What options are available when a party is hit with a significant costs award in arbitration? The natural reaction may be to consider an appeal—but on what legal basis can a costs award be challenged? How do arbitration costs compare to those typically awarded in litigation?
Introduction
Clients and practitioners can easily assume costs in arbitration will mimic the Court model, but this is incorrect. The High Court’s recent decision in McCracken v Boyer [2025] NZHC 546 reaffirms the legal principles governing appeals of arbitration costs awards. It serves as a timely reminder of the risks, limitations, and realities of costs in arbitration compared to traditional Court proceedings.
McCracken v Boyer
This case involved a longstanding dispute over a cross-lease property, culminating in a 2022 arbitration before experienced arbitrator Dr Anna Kirk. The arbitrator largely sided with the Boyers, awarding them $191,154.66 in legal and arbitration costs — roughly two-thirds of their actual expenses. McCracken, unhappy with the result, turned to the High Court to challenge the award.
McCracken’s argued that the arbitrator:
- Should have applied the High Court Rules 2016 (HCR) costs scale;
- Had failed to assess the reasonableness of costs properly;
- Had overlooked indulgent conduct by the Boyers; and
- Had ignored the Boyers’ reluctance to engage in alternative dispute resolution.
None of these arguments succeeded. Justice O’Gorman reaffirmed the core principles:
- Arbitrators are not bound by the HCR cost scale unless the parties agree to it; and
- The Arbitration Act 1996 (Act) gives arbitrators broad discretion to award actual and reasonable costs — invariably more generous for the winner (and more bruising for the loser) than the conservative scale costs in Court.
- Crucially, the Court made clear that it will not review the merits of a cost award unless there is a clear error of law or a decision so unreasonable it cannot stand.
- That threshold was not met in McCracken v Boyer. Justice O’Gorman found Dr Kirk had acted within her discretion and her reasoning met the required standard of an arbitrator. The appeal was dismissed, and costs were awarded to the Boyers.
Why this matters for practitioners
While arbitration can offer greater flexibility and efficiency, it may also carry a higher risk of substantial costs if your client does not prevail. When advising clients on dispute resolution options, it is essential to consider more than just procedural preferences or confidentiality concerns — the decision between court proceedings and arbitration could ultimately have significant financial consequences, potentially reaching six figures in costs.
Given that an agreement to arbitrate is often made when the contract is first entered into, practitioners drafting or advising on contracts should remember the importance of informing clients of the potential cost implications of arbitration both in term of the costs of the arbitrator and the potential exposure to significant adverse costs award.
Where there is no contractual agreement to arbitrate, parties to a dispute and their advisors need to consider a range of factors when deciding whether private arbitration is preferable to Court proceedings, including the possibility of significant costs awards.
