The Hong Kong Court of Appeal recently awarded indemnity costs against
an applicant who attempted unsuccessfully to set aside an arbitral
award. In a decision that many will welcome, the Hong Kong court has
sent another strong message of support for the finality of the arbitral
process.
In Pacific China Holdings Ltd v Grand Pacific Holdings Ltd CACV
136/2011, the Hong Kong Court of First Instance set aside an ICC award
in favour of Grand Pacific, a Hong Kong-based investment company, on the
basis of breaches of Article 34(2)(a)(ii) and (iv) of the UNCITRAL
Model Law. The Court held that Pacific China had been “unable to present
its case”, and that the arbitral procedure was “not in accordance with
the agreement of the parties”.
In May 2012, the Hong Kong Court of Appeal unanimously overturned the
decision and reinstated the award, finding that the matters complained
of did not constitute grounds for setting the award aside under Article
34(2) of the UNCITRAL Model Law. The Court clarified that “only a
sufficiently serious error” undermining due process could be regarded as
a violation of Article 34(2)(a)(ii) (the principal ground on which
Pacific China had based its application). In order to establish a
breach, it must be shown that the tribunal’s conduct was of a “serious”
or even “egregious” nature. The Court also placed heavy emphasis on the
wide, discretionary case management powers of the arbitral tribunal.
Click here for a copy of the judgment.
In a separate decision ,
the Court of Appeal ordered Pacific China to pay Grand Pacific’s costs
from the court below and the Court of Appeal proceedings on the
indemnity basis.
The Court of Appeal adopted the approach of the Hong Kong Court of First Instance in A v R [2009] 3 HKLRD 389 and its own approach in Gao Haiyan & Anor v Keeneye Holdings Ltd & Anor (No 2)
[2012] 1 HKC 491, holding that, in proceedings arising out of or in
connection with arbitral proceedings (for example, an unsuccessful
application to challenge or resist enforcement of an arbitral award),
and in the absence of special circumstances, the Court will normally
consider it appropriate to order costs on an indemnity basis.
The Court cited Reyes J in A v R; where a party unsuccessfully makes such an application, he should in principle (emphasis
added) expect to pay costs on a higher basis, because a party seeking
to enforce an arbitral award should not have to contend with such a
challenge. If the losing party is made to pay costs on a conventional
party-to-party basis only, the winning party would in effect be
“subsidising the losing party’s abortive attempt to frustrate
enforcement of a valid award”. This would not be consistent with
promoting just, cost-effective and efficient resolution of a dispute.
In the Court’s view, the fact that Pacific China’s complaints against
the arbitral award were considered by the court below and other overseas
courts to be “reasonably arguable” was not a special circumstance.
The Hong Kong court’s approach was echoed in a recent U.S. decision. In Digitelcom, Ltd v Tele2 Sverige AB (No.12
Civ.3082), a New York court sanctioned a law firm, after finding that a
motion to vacate an ICDR award against its client caused “unnecessary
expense”. Normally, parties to New York litigation bear their own
costs. However, in this case, one of the parties applied for costs on
the basis that counsel on the other side had multiplied the proceedings
“unreasonably and vexatiously”. The judge imposed costs on the opposing
counsel and noted that, where parties agree to arbitration as an
efficient and lower-cost alternative to litigation, both the parties and
the system itself should respect the finality of the arbitration award.
Litigants must therefore be discouraged from defeating the purpose of
arbitration by bringing petitions based on mere dissatisfaction with the
tribunal’s conclusions.
While the Grand Pacific costs decision no doubt underscores the
“arbitration friendliness” of the Hong Kong courts, it is interesting to
compare it with the position in a number of other arbitration-friendly
jurisdictions, e.g. England & Wales and Australia.
In Grand Pacific, the Hong Kong Court of Appeal considered,
but ultimately departed from, a decision of the Court of Appeal of
Victoria (Australia). In IMC Aviation Solutions Pty Limited v Altain Khuder [2011] VSCA 248(the “IMC decision”) the Victorian Court of Appeal expressly declined to adopt the approach of Reyes J in A v R,
holding that there was nothing in the Victorian civil procedure statute
or in the nature of enforcement proceedings for arbitral awards which,
of itself, warranted costs being awarded against an unsuccessful party
on a basis different from that on which they would have been awarded in
other civil proceedings.
In Australia, costs are ordinarily awarded against the unsuccessful
party on a “party-and-party” basis, unless special circumstances can be
established by the successful party. The special circumstances usually
involve misconduct, for example where a party has maintained a cause of
action with no real prospect of success (Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397), or with wilful disregard for known facts or clearly established law (J-Corp Pty Ltd v Australia Builders Labourers Federation Union of Workers (WA) (No2) 1993 46 IR 301).
In England, costs are always in the court’s discretion, under Rule
44.3 of Civil Procedure Rules. Although the discretion is wide, case
law demonstrates that indemnity costs tend to be ordered only when there
is some culpability or abuse of process, or something “out of the
norm”, on the part of the paying party. When considering an application
for the award of costs on the indemnity basis, the court is concerned,
principally, with the losing (paying) party’s conduct of the case,
rather than the substantive merits of its position. Examples of conduct
which may give rise to indemnity costs include a claimant acting
unreasonably in trying to delay the trial of an action (Naskaris v ANS Plc [2002]EWHC
1782) or changing its case constantly throughout the proceedings and
producing wholly unacceptable volumes of documentation (ABCI v BFT [2002]
EWHC 567 Comm). To justify an indemnity costs order, the litigant’s
conduct must amount to “misconduct deserving moral condemnation”, or be
unreasonable to a high degree, and not just be wrong or misguided in
hindsight (McPhilemy v Times Newspapers No 2 [2001] EWCA Civ
993). An order for indemnity costs is not justified by the mere fact
that the paying party has been found to be wrong, either in fact or in
law, or both, or by the fact that, in hindsight, the result of the case
now being known, the position adopted by that party may be thought to
have been unreasonable (Healy-Upright v Bradley & Another [2007] EWHC 3161).
In the context of arbitration, the English courts will generally
award indemnity costs where proceedings are brought in breach of a
binding arbitration agreement: see A v AJ and others [2007]
EWHC 54 (Comm), in which the court confirmed that, as a general
principle the appropriate costs order in such circumstances will usually
be indemnity costs. In another case, the English court rejected a
party’s application to set aside an arbitration award on the ground that
no dispute existed because the party had admitted liability. The court
took the view that, if a party admits liability for a specific claim
but does not render payment, there is a sufficient dispute for the
matter to be referred to arbitration. Costs were awarded to the
respondent on an indemnity basis, on the grounds that the applicant had
acted in its own perceived commercial interest and without merit, and
should pay the commercial price of doing so (Exfin Shipping (India) Ltd. Mumbai v. Tolani Shipping Co. Ltd Mumbai, [2006] EWHC 1090 (Comm)).
However, there are still cases in which the English courts have
declined to award indemnity costs in an unsuccessful application to set
aside an arbitral award, despite the fact that the application was
unmeritorious. In Price Waterhouse SARL and PWE Conseil SARL v. PricewaterhouseCoopers International Limited [2010]
(Unreported), the court held that the circumstances were not
sufficiently “outside the norm”, nor demonstrated such a high degree of
unreasonableness, as to justify an award on the indemnity basis.
It will be interesting to see whether other courts follow the Hong Kong line of authority. Having been refused leave to appeal by the Hong Kong Court of Appeal, Pacific China is seeking leave from the Court of Final Appeal on the set aside application, and has indicated its intention to seek leave from the Court of Final Appeal on the indemnity costs issue.
In the meantime, the Hong Kong Court of Appeal’s decision is a further reminder to think very carefully indeed before applying to set aside, or resist enforcement of, an arbitral award in Hong Kong – or be prepared to pay the price of failure.
Source: KluwerArb
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