Hong Kong Court of Appeal confirms principle of indemnity costs in unsuccessful set aside application

The Hong Kong Court of Appeal has awarded costs on an indemnity basis against a party that made an unsuccessful application to set aside an arbitral award.  This decision demonstrates, yet again, the respect of the Hong Kong courts for the finality of the arbitral process.

In its decision in Pacific China Holdings Ltd (in Liquidation) v Grand Pacific Holdings Ltd CACV 136/2011 on 9 May 2012, the Court of Appeal unanimously overturned a first instance decision to set aside an ICC arbitral award for alleged violations of Article 34(2)(a) of the UNCITRAL Model Law (click here for our report on the decision).  Pacific China subsequently applied to the Court of Appeal for leave to appeal to the Court of Final Appeal, but this application was rejected on 20 June 2012 on the basis that Pacific China was not entitled to appeal as of right under the Hong Kong Court of Final Appeal Ordinance (Cap 484) and that the Court's decision did not raise questions of great general or public importance (click here for a copy of the Court's reasons for judgment).

In its decision on costs (click here for a copy), the Court of Appeal also made clear that where a party has been unsuccessful in setting aside or resisting enforcement of an arbitral award in Hong Kong, in the absence of special circumstances, that party should pay costs on an indemnity basis.  The Court agreed with the approach of Reyes J 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 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.  Where a party unsuccessfully makes such an application, the Court stated that it is fair that it should expect to pay costs on a higher basis.  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 in the Court's view.

 In its submissions, Pacific China had referred to the Australian decision of IMC Aviation Solutions Pty Limited v Altain Khuder [2011] VSCA 248, in which the Victorian Court of Appeal declined to adopt the approach of Reyes J in A v R and found that there was nothing in the Victorian civil procedure statute or in the nature of enforcement proceedings for arbitral awards which, of itself, calls for 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 Hong Kong Court of Appeal carefully considered the reasons of the Victorian Court of Appeal, but remained of the view that in Hong Kong, the courts can and should order costs on the indemnity basis.

The strong indication that the Hong Kong courts will, in principle, award indemnity costs against a party that applies unsuccessfully to set aside, or resist enforcement of, an arbitral award is another example of Hong Kong judiciary's strong support for arbitration.  It is also important an important reminder to parties to be aware of the potential costs consequences of launching challenges to arbitral awards in Hong Kong.