An end to "speculative" challenges to arbitral awards? The English courts raise the sanction of indemnity costs for unmeritorious s68 applications

Over the past few years, we have seen a substantial rise in the number of applications to the English court challenging arbitral awards on grounds of "serious irregularity". Such applications are made under s68 of the Arbitration Act 1996 and require the applicant to show that a serious irregularity has occurred which has caused or will cause substantial injustice to the applicant. While the bar is set high, it has not stopped parties making backdoor appeals dressed up as.68 challenges or mounting "speculative" applications to the court under s68 for tactical reasons (for example, delaying enforcement).

This sort of application may now be given very short shrift in the English courts. The 2013 Commercial Court Guide came into effect yesterday and includes an expanded provision, O8.8, which aims to reduce the number of such unmeritorious challenges by imposing cost consequences on the party that brings them.

O8.8 retains the right for the English court to dismiss an application without a hearing where it has no real prospect of success. However, new elements have been added.

• A Respondent now has the right to apply to the court to hear a s68 application on paper.
• Where the court makes an order dismissing the application without a hearing the applicant will have the right to apply to the court to set aside the order and to seek directions for the hearing of the application.
• However, if such application is made and dismissed after a hearing the court may consider whether it is appropriate to award costs on an indemnity basis.

Respondents previously had limited scope to make tactical responses to speculative s68 applications. The new language in O8.8 offers a new opportunity to respondents to seek resolution on paper, leaving the applicant to decide whether to risk the courts' disapproval and hefty cost censure by pushing ahead to a hearing in person. While the language of O8.8 is gently phrased, merely inviting the court to "consider whether it is appropriate" to award indemnity costs, it is unlikely that such amendments would be made to the Commercial Court Guide itself unless they reflected the Court’s intention to make use of such provisions. In short, applicants who bring tactical s68 applications to a full court hearing do so at their own risk and in the full knowledge that they risk having indemnity costs imposed upon them.

The English courts are not alone in seeking to uphold the finality of arbitral awards and censuring parties making unmeritorious applications. Other courts around the world are also grappling with an increasing number of quasi-appeals of arbitral awards. In the recent decision in in Pacific China Holdings Ltd (in Liquidation) v Grand Pacific Holdings Ltd (see our previous blog post here) the Hong Kong Court of Appeal held 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. This takes the application of indemnity costs further than the Commercial Court Guide currently envisages, applying indemnity costs to parties resisting enforcement. In America, the 7th Circuit Court of Appeals has also applied similar reasoning, stating that frivolous “challenges to commercial arbitral awards bear a high risk of sanctions" in the way of indemnity cost awards (Johnson Controls, Inc. v. Edman Controls, Inc. (Docket Nos. 12-2308 & 12-2623, 7th Cir., March 18, 2013)).

As more and more parties choose arbitration as their preferred method of dispute resolution, challenges to arbitral awards will no doubt also rise. The English, Hong Kong and US Courts have chosen to support arbitration and reinforce the finality of arbitral awards by censuring those who seek to make "frivolous" or unmeritorious challenges. We will have to wait and see whether this approach is adopted more widely across the globe and what impact cost sanctions have on parties' willingness to make tactical challenges to arbitral awards in future.