’ preferences and the circumstances of the case, the terms ofappointment may be recorded in a contract document, a retainer letter orin an exchange of written communications. Alternatively, once thetribunal is constituted, the arbitrators may confirm their terms ofappointment in a procedural order, terms of reference or a similardocument.Content of the terms of appointmentb) There is no prescribed form that arbitrators should follow when draftingtheir terms of appointment. However, before preparing terms ofappointment, arbitrators should check the governing rules and laws forany express requirements or limitations that they need to take account ofand ensure that these are reflected in the terms of appointment.c) The terms of appointment will typically include (1) a brief description ofthe dispute to be resolved; (2) a confirmation of the arbitrator’sjurisdiction; (3) a reference to the arbitration agreement pursuant towhich the arbitrator has been appointed; (4) a declaration ofindependence and impartiality; (5) a statement of availability; and (6)the basis of remuneration and arrangements for payment of fees andexpenses including any interim payments on account (see Article 2below).d) Additional terms may be included to specifically deal with matters suchas, for example, confidentiality, immunity from suits, the right toappoint experts and/or assistants, document retention/destruction, and/orany other matter the arbitrators consider appropriate in the particularcircumstances of the case.4

Terms of Appointment including RemunerationParagraph 3Modification of the terms of appointmentAs it is not possible at the start of the arbitration to anticipate exactlyhow the arbitration will proceed, it is advisable to expressly state that theterms of appointment may be modified in the event of a change ofcircumstances that justifies an amendment. When a variation of terms issought, it should be raised promptly and will require the expressagreement of all parties as well as the arbitrators.5 It is good practice torecord any amendments in writing.Article 2 — Terms of remunerationThe terms of remuneration should address the following:i. method by which the arbitrators’ fees will be calculated;ii. any commitment or cancellation fees;iii. reimbursement of expenses reasonably incurred;iv. value added or other taxes;v. payment terms, including any arrangements for advancedeposits on account;vi. final account for fees and expenses;vii. specific arrangements for remuneration and reimbursement offees and expenses in the case of an early termination orsettlement; andviii. any other relevant matters.Commentary on Article 2i) Methods for calculating remunerationa) Arbitrators engaged to resolve a dispute are entitled to be remuneratedfor the services they render in the course of the arbitration. The terms ofappointment should therefore specify the method to be used to calculatethat remuneration and the rate for their fees. The most commonly used5

Chartered Institute of Arbitratorsmethods for calculating the arbitrators’ remuneration are (1) time spent,where a fee is calculated on the basis of an agreed hourly or daily ratefor work done; (2) fixed fee, where a fee is fixed in advance regardlessof the actual work undertaken; and (3) ad valorem, where a fee iscalculated as a proportion of the amount in dispute. When consideringthe method and rate to apply, the arbitrators may look for guidance frominformation published by arbitral institutions. In any event, regardless ofthe chosen method to determine the remuneration, the fees should bereasonable in all of the circumstances of the case.b) In a three-member tribunal, each member should be compensated by thesame method. However, when arbitrators are remunerated by referenceto the time spent, they may charge different rates depending on theirexperience and responsibilities.c) If the arbitration is expected to continue for more than twelve months,the arbitrators should, depending on the adopted method for calculationof the arbitrators’ remuneration, consider whether it is appropriate toinclude an indexation mechanism or other provision for a periodicadjustment of fees.Factors to consider when setting the arbitrators’ feesd) In setting their fees, arbitrators should consider (1) the complexity of thedispute, including the novelty and difficulty of the issues likely to bepresented; (2) any specialist expertise of the arbitrators; (3) the numberof parties; (4) the arbitrators’ experience and role within the tribunal; (5)the amount of time and nature of the work likely to be required; and (6)any other relevant circumstances of the case.ii) Commitment or cancellation feesa) The purpose of commitment and cancellation fees is to compensatearbitrators for time reserved but not used in the event that meetings or6

Terms of Appointment including Remunerationhearings are cancelled or adjourned, including preparation time inconnection with such meetings or hearings.6 As the practice of chargingcancellation or commitment fees is common in some jurisdictions butunknown or prohibited in others,7 arbitrators should first consider theextent to which these fees are permitted under the terms of thearbitration agreement, including any arbitration rules and/or the lexarbitri. If they are permissible, arbitrators who wish to charge themshould include an express provision to this effect in their terms ofappointment.b) A commitment fee, also known as a booking fee, is payable at the time abooking is made. It is a non-refundable payment on account of theestimated fees for each arbitrator for the period booked. If the bookedperiod is used, the commitment fee is applied to the actual fees incurredfor the booking.c) A cancellation fee is a fee payable if a hearing is cancelled or adjourned.The amount of a cancellation fee will usually be fixed by reference to(1) the arbitrators’ agreed rate of compensation; (2) the amount of timereserved; and (3) the length of notice the arbitrators are given of theneed for cancellation or adjournment: the shorter the notice, the higherthe fee. If the period of notice is long enough to afford the arbitrator areasonable opportunity to arrange other replacement work for thereserved time, there is no justification for a cancellation fee.iii) Reimbursement of arbitrators’ expensesIn addition to fees, arbitrators are also entitled to the reimbursement ofany reasonable out-of-pocket expenses incurred in connection with thearbitration. It is therefore good practice to include in the terms ofappointment a provision expressly authorising arbitrators to recoversuch expenses, including but not limited to travel, accommodation andsubsistence costs in relation to meetings and hearings as well as office7

Chartered Institute of Arbitratorsexpenses, such as photocopying, printing and courier costs. The terms ofappointment may also address the cost of a tribunal secretary and/or thefees of a legal adviser or an expert appointed by the arbitrators ifanticipated at the time the terms of appointment are concluded. 8 Alldisbursements should be charged to the parties at cost and, upon request,supported by receipts or evidence of the expenses.iv) Value added or other taxes on arbitrators’ fees and expensesServices rendered by arbitrators may be subject to value added tax,withholding tax or other charges under any local law applicable to them.Different tax regimes may apply to different members of the tribunal.Therefore each arbitrator should ensure that the terms of appointmentinclude specific provisions for the addition of local taxes or othercharges appropriate to their own fees and disbursements.v) Payment termsa) There is no universally accepted practice in relation to the terms onwhich arbitrators should be remunerated but there may be local practicesand/or rules governing this issue. Arbitrators should therefore take careto establish what the local practice may be. In some jurisdictions, forexample, in ad hoc proceedings, arbitrators may receive the full paymentof fees from the parties at the early stage(s) of the proceedings.However, a more widely accepted practice is the arbitrators to receiveinterim payments on account in which case it is prudent to includeprovisions allowing interim invoicing for fees and expenses andindications as to when they may be invoiced and the time within whichthey are payable.b) Arbitrators may also include an express provision that the parties arejointly and severally liable to the arbitrators for their fees and expensesto assist recovery of any sums unpaid.8

Terms of Appointment including RemunerationArrangements for advance deposits on accountc) Most arbitration rules and laws provide allow arrangements for advancedeposits on account. If any such a regime applies, the terms ofappointment should be drafted to comply with it (see Article 1.2 above).If there is no such regime, arbitrators should consider including expressprovisions in their terms of appointment for advance deposits on accountof fees and expenses.d) In any case, the terms of appointment should specify the steps the partiesneed to follow in order to make an advance deposits including the detailsof the bank account where the deposit is to be lodged, for example anaccount controlled by the presiding arbitrator. It is also important todetermine the amount each party will be expected to advance and thecircumstances in which the arbitrators may require a further increaseddeposit.e) As it is often unclear at the beginning of an arbitration the course thearbitration will actually take, it is usually sufficient for the arbitrators toask for an initial deposit on account to take the arbitration through theinitial stages of the proceedings. When this approach is taken if theadvance deposit proves to be insufficient, arbitrators may requestadditional deposits at any time during the proceedings. A further depositon account should be requested before the earlier deposit has beenexhausted. The request for deposits on account may be recorded in aprocedural order.Consequences of failure to provide advance depositsf) When requesting an advance deposit, arbitrators should also make clearto the parties the consequences of any delay and/or failure to make thedeposit. Some arbitration rules and laws provide that arbitrators maysuspend work and eventually terminate the arbitration if a party does notcomply with a request for payment within a specified or reasonable time.9

Chartered Institute of ArbitratorsIn the absence of express provisions in the applicable laws and rules, itis good practice to include express provisions to this effect in the termsof appointment, for example, by reserving the right to suspend workuntil an advance deposit and/or overdue invoice has been satisfied.Keeping track of the fees accruing and deposit accountg) It is normal for one arbitrator, usually the presiding arbitrator, to takeresponsibility for managing the deposit account. Throughout anarbitration the arbitrators should closely monitor the level to which theirfees are accruing in relation to the balance on any deposit account so asto ensure sure that there are sufficient funds to cover the arbitrators’ feesand expenses and that appropriate notice is given to the parties of anyneed to make additional deposits. If agreed as discussed regardingArticle 2(v) above, the arbitrators may periodically issue interiminvoices for fees and expenses as the arbitration progresses. They maywithdraw deposit funds to pay those invoices in accordance with thepayment terms. This will facilitate determining the sufficiency ofremaining funds to cover future fees and expenses and the need torequire a further increased deposit.h) Arbitrators are also encouraged to include an express provision t

appointment before or immediately after accepting an appointment, bearing in mind the terms of the arbitration agreement, including any arbitration rules and the law of the place of arbitration (lex arbitri). 2. The terms of appointment should be recorded in writing and should address the nature of the appointment, arrangements for the arbitrators’ remuneration and any other material terms .

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