Hong Kong Court of Appeal – Indemnity Costs against Unsuccessful Party Setting Aside or Resisting Enforcement of Award

The Hong Kong Court of Appeal in decision of Pacific China Holdings Ltd (in Liquidation) v Grand Pacific Holdings Ltd CACV 136/2011 has affirmed the principle that an unsuccessful party in applying to set aside an arbitral award, or in resisting the enforcement of the award, in the absence of special circumstances, will then be liable to pay costs on an indemnity basis.

The Court of Appeal affirmed this principle set out by Reyes J in the Hong Kong Court of First Instance case of A v R [2009] HKCFI 342. It is worth setting out the relevant passages by Reyes J which has the underlying principle that Courts should more readily respect arbitration proceedings and dissuade frivolous attempts to delay the enforcement of arbitral awards:

67. Parties should comply with arbitration awards. A person who obtains an award in his favour pursuant to an arbitration agreement should be entitled to expect that the Court will enforce the award as a matter of course.

68. Applications by a party to appeal against or set aside an award or for an Order refusing enforcement should be exceptional events. Where a party unsuccessfully makes such application, he should in principle expect to have to pay costs on a higher basis. This is because a party seeking to enforce an award should not have had to contend with such type of challenge.

69. Further, given the recent introduction of Civil Justice Reform (CJR), the Court ought not normally to be troubled by such type of application. A party unmeritoriously seeking to challenge an award would not be complying with its obligation to the Court under Order 1A Rule 3 to further the underlying objectives of CJR, in particular the duty to assist the Court in the just, cost-effective and efficient resolution of a dispute.

70. If the losing party is only made to pay costs on a conventional party-and-party basis, the winning party would in effect be subsidising the losing party’s abortive attempt to frustrate enforcement of a valid award. The winning party would only be able to recover about two-thirds of its costs of the challenge and would be out of pocket as to one-third. This is despite the winning party already having successfully gone through an arbitration and obtained an award in its favour. The losing party, in contrast, would not be bearing the full consequences of its abortive application.

71. Such a state of affairs would only encourage the bringing of unmeritorious challenges to an award. It would turn what should be an exceptional and high-risk strategy into something which was potentially “worth a go”. That cannot be conducive to CJR and its underlying objectives.

72. Accordingly, in the absence of special circumstances, when an award is unsuccessfully challenged, the Court will henceforth normally consider awarding costs against a losing party on an indemnity basis. The Respondent will here pay the Applicant’s costs on an indemnity basis.

This approach set out in A v R was however not followed in Australia, as seen in the Court of Appeal of the Supreme Court of Victoria in IMC Aviation Solutions Pty Ltd v Altain Khuder LLC [2011] VSCA 248.

It will be interesting to see which approach Malaysia takes when these competing arguments are raised before the Courts. I am not aware of any decision directly dealing with the issue of indemnity costs. The reported decisions appear to only award costs on the ordinary party-to-party basis, since parties may not have brought these issues to the attention to the Court.

I can see the strong public policy argument in support of the Hong Kong approach that the Courts should be pro-arbitration and do all that is necessary to minimise delay and umeritorous challenges to arbitral awards.

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One thought on “Hong Kong Court of Appeal – Indemnity Costs against Unsuccessful Party Setting Aside or Resisting Enforcement of Award

  1. Pingback: Opposing an Arbitral Award – Indemnity Costs | Of Counsel

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