The Case for Indemnity Costs in Opposing Arbitral Awards

[Originally published in the Malaysian Institute of Arbitrators Newsletter 2013]

In upholding the contractual agreement for parties to arbitrate a dispute, a party who obtains an arbitral award in his favour should be entitled to expect that the Court will enforce the award as a matter of course. After the award has been issued however, the successful party will likely still face Court challenges by the losing party through an application filed to set aside the award or to oppose the enforcement of the award.

If such an application is unsuccessful however, there may be a case to argue that the successful party should then be allowed costs on the higher indemnity basis rather than just the standard basis.

This article will analyse how the different jurisdictions have dealt with this issue and how in Malaysia, there is a case for costs on an indemnity basis to be awarded in such unsuccessful challenges to an arbitral award.

Hong Kong’s Position in Support of Indemnity Costs

The Hong Kong Court of Appeal in Pacific China Holdings Ltd (in Liquidation) v Grand Pacific Holdings Ltd [2012] HKCA 332 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 be liable to pay costs on an indemnity basis.

The Court of Appeal affirmed the principle set out by Reyes J in the Hong Kong Court of First Instance case of A v R [2009] HKCFI 342 and its own approach in Gao Haiyan & Anor v Keeneye Holdings Ltd & Anor (No 2) [2012] 1 HKC 491 in holding that, given that the parties had agreed to arbitration, applications by a party to set aside an arbitral award or to resist enforcement should be exceptional events.

The reasoning is that 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.

Therefore, it now appears quite settled in Hong Kong that the onus is on the losing party who is unsuccessful in such a challenge to demonstrate the special circumstances why an indemnity costs order ought not be granted.

Australia and England

By contrast to the Hong Kong position however, the cases from Australia and England adopt the position that in an unsuccessful challenge to an arbitral award, costs should still only be awarded on the standard basis unless there are other circumstances to justify an indemnity costs order.

In Australia, the Court of Appeal of Victoria in IMC Aviation Solutions Pty Limited v Altain Khuder [2011] VSCA 248 considered the issue of whether indemnity costs should be awarded in an unsuccessful challenge to an arbitral award. The Judge at first instance had adopted the approach of Reyes J in A v R in awarding such indemnity costs. However, the Court of Appeal overturned this decision and held 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. The general position would be that costs will ordinarily be awarded against the unsuccessful party on the standard basis unless the successful party can establish special circumstances.

In England, the English courts may likely award indemnity costs where proceedings are brought in breach of a binding arbitration agreement. In the High Court decision of A v B (No 2) [2007] EWHC 54 (Comm) for example, court proceedings were stayed as the proceedings were brought in breach of an arbitration agreement. It was held that as the breach had caused the innocent party to incur legal costs, those costs should normally be recoverable on an indemnity basis.

Similar to the Australian position however, the English decisions have not appeared to adopt the Hong Kong approach in leaning towards awarding indemnity costs for unsuccessful challenges. The general position is that an order for indemnity costs will be made only where there is some conduct or some circumstances which takes the case out of the norm (see the English High Court decision of Fiona Trust & Holding Corporate and ors v Yuri Privalov and ors [2011] EWHC 664 (Comm) summarising the general principles justifying the award of indemnity costs).

The English High Court decision of Exfin Shipping (India) Ltd. Mumbai v. Tolani Shipping Co. Ltd Mumbai, [2006] EWHC 1090 (Comm) is an example where costs were awarded on an indemnity basis. The applicant was unsuccessful in applying to set aside an arbitral award and it was held that the applicant had acted in its own perceived commercial interest and without merit. That was sufficient to take the case “out of the norm” thus justifying the order for indemnity costs.

Malaysia

An award of costs on an indemnity basis is set out in Order 59 Rule 16(4) of the Rules of Court 2012 (“RC”) which essentially allows for all costs except in so far as they are of an unreasonable amount or have been unreasonably incurred.

The issue of whether costs on an indemnity basis should be allowed in unsuccessful challenges to an arbitral award does not appear to have been considered by the courts here. Thus far, the general principle in Malaysia on indemnity costs would also require something out of the norm in order to depart from costs on the standard basis. The Federal Court in Takako Sakao (f) v Ng Pek Yuen (f) & Anor (No 2) [2010] 2 MLJ 181 set out some of the guideless for an award of indemnity costs and emphasised that the discretion to award such costs is unfettered.

Order 59 Rule 8 of the RC does provide some guidance on the special matters to be taken into account in the exercise of the Court’s discretion in the award of costs, one of which is to consider the “conduct of all parties, including before and during the proceedings.” The act of challenging an arbitral award can be seen as an exceptional event (see this general sentiment expressed in the Federal Court decision of Intelek Timur Sdn Bhd v Future Heritage [2004] 1 MLJ 401 and the Court of Appeal in AJWA For Food Industries Co (MIGOP), Egypt v Pacific Inter-Link Sdn Bhd and another appeal [2013] 2 CLJ 395). Therefore, similar to the Hong Kong position, the losing party should bear the full consequences of its unsuccessful attempt at challenging the award by being penalised with indemnity costs.

It remains to be seen which direction we will move towards and whether we will adopt the more punitive approach of awarding indemnity costs for unsuccessful challenges to an award. This may then enhance Malaysia’s position as an arbitration-friendly jurisdiction, with the courts upholding awards and discouraging frivolous challenges.

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