NARVA Cost Dispute / Sealed Offers

NARVA Cost Dispute / Sealed Offers T. Langan, Esq. 07 March 2013

Narva Cost Dispute / “Sealed Offers” • FWEOY and Narva advanced substantial claims and counterclaims arising out of the repowering of two steam turbines at Eesti and Balti power plants in Estonia operated by Narva. • FW Claim = €31 million (€22.7 million retainage+ €9.1 million out of scope work and cost due to Narva not procuring proper insurance) • Narva Claim = €44.5 million (€37.6 million delay LD (cap) + €6.9 million for equipment relocation, consumables, warranty repairs and punchlistitems) • 9 Mar 2006 arbitration commenced by FWEOY. • 5 Dec 2008 First Partial Award (“Liability Award”) • 22 Dec 2008 “Sealed Offer” = €11,000,000. • 2 Mar 2010 Second Partial Award (“Quantum Award”) = €10,166,463 • 28 Sep 2010 cost hearing. • 16 Dec 2010 Final Award. Narva Arbitration 7 Mar 2013 Privileged & Confidential

Narva Cost Dispute / “Sealed Offers” • Ad Hoc (self-administered) arbitration; UNCITRAL Rules • 3 arbitrators appointed per UNCITRAL Rules • ICC to appoint if parties or arbitrators fail to appoint. • English law controls the arbitration per the parties’ contract: • “The parties’ arbitration agreement set forth in this Article and any arbitration proceedings hereunder shall be governed by and construed in accordance with the laws of England and this paragraph shall be construed accordingly. Where the UNCITRAL Rules do not deal with any issue arising in connection with the conduct and/or procedure of the arbitration, such issue shall be resolved in accordance with the laws of England.” • Cost sharing: • “The costs and expenses of the mediator and the arbitrators shall be paid equally by the parties, and each party shall bear its own costs and expenses (including legal fees) in connection with the mediation and arbitration proceedings.” Narva Arbitration Clause 7 Mar 2013 Privileged & Confidential

Narva Cost Dispute / “Sealed Offers” • Article 60 – • “An agreement which has the effect that a party is to pay the whole or part of the costs of the arbitration in any event is only valid if made after the dispute in question has arisen.” • Article 61 – • “(1) The tribunal may make an award allocating the costs of the arbitration as between the parties, subject to any agreement of the parties” • “(2) Unless the parties otherwise agree, the tribunal shall award costs on the general principle that costs should follow the event except where it appears to the tribunal that in the circumstances this is not appropriate in relation to the whole or part of the costs.” English Arbitration Act 1996 7 Mar 2013 Privileged & Confidential

Narva Cost Dispute / “Sealed Offers” • Article 38 - • “The arbitral tribunal shall fix costs of arbitration in its award.” • “Cost” includes: (e) “The costs for legal representation and assistance of the successful party if such costs were claimed during the arbitral proceedings, and only to the extent that the arbitral tribunal determines that the amount of such costs is reasonable.” • Article 40 - • “1. Except as provided in paragraph 2; the costs of arbitration shall in principle be borne by the unsuccessful party. However, the arbitral tribunal may apportion each of such costs between the parties if it determines that apportionment is reasonable, taking into account the circumstances of the case.” • “2. With respect to the costs of legal representation and assistance referred to in Article 38, paragraph (e), the arbitral tribunal, taking into account the circumstances of the case, shall be free to determine which party shall bear such costs or may apportion such costs between the parties if it determines apportionment is reasonable.” UNCITRAL Rules with respect to Costs 7 Mar 2013 Privileged & Confidential

Narva Cost Dispute / “Sealed Offers” • SCC, AAA IAR, and LCIA - all follow similar “successful party” approach on legal costs. • SCC Article 41 – • “Unless the parties have agreed otherwise, the Arbitral Tribunal may, at the request of a party, in an award or other order by which the arbitral proceedings are terminated, order the losing party to compensate the other party for legal representation and other expenses for presenting its case.” • AAA IAR Article 31 – • “The tribunal shall fix the costs of arbitration in its award. . . . Such costs may include: . . . (d) the reasonable costs for legal representation of a successful party.” • LCIA Article 28.4 - • “Unless the parties agree otherwise in writing, the Arbitral Tribunal shall make its orders on both arbitration and legal costs on the general principle that costs should reflect the parties’ relative success and failure in the award or arbitration, except where it appears to the arbitral tribunal that in the particular circumstances this general approach is inappropriate.” “Successful Party” 7 Mar 2013 Privileged & Confidential

Narva Cost Dispute / “Sealed Offers” • Article 37 (eff. 1 Jan 2012) - • “1) The costs of the arbitration shall include . . . the reasonable legal and other costs incurred by the parties for the arbitration.” • “4) The final award shall fix the costs of the arbitration and decide which of the parties shall bear them or in what proportion they shall be borne by the parties.” • “5) In making decisions as to costs, the arbitral tribunal may take into account such circumstances as it considers relevant, including the extent to which each party has conducted the arbitration in an expeditious and cost-effective manner.” • “6) In the event of the withdrawal of all claims or the termination of the arbitration before the rendering of a final award, the Court shall fix the fees and expenses of the arbitrators and the ICC administrative expenses. If the parties have not agreed upon the allocation of the costs of the arbitration or other relevant issues with respect to costs, such matters shall be decided by the arbitral tribunal. If the arbitral tribunal has not been constituted at the time of such withdrawal or termination, any party may request the Court to proceed with the constitution of the arbitral tribunal in accordance with the Rules so that the arbitral tribunal may make decisions as to costs.” Contrast ICC Rules with respect to Costs 7 Mar 2013 Privileged & Confidential

Narva Cost Dispute / “Sealed Offers” • Written offer to settle a dispute which has been referred to arbitration, made “without prejudice, save as to costs” (a/k/a “Calderbank offer”). • Sealed and “without prejudice” because it is not to be brought to the attention of the tribunal before the underlying dispute is decided, so as not to influence the tribunal’s decision with respect to the merits of such dispute. • However, in order that it be taken into account in assessing responsibility for the arbitration costs, it must be brought to the attention of the tribunal before it assesses such costs, hence the term “save as to costs.” • Originates from English Law, where as a general rule in litigation and domestic arbitration, the party considered to be the overall loser is ordered to pay to costs of the proceedings as well as the reasonable legal and other costs of the overall winner, a/k/a “loser pays all” or “costs follow the event.” • Generally followed, even where loser may have defeated the winner on a number of points and recovery by the winner is significantly less than the amount originally claimed, as long as it is more than a nominal amount. • Sealed offer approach was devised to specifically counteract this harsh approach to cost allocation. • Alters the “loser pays all” rule where the winner has failed to accept the offer which it does not subsequently beat. Winner is generally held liable for the loser’s costs incurred after the offer’s acceptance deadline. “Sealed Offer” - Origin and Definition 7 Mar 2013 Privileged & Confidential

Narva Cost Dispute / “Sealed Offers” • Recognized by common law jurisdictions that follow English “loser pays all” approach, such as Hong Kong, India, Australia, and Canada. (Cf. USA, where each side bears its own fees and costs.) • Appropriate for: • An international arbitration which has its seat in one of these common law jurisdictions or the law of one of these jurisdictions as its procedural law. • Tribunals made up of one or more arbitrators who practice in these common law jurisdictions. • Arbitrations governed by arbitration rules which allocate costs to the “successful party,” even though no connection with these common law jurisdictions. • Use where there is a concern for the high cost of the proceeding and a risk that FW will be found liable on at least some of the claims against it. “Sealed Offer” - Where and When to Use 7 Mar 2013 Privileged & Confidential

Narva Cost Dispute / “Sealed Offers” • In writing and branded “Confidential and Without Prejudice, Save as to Costs.” • Should explain the significance of these words in the letter. • Must be clear so that the offeree can make an informed choice and the tribunal can determine whether the offeree would have been better off accepting the offer. • It should address - • deadline for response • offeree’s costs • interest • any counterclaims. • Can be revised at any time as the case proceeds; prior offer will be ignored. • Seek a bifurcation of the award, if available, so that sealed offer can be submitted to the tribunal after its award on the underlying dispute. “Sealed Offer” - Requirements 7 Mar 2013 Privileged & Confidential

Narva Cost Dispute / “Sealed Offers” • Narva, not FW, was the “successful party” since FW’s claim for retainage was never disputed and should be netted out of the Award. • Narva contended that its only dispute regarding the payment of retainage was the date on which it became due. • Narva is entitled to receive €6.6 million (80% of €8.3 million) of its liability phase fees, plus €2.4 million in other costs (e.g., tribunal, expert and witness fees, translation costs, etc.) • UNCITRAL Rules do not preclude the tribunal from adopting an issue-by-issue based analysis, or from determining that there was more than one successful party. • Even if Narva was not the successful party overall, it was the successful party for the quantum phase, since FW received an award of less than Narva’s sealed offer amount. • Narva was the “successful party” on the quantum phase of the case and therefore is entitled to its portion of fees for this period (in addition to precluding FW’s recovery of fees for this period). Narva’s Position (1) 7 Mar 2013 Privileged & Confidential

Narva Cost Dispute / “Sealed Offers” • 22 Dec 2008 letter “Without Prejudice Save as to Costs” • “€11,000,000 in full and final settlement of all outstanding claims and counterclaims in the arbitration. This offer is inclusive of both parties’ claims to interest and costs. This offer will remain open for acceptance until 4.00pm on 30 January 2009.” • According to Narva, the quantum award of €10,786,665 (€10,166,463 plus €620,222 in interest calculated to the expiry of the offer) did not beat this offer. • The offer was not ambiguous; FW should reasonably have understood the letter to have been on a “no cost” basis since FW in its post quantum hearing submission argued that contract Art. 14.6 required the parties to bear their own costs. • Since FW did not beat the offer, Narva’s should be awarded its €1.9 million in fees from the point of the offer forward to the quantum award. Narva’s Position (2) 7 Mar 2013 Privileged & Confidential

Narva Cost Dispute / “Sealed Offers” • There can be only one “successful party” under UNCITRAL Rules; an issue-by-issue determination is not authorized. • FW is the successful party: • It is the party receiving a net principal payment of €10,166,463. • It won on over 75% of its claims; Narva won on only 30% of its claims. • Narva is incorrect to maintain that FW’s contract balance was not in dispute: • FW was forced to initiate the arbitration to recover the€22 million balance of its contract sum. • Narva disputed FW’s claim for contract balance throughout the liability phase by asserting a massive counterclaim of €44.5 million and expressly pleading the right of set off. • Narvareneged on express agreements to waive LDs in order to keep its €37.6 million LD claim intact. • Even if FW had posted the warranty and punchlist securities, Narva would not have paid the retainage. FW’s Position (1) 7 Mar 2013 Privileged & Confidential

Narva Cost Dispute / “Sealed Offers” • UNCITRAL rules contemplate only one successful party; and issue-by-issue is allocation is not authorized. • UNCITRAL rules contain no express provision allowing consideration of sealed offers. • There is no provision in the rules where the tribunal can fix the costs for one party for part of the proceedings and the costs of the other party for the balance of the proceedings. • If the sealed offer is to be considered, however, it may only be considered for the purpose of deciding whether it affects the proportion of FW’s feesNarva has to pay; it cannot be used in a way which has a cost-shifting effect so that an unsuccessful party can nonetheless be entitled to recover any of its costs. • The offer was defective since it did not clearly state what amount was being offered for costs. As a result, the amount being offered on the claims was an unknown quantity. • Accordingly it was impossible, until the tribunal’s award of costs, to determine whether or not FW has done better than the offer. FW’s Position (2) 7 Mar 2013 Privileged & Confidential

Narva Cost Dispute / “Sealed Offers” • 16 Dec 2010 Final Award (Cost Award). • €4 million in fees and expenses awarded to FW, roughly 45% of FW’s total costs for the case. • Panel agreed that FW was the overall successful party. • The panel also agreed that under UNCITRAL rules only an apportionment of the successful party’s costs is permissible. • No issue-by-issue determination of successful party status. • No cost shifting by reason of a sealed offer. • Panel also agreed with FW’s position that the sealed offer was unclear. • FW was not precluded from asserting cost claim and Narva should have reasonably assumed that it would. • However, the panel found that it would have been appropriate for FW to have sought a clarification of the offer and therefore refused to apportioned all FW’s costs for the quantum phase to Narva. Final Award 7 Mar 2013 Privileged & Confidential

Narva Cost Dispute / “Sealed Offers” • Provision stating that retainage is not due until punchlist or warranty security is posted will be strictly enforced as far as interest accrual start date, even though FW is ultimately determined to be owed the retainage. • Where each-side-pays-its-own-costs provision is desired, check the law governing the arbitration for enforceability. • Only the successful party’s costs will be apportioned under UNCIRAL rules and SCC rules (uncertain about LCIA rules). • Use of a sealed offers should be considered where there is a concern for the high cost of the proceeding and a risk that FW will be found liable on at least some of the claims against it. Lessons Learned (1) 7 Mar 2013 Privileged & Confidential

Narva Cost Dispute / “Sealed Offers” • Sealed offers are appropriate for: • An international arbitration which has (a) its seat in a common law jurisdiction that follows English “loser pays all” approach, such as Hong Kong, India, Australia, and Canada, or (b) the law of one of these jurisdictions as its procedural law. • Arbitrations with tribunals made up of one or more arbitrators who practice in these common law jurisdictions. • Arbitrations governed by arbitration rules which allocate costs to the “successful party,” even though no connection with these common law jurisdictions. • Clarity should be sought on unclear sealed offers received by FW; Seek local counsel’s advice if needed. Lessons Learned (2) 7 Mar 2013 Privileged & Confidential

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NARVA Cost Dispute / Sealed Offers