Indemnity Costs Orders for Unsuccessful Challenge to Arbitration Award

In most common law jurisdictions (save, most prominently, for the US), “costs follow the event” is the usual rule for the payment of legal fees and other cost of court proceedings i.e. the losing party pays the winning party’s costs. There are two types of costs orders that the court may grant. The usual costs order is costs on a standard basis. However, in exceptional circumstances, the court may order costs on an indemnity basis. The difference can be very substantial with the later amouting to almost twice as much as the former.

In 2012, the Hong Kong Court of Appeal decided in 2 separate cases that the respondent to a failed application to set aside an arbitration award was entitled to costs on an indemntiy basis from the applicant. Such indemnity costs would be awarded, save where there were exceptional circumstances i.e. a reversal of the usual court practice in other civil and commercial disputes.

In Gao Haiyan and Another v. Keeneye Holdings Ltd and Another [2012] HKCA 43, the Court of Appeal held that it was appropriate to award damages on an indemnity basis against the failed applicant. This was based on the Court’s view that parties should comply with arbitraiton awards and that an unmeritous application would be contrary to the underlying objectives of the Civil Justice Reform i.e. the duty to assist the Court in the just, cost-effective and efficient resolution of a dispute. Permitting the losing party to only pay costs on the lower standard basis would in effect cause the victorious party “to subsidise the losing party’s abortive attempt to frustrate enforcement of a valid award” (citing A v R [2010] 3 HKC 67 at [67] to [72]).

Subsequently, a differently constituted Hong Kong Court of Appeal in Pacific China Holdings Ltd (In Liquidation) v. Grand Pacific Holdings Ltd [2012] HKCA 332 held that it was bound by its previous decision in Keeneye Holdings and that it continued to agree with its previous holdings (see paragraph [5] and [15]).

Pacific China Holdings is also noteworthy for its consideration of adverse dicta by the Court of Appeal of Victoria in IMC Aviation Solutions Pty Limited v Altain Khuder LLC2011 VSCA 248, which had been decided in the interim between Keeneye Holdings and Pacific China Holdings. The Court of Appeal of Victoria had overturned the lower court’s order to award indemnity cost. The Victorian lower court had relied on A v R in coming to its decision.

However, the Court of Appeal of Victoria (per Hansen JA and Kyrou AJA, Warren CJ declining to express a view) decided in dicta that,

“335. With great respect to his Honour, we can find nothing in the [Victorian Civil Procedure Act 2010] or in the nature of the proceedings that are available under the Act which of itself warrants costs being awarded against an unsuccessful award debtor on a basis different from that on which they would be awarded against unsuccessful parties to other civil proceedings. Accordingly, his Honour acted on a wrong principle in embracing the approach that has been adopted by the Hong Kong Court of First Instance. We note also that the Civil Procedure Act 2010 was not in force when his Honour heard this proceeding. Even if it were in force, it would not have warranted the order he made.

336. In proceedings under the Act, as in other civil proceedings, costs will ordinarily be awarded against the unsuccessful party on a party and party basis unless the successful party can establish special circumstances. The principles for determining the existence of special circumstances are well established. Special circumstances, if they exist, are found in the facts of the case at hand, and the exercise of the judicial discretion is not otherwise conditioned on whether those facts are comprehended by a category of case or cases in which a special order has been made. The fact that an award debtor fails to establish a ground for resisting enforcement of a foreign arbitral award cannot, of itself, constitute special circumstances. Nor can a finding that the award debtor’s case was ‘unmeritorious’ if all that is meant by that expression is that the award debtor failed to persuade the Court to accept his or her evidence and submissions.”

Nevertheless, the Hong Kong Court of Appeal preferred its earlier view and reiterated its holding that a “not unarguable” or even “reasonably arguable” case for setting aside (including a successful decision in the courts below) did not constitute special circumstances to avoid an award of costs on an indemnity basis (see paragraph [22] and paragraph [14] of Keeneye Holdings)).

In Singapore, this issue has not arisen before our courts. However, in Tjong Very Sumito and others v Antig Investments Pte Ltd, [2009] 4 SLR(R) 732; [2009] SGCA 41, the Singapore Court of Appeal held that indemnity costs would be awarded when a party instituted courts proceedings in breach of an arbitration agreement thereby necessitating an application for the stay of proceedings.

In this respect, the Singapore Court of Appeal at paragraphs [17] and [71] adopted the remarks of the learned judge in the English High Court case of A v B (No 2) [2007] 1 Lloyd’s Rep 358,

“There can be no question but that the procedural consequence of conduct by a party to an arbitration or jurisdiction agreement which amounts to a breach of it and causes the opposite party reasonably to incur legal costs ought to be that the innocent party recovers by a costs order and/or by an award of damages the whole, and not merely part, of its reasonable legal costs. Against that background, it is necessary to ask whether there is any sustainable policy consideration which would require that unless there were some special circumstances, excluding the fact that it was an arbitration or jurisdiction agreement that had been broken, the successful party should have to forego part of its costs or alternatively to bring a separate claim for damages to cover any shortfall on assessment of costs. The relevant considerations point very strongly indeed against either result. To forego part of the loss would be unjust. To be placed in a position where the balance of the recoverable damages could not be quantified until after the costs had been formally assessed would involve delay in obtaining compensation properly due and a formalistic and cumbersome procedure which would in itself involve more costs and judicial time. Where the defendant who had been improperly impleaded in the English courts was outside the jurisdiction, no claim for damages could be brought in the English courts without submitting to the jurisdiction.

In my judgment, provided that it can be established by a successful application for a stay or an anti-suit injunction as a remedy for breach of an arbitration or jurisdiction clause that the breach has caused the innocent party reasonably to incur legal costs, those costs should normally be recoverable on an indemnity basis.

The conduct of a party who deliberately ignores an arbitration or a jurisdiction clause so as to derive from its own breach of contract an unjustifiable procedural advantage is in substance acting in a manner which not only constitutes a breach of contract but which misuses the judicial facilities offered by the English courts or a foreign court. In the ordinary way it can therefore normally be characterised as so serious a departure from ‘the norm’ as to require judicial discouragement …”

Interested readers might also note that the recent Singapore High Court case of Quarella SpA v Scelta Marble Australia Pty Ltd, [2012] SGHC 166, similarly involved a failed attempt by Quarella to set aside an arbitration award (see our discussion here). Pertinently, the learned judge remarked that “besides examining the guidance of the Court of Appeal [in CRW and PT Asuransi], Quarella would not have had to venture too far to find literature that would have indicated that the prospects of it succeeding in the setting aside application on this ground were dim” (see paragraph [54]). Nonetheless, there was no particular costs order stated in the written judgment. We will update our readers if a costs order is issued for the Quarella case.

It therefore remains to be seen which approach the Singapore courts will take, that is whether they would prefer to adopt the approach of the Victorian courts, or the Hong Kong courts, or even some sort of intermediate approach.

About Shaun Lee

International Dispute Resolution and Arbitration lawyer. Fellow of the Chartered Institute of Arbitration. Panel of Arbitrators and Panelist for DNDR at the KLRCA.
This entry was posted in Arbitration, China, Singapore, UK and tagged , , , , , , , . Bookmark the permalink.

One Response to Indemnity Costs Orders for Unsuccessful Challenge to Arbitration Award

  1. Pingback: Setting Aside Arbitral Awards in Singapore: A Problem in the Standard of Review? | Singapore International Arbitration Blog

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