In domestic and international commercial arbitrations, it is common for successful parties to be awarded their actual reasonable legal fees and disbursements. The legislation governing domestic commercial arbitrations in British Columbia permits arbitrators to exercise their discretion to award such costs.

The Supreme Court of British Columbia discussed the law applicable to indemnification cost awards in its recent decision in Allard v. The University of British Columbia. In Allard, the successful party to an arbitration had sought – and been awarded – its actual reasonable costs. In awarding these costs, the arbitrator rejected an argument that indemnity costs represent “elevated” costs in the arbitration context, noting:

The Claimants have asserted forcefully that it is wrong for an arbitrator to consider that the “default” position is that a successful party should receive actual reasonable costs. The authorities cited in fact support a conclusion that provided a party is determined to have been successful and that there is no reason to parse success, then the issue is whether considering all of the factors involved in the exercise of a discretion, there is any reason to award costs on a basis other than actual reasonable costs.

The unsuccessful parties (Petitioners) brought a petition in the Supreme Court of British Columbia seeking to appeal both the arbitration award and the costs award. They argued that the arbitrator erred by awarding actual reasonable costs to the successful party without identifying factual findings or relying on misconduct by the Petitioners to justify such an award. They also suggested that a practice of awarding “elevated” (i.e. actual) costs to successful parties in arbitrations could result in a “chilling effect” on domestic arbitrations.

The Court rejected the Petitioners’ submissions, noting that the arbitrator was not required to find misconduct on the part of the Petitioners to award the successful party its actual reasonable costs. Instead, the Court confirmed that the normal rule in arbitrations is that successful parties are entitled to indemnification costs unless special circumstances warrant otherwise.

Regarding the Petitioners’ warning of a potential “chilling effect” from full indemnity cost awards, the Court highlighted a statement by B.C.’s former Attorney General that a historical Arbitration Act amendment would “…preserve a desirable feature of arbitration: namely, the ability of a party to recover its actual costs.” Far from supporting the Petitioners’ concern, the Court found that this statement supported the opposite conclusion: “that parties are more likely to pursue a commercial arbitration precisely because doing so permits them to recover their actual costs.”

The Court in Allard ultimately dismissed the petition, recognizing that a successful party’s entitlement to reasonable legal costs is an appropriate “starting point” for an arbitrator’s discretionary costs analysis in commercial arbitrations. In doing so, the Court reaffirmed an important aspect – and risk – of commercial arbitrations: the availability of full indemnity cost awards for successful parties.