Security for Costs and Payments into Court for Challenge of English Award

It seems almost ridiculous to think of winning an arbitration as only half the battle won. The reality, however, is that a victorious party may still need to enforce its award. A losing party may deliberately refuse on pay on the award and choose to delay matters by challenging the award on unmeritorious grounds. While the victorious party may eventually prevail in the court challenge, it might still find itself faced with a recalcitrant party. Worse still, despite prevailing, it might find itself out of pocket for its costs in the court challenge.

In the recent case of X v Y [2013] EWHC 1104 (Comm), the English High Court was faced with two applications by the respondent Y (the victorious claimant in the English arbitration). The first was for security for costs from the claimant X (the respondent in the arbitration) for its application to challenge the arbitration awards. The second was the respondent’s application for the claimant to pay into the court that amount which had been awarded against them by the Tribunal.

The arbitration and satellite litigation

As noted by the English High Court, the dispute “has engaged the attention not only of London arbitrators but also of the courts of India, Australia and England” (see paragraph [1]).

  • The London tribunal rendered 4 awards (see paragraph [3]). The first award confirmed the tribunal’s jurisdiction. The second found that X had been in breach by refusing to perform the contract. The third was for damages in favour of Y. The fourth confirmed the tribunal’s jurisdiction in respect of (shipping) obligations due in 2011 and found that X had been in breach for failure to perform them.
  • In India, X obtained an order from the Indian courts ordering that Y be restrained from taking any steps from enforcing the second and third awards in India (see paragraphs [4] and [5]).
  • In Australia, Y obtained a freezing order and an anti-suit injunction against X. X owns coal mines and subsidiary companies in Australia (see paragraph [6]).
  • In England, X had initially sought leave to appeal the second award but subsequently abandoned that application (see paragraph [4]).

The case before the English High Court was with respect to X’s challenge of the fourth award “pursuant to section 67 of the Arbitration Act 1996 (a jurisdictional challenge) and pursuant to section 68 of the Act (a challenge based upon an alleged serious irregularity)” (see paragraph [10]). By this point, time had expired for X to challenge the third award for damages in favour of Y.

Decision of the High Court

The English High Court rejected Y’s application that X pay the amount of the fourth award in court, but allowed its application that X pay security for (Y’s) costs.

Security for Costs

The English position is that generally there are no “formal fetters on the court’s discretion to order security for costs but that regard must be had to section 1(a) of the 1996 Act which provides that ‘The object of arbitration is to obtain the fair resolution of disputes by an impartial tribunal without unnecessary delay or expense.’” (see paragraph [12]). Accordingly, granting security for costs would be “rare…if the applicant has sufficient assets to meet any order as to costs and if those assets are available for satisfaction of any such order for costs” (see paragraph [13]).

The rationale put forward by the High Court was that in such a situation, an order for security for costs would be “an unnecessary expense” (see paragraph [13]).

The High Court ordered that X was to pay Y’s security for costs notwithstanding that it was “a substantial concern in India with considerable assets in India“. This was because the court considered that “there [was] a real risk that the assets of X [were] not readily available for the satisfaction of any orders for costs which may be made by the court against X” for the following reason (see paragraph [17] and [18]):

  • Through its conduct, “X [had] plainly set its mind against honouring any of the awards made against it, including the orders for costs made against it“.
  • X’s major asset was not liquid i.e. readily realisable. That asset in question was X’s shareholding in a subsidiary company.
  • Whilst X could probably be made to pay in the end, it probably could not be made to pay with any high degree of promptness“.
  • Finally, there had been no witness statement on behalf of X “expressing either a willingness to pay such costs as may be ordered against it or explaining how such a liability could readily be enforced by Y“.

Payment into Court

However, the High Court rejected Y’s application that X pay the amount of the fourth award into court as a pre-condition for X’s challenge of that fourth award.

Section 70(7) of the UK Arbitration Act 1996 provides that,

“The court may order that any money payable under the award shall be brought into court or otherwise secured pending the determination of the application or appeal, and may direct that the application or appeal be dismissed if the order is not complied with”.

Like with any application for security for costs, the court’s discretion is similarly unfettered (see paragraph [20]). Nonetheless, guidance for the exercise of that discretion was to be found in the case of A v B [2011] 1 Lloyd’s Reports 363 per Flaux J. The learned judge held that (see paragraph [21]),

“…there is a threshold requirement, namely, that the party making the section 70(7) application must demonstrate that the challenge to the jurisdiction is flimsy or otherwise lacking in substance; see paragraph 32 of the judgment. If that threshold requirement is satisfied then the court should not order security unless the applicant can demonstrate that the challenge to the award will prejudice its ability to enforce the award. This will often entail demonstrating some risk of dissipation of assets, although there may be other ways in which enforcement could be prejudiced; see paragraph 50 of the judgment.

In this respect, the High Court held that X’s challenge on jurisdiction was in fact “flimsy and lacking in substance“. This was because the tribunal had found that there had been an ad hoc submission to arbitrate disputes relating to the 2011 shipments (see paragraph [22]). Critically, the High Court held that X had no answer to the point that they had themselves raised the issue of the 2011 shipments in their statement of defence (see paragraph [24]).

Nevertheless, Y was unable to establish that X’s challenge to the (fourth) award would prejudice its ability to enforce the award or diminish X’s ability to honour the award (see paragraph [32]). On that basis, Y’s application for payment into court failed (see paragraph [35]).

The High Court considered that X’s challenge would have two potential effects, namely (a) a delay in enforcement of the award and (b) the ability of X to rely on the challenge to extend the Indian court injunction (see paragraph [33]).

First, the High Court accepted that payment in was not to be “used as a means of assisting a party to enforce an award which had been made in its favour” (see paragraph [32]).

Second, Y had focused its attention on enforcing the award(s) in Australia (where X’s substantial assets were located) and was not concerned with India (see paragraph [33]). Furthermore, the Indian court injunction against enforcement was restricted in geographical scope to India (see paragraph [34]).

Finally, the mere fact that X had consistently refused to honour the awards was “not a legitimate reason for ordering that it pay the amounts of the fourth award into court” (see paragraph [34]). In this respect, X’s assets were in Australia where Y was seeking to enforce the award(s). Y also had the benefit of the Australian freezing order which would prevent a dissipation of assets by X.

Conclusion

Interestingly, neither the Singapore International Arbitration Act (Cap. 143A), nor the UNCITRAL Model Law which it incorporates, provide that the Singapore courts may order a party challenging an arbitral award to furnish security for that challenge. Instead, the Singapore court has the power to order that a party seeking to enforce an award might have to furnish security if the award is the subject of a challenge in another jurisdiction (see section 31(1)(5) of the IAA and Article 36(2) of the Model Law).

Notwithstanding the challenges that parties face in seeking recognition and enforcement of arbitral awards, the international arbitration regime continues to be particularly attractive to parties from different nationalities and who may have concerns of perceived bias in litigating before one of the domestic courts.

To quote an extract from our previous post about enforcement in arbitration and how it compares favourably to litigation:

“Arbitration often provides for a convenient neutral alternative and is complemented by the New York Convention in allowing parties to enforce their awards virtually world wide. The alternative, which is litigation in the domestic courts of one of the parties, gives rise to even more severe cross-border enforcement issues. Parties seeking the enforcement of foreign court judgments face more hurdles because of lack of reciprocal arrangements or treaties between most foreign countries. For example, in Singapore there are only 11 countries (UK, Hong Kong, New Zealand, Sri Lanka, Malaysia, Windward Islands, Pakistan, Brunei Darussalam, Papua New Guinea, India (except the State of Jammu and Kashmir) and Australia) from which judgments of their superior courts may be registered in Singapore under the Reciprocal Enforcement of Commonwealth Judgments Act (Cap. 264) or the Reciprocal Enforcement of Foreign Judgment Act (Cap. 265). In contrast, the New York Convention provides that an award can be recognised and enforced in its 146 signatory states.”

 [Editors’ note: the New York Convention now has 149 state signatories]

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, Singapore, UK and tagged , , , , , , , . Bookmark the permalink.

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