I had written before on the approach by other jurisdictions to grant indemnity costs if Court proceedings were initiated in breach of an arbitration agreement.

Yesterday afternoon, I successfully obtained an order for costs on an indemnity basis as I had succeeded in applying for a stay of the Court proceedings pending arbitral proceedings. This was for four stay applications we had filed and all four was allowed with costs on an indemnity basis. I am not aware of any reported Malaysian decision on this point.

The argument was that the suit had been filed in breach of the arbitration agreement. Therefore, the successful applicant should be entitled to be compensated dollar-for-dollar for the legal costs incurred in applying for a stay.

Such an approach by the Malaysian Courts would throw support for arbitration and ensure that parties largely follow their contractual bargain to arbitrate.

A summary of the legal authorities from England, Australia and Singapore is set out below.

England

In A v B (No 2) [2007] EWHC 54, 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.

The English High Court held that where a party has successfully obtained an anti-suit injunction or a stay of court proceedings as a remedy for a breach of an arbitration agreement, and provided that that party demonstrates that the breach caused it to reasonably incur legal costs, such costs should normally be recoverable on an indemnity basis. The alternative, if those costs were assessed on a standard basis, would mean that the successful party would be unable to recover part of the losses resulting from the breach. That unrecoverable portion of costs would either be lost or would have to be recovered through separate proceedings, a situation which the court considered would give rise to a fundamentally unjust situation:

(At pages 636-637)
“[9]    … (I)f a costs order in favour of a successful applicant for a stay or for an anti-suit injunction directed to giving effect to an arbitration agreement or an English jurisdiction clause must, save in exceptional cases be confined to costs on the standard basis, there would necessarily be a part of the successful applicant’s costs of the application which it had properly incurred but could not recover by such an order because of the restrictive process of assessment. This unindemnified portion of costs would then be loss which could only be recovered as damages for breach of the jurisdiction or arbitration agreement, if such a damages claim were permissible. Where the cause of action for relief enforcing the agreement by stay or injunction in the English court and the cause of action for damages for breach of that agreement are, as they normally will be, the same, the effect of those authorities such as Berry’s case, supra, referred to in the Union Discount case, supra, will be to prevent separate proceedings for damages by reference to unrecovered costs, notwithstanding the breach of the arbitration or jurisdiction agreement.

[10]    This would give rise to a fundamentally unjust situation. 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.”

Australia

The approach in A v B was recently adopted in the Supreme Court of Western Australia decision of Pipelines Services WA Pty Ltd v ATCO Gas Australia Pty Ltd [2014] WASC 10. The Court ordered Pipeline to pay costs on an indemnity basis to ATCO when ATCO had successfully applied for a stay of proceedings under section 8 of the Commercial Arbitration Act 2012.

In making the order, the Court confirmed the application of the principle in A v B that indemnity costs will generally be awarded where a party commences legal proceedings in breach of a contractual obligation to refer a dispute to arbitration; see pages 44-47 of the Austlii report.

Singapore

The English Court’s approach has also been adopted by the courts in Singapore. In the case of Tjong Very Sumito and Others v Antig Investments Pte Ltd [2009] 4 SLR (R) 732 (CA Sing), the Singapore Court of Appeal heard an appeal against an order granting a stay of proceedings arising out of a share purchase agreement containing an arbitration clause. The lower court had endorsed the English court’s decision in A v B and granted the stay with indemnity costs to be paid to the successful party. The Court of Appeal upheld that decision, found the appeal to be entirely unmeritorious and dismissed it, again with indemnity costs; see pages 741 and 768 of the report.