Indemnity costs for unsuccessful challenge to arbitration agreement

The Hong Kong High Court has clarified in a decision by Madam Justice Mimmie Chan in Chimbusco International Petroleum (Singapore) Limited v Fully Best Trading Limited [2015] HKCFI 2196 that absent special circumstances, costs to be borne in an unsuccessful challenge to an arbitration agreement should be ordered on an indemnity basis.

Background

Chimbusco commenced proceedings in Hong Kong against our client Fully Best in November 2014, seeking payment under a fuel supply agreement. Fully Best applied for a stay of the action to arbitration pursuant to an arbitration agreement. The hearing of the stay application was adjourned to 30 November 2015.  On 19 November 2015 Chimbusco confirmed it would consent to Fully Best’s stay application. The remaining issue related to whether Chimbusco should pay Fully Best’s costs on an indemnity basis or whether costs should be in the cause of the arbitration.

Precedent

Since A v R (Arbitration: Enforcement) [2009] 3 HKLRD 389, where a party unsuccessfully tries to appeal against, set aside or refuse enforcement of an arbitral award it has been the practice in Hong Kong to order costs on an indemnity basis unless special circumstances can be shown.

Submissions

Chimbusco sought to distinguish indemnity costs being awarded in cases of challenges against an arbitral award, on the basis that in such cases, the parties have already gone through arbitration and have had the opportunity to argue their case. The winning party should not be burdened again by the losing party rearguing its case. Fully Best argued the position was different where no arbitration had yet taken place, and no award had been rendered.

Holding

Chan J saw no reason to differentiate between unsuccessful attempts to resist enforcement of arbitral awards and unsuccessful attempts to resist enforcement and recognition of the arbitration agreement itself stating:

“Parties to an arbitration agreement should expect that the Court will recognize and enforce the arbitration agreement, and if they take the risk of instituting court proceedings in breach of such agreement, they should expect to pay costs on a higher scale if they fail in their attempt to impeach the agreement.”

None of the matters raised by Chimbusco (as to the merits of the existence or otherwise of a valid arbitration agreement or as to the conduct of the parties) constituted a special circumstance to justify the Court departing from the general rule that the costs to be borne in an unsuccessful challenge to an arbitration agreement should be ordered on an indemnity basis.

Chan J also held, following PCCW Global Ltd v Interactive Communications Service Ltd [2007] 1 HKLRD 309, that where it is claimed that there is no valid arbitration agreement, unless the matter is clear the Court should not attempt to resolve the issue and it should be stayed to arbitration. The Court should not usurp the function and role of the tribunal, which may rule on its own jurisdiction and procedure, including the rules to apply to the arbitration. There being no provision similar to O. 73 r. 6(2) of the English rules to allow the Court to determine the question as to the conclusion of the arbitration agreement, it should be an exceptional case when a party seeks recourse from the court instead of the arbitral tribunal where there is an arbitration agreement between the parties.

Takeaway

Parties should exercise great care before resisting applications to stay proceedings to arbitration unless it is clear that there is no valid arbitration agreement in place. In cases of doubt, determination of the validity of arbitration agreements is ordinarily best left to the arbitral tribunal.

This alert is for information only and is not legal advice.