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Construction contracts often require parties to finally resolve disputes through arbitration rather than Court litigation. One important difference between arbitration and the Courts is that arbitrators have broad discretion when awarding and allocating the costs of the proceedings between the parties. The wide scope of this power under the Arbitration Act 1996 has been highlighted and affirmed in the High Court’s recent decision in McCracken v Boyer [2025] NZHC 546.
Background
McCracken involved a long-running cross-lease property dispute between neighbours. In March 2022, the Boyers initiated arbitration proceedings against Ms McCracken, seeking to update the property’s flats plan and cross-leases to reflect a new boundary ordered by the Court and extensions consented to by the owner preceding Ms McCracken. Ms McCracken counterclaimed over a boundary wall and driveway repairs.
The Boyers were largely successful at arbitration, although Ms McCracken succeeded on some minor points. The arbitrator did not award the Boyers the full amount of their costs claimed, but did order that Ms McCracken pay a “reasonable contribution” amounting to 66% of their claimed legal fees and hearing costs, 50% of their expert costs, the full amount of the Boyers’ share of the arbitrator’s fees for the costs award, and interest on those costs. The total sum was upwards of $190,000.
Appeal
Ms McCracken appealed the arbitration costs award to the High Court on four grounds:
- Ground 1: The arbitrator did not apply the High Court Rules 2016 costs regime to the arbitration proceedings.
- Ground 2: The arbitrator did not properly assess whether the Boyers’ claimed costs were reasonable.
- Ground 3: The costs award was an “indulgence”, as the Boyers had purchased the property with knowledge of title defects.
- Ground 4: The Boyers had not attempted to settle the dispute, thereby increasing costs for both parties.
High Court’s decision
The High Court considered and dismissed each ground of appeal, finding that the arbitrator’s discretion had been appropriately exercised.
In respect of Ground 1, the Court extensively reviewed previous authority on this point holding that there is no requirement for an arbitrator to follow, or even consider, the costs regime in the High Court Rules 2016. Statements in previous judgments that an arbitrator had the “same jurisdiction” to award the High Court in a civil proceeding, referred broadly to the ability to provide relief, not the details of how the arbitrator’s discretion was to be exercised.
There is a high threshold for overturning an exercise of arbitral discretion, such as where an arbitrator makes an “unreasonable”. This reflects the recognition that the arbitrator is the person best placed to consider what costs are reasonable costs in an arbitration.
Regarding Ground 2, the Court held that the arbitrator has discretion to assess reasonable costs based on their own experience of costs in the round. The specific “weight” that the arbitrator allocates to factors in assessing reasonableness could not be appealed; so long as the costs award was “principled and within reasonable bounds” and generally followed principles of natural justice (e.g. taking into account the extent to which parties were successful).
Grounds 3 and 4 were dismissed as the arbitrator had correctly considered each matter as a matter of law in providing the costs award.
Overall, the Court found no evidence that the costs award was “unreasonable”, in the sense that a relevant factor had been omitted or an irrelevant factor had been considered, and emphasised that it would only interfere with an arbitrator’s cost award if it is “plainly shown that the award was unreasonable in all the circumstances.”
Final comments
The decision reinforces the wide discretion that arbitrators in New Zealand have when awarding costs. They are not required to apply the High Court rules unless expressly agreed by the parties.
Those in the construction sector – where arbitration is commonly adopted under standard form contracts (e.g. NZS 3910) or bespoke commercial terms – should be aware that:
- An arbitrator’s discretion to award costs may mean potentially higher levels of cost recovery in arbitration proceedings than in court, but only for “reasonable” costs, incurred “reasonably”.
- Construction arbitration costs are often significant, and it therefore pays to carefully consider how a party engages in arbitration (e.g. reasonable procedural cooperation, seeking to agree efficient procedures, making suitable Calderbank offers, putting forward sensible and reasonable claims or defences) as arbitrators may take this into account when exercising their discretion as to costs.
It is important to be mindful of potential cost consequences even from the early stages of an arbitration, because, as this case confirms, challenging an arbitral costs award is very difficult, and requires clear error or plain unreasonableness.
If you have any questions about the arbitration in construction disputes, or generally, please get in touch with our Construction or Disputes teams or your regular contact at Hesketh Henry.
Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.
