Hong Kong Court extends indemnity costs principle to arbitration agreement challenges

In Chimbusco International Petroleum (Singapore) Pte Ltd v Fully Best Trading Ltd (HCA 2416/2014), the Hong Kong Court of First Instance (CFI) has confirmed that a party who unsuccessfully challenges an arbitration agreement before the court should expect to pay costs on an indemnity basis, unless special circumstances can be shown.

Background

The plaintiff commenced court proceedings against the defendant, seeking payment of sums due under an agreement for its supply of fuel oil (Agreement). The Agreement contained an arbitration clause, which provided that disputes arising out of or in connection with the Agreement should be referred to arbitration at the Singapore International Arbitration Centre  in  accordance with the Singapore Bunker Claims Procedure (Arbitration Agreement).

After the plaintiff filed the Statement of Claim, the defendant applied for a stay of the action in favour of arbitration (Stay Application), pursuant to the Arbitration Agreement. Immediately before the hearing of the Stay Application, the plaintiff consented to the Stay Application.

Issues

The key issue was whether, in view of the plaintiff's consent to the Stay Application, the plaintiff should pay the defendant's costs on an indemnity basis, or whether, as the plaintiff claimed, costs should be in the cause of the arbitration. The CFI noted that, where a party unsuccessfully applies 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.

Accordingly, the CFI had to consider the following issues:

1. Did the general principle of ordering costs on an indemnity basis in the case of an unsuccessful challenge to an arbitral award apply equally to the present case involving an unsuccessful challenge to the Arbitration Agreement?
2. If yes, were there special circumstances in the present case that would justify a departure from the general principle?

Extension of the indemnity costs principle

The plaintiff argued that the principle of ordering costs on an indemnity basis did not apply in the present case, because there is a distinction between unsuccessful challenges to an arbitral award and unsuccessful challenges to an arbitration agreement. In the former, the parties have already had an opportunity to argue their cases in the arbitration. Accordingly, having succeeded before the tribunal, the winning party should not be taxed again by the losing party rearguing the case before the court. In contrast, in the latter case, the parties have not had a chance to argue before the tribunal in the arbitration.

The CFI rejected the plaintiff's argument. Mimmie Chan J found that the principle of awarding costs on an indemnity basis for unsuccessful attempts to challenge or resist enforcement of an arbitral award applies with equal force to unsuccessful attempts to resist recognition and enforcement of an arbitration agreement. She reviewed recent caselaw in which the principle is set out, including A v R [2009] 3 HKLRD 389, where Reyes J emphasised that parties who agree to arbitration should not have to face unmeritorious challenges to their awards, and that the courts "ought not normally to be troubled by such type of application". If a losing party pays costs on the conventional party-and-party basis only, it will be liable for only about two-thirds of the winning party's costs. Thus, the winning party is "effectively subsidising the losing party's abortive attempt to frustrate enforcement of a valid award".

Applying the same principles, the judge ruled that where a challenge to an arbitration agreement is unsuccessful, costs should be awarded on an indemnity basis, unless special circumstances can be shown. She held that:

• parties should expect that the court will recognise and enforce the arbitration agreement entered into between them, and if they take the risk of instituting court proceedings in breach of such an agreement, they should expect to pay costs on a higher scale if they fail to impeach the agreement; and
• parties are under obligations to further the underlying objectives of the Civil Justice Reform under Order 1A, rule 3 of the Rules of High Court; in particular, the duties to assist the court in the cost-effective and efficient resolution of a dispute, and to ensure the fair distribution of the resources of the court. Where a party uses court proceedings to make unmeritorious challenges to an arbitration agreement, it breaches its duties to the court.

Therefore, in this case, given that the defendant was successful in obtaining the stay of the action (albeit as a result of the plaintiff's consent), the CFI found that unless there were any special circumstances, the defendant should be entitled to its costs on an indemnity basis.

Were there special circumstances?

The plaintiff argued that the following constituted special circumstances, such that the CFI should depart from the general rule of ordering indemnity costs:

• The Arbitration Agreement was null and void because it adopted the rules of a non-existent organization; and
• The defendant was silent after its part payment of the sum claimed by the plaintiff.

The CFI rejected the plaintiff's arguments.

The CFI noted that where the parties have clearly expressed an intention to arbitrate, an arbitration agreement is not nullified even if they chose the rules of a non-existent organization. In the present case, given that the parties had manifestly expressed their intention to have their disputes submitted to arbitration in Singapore, such agreement was capable of being performed in Singapore. It was for the tribunal to decide on its own jurisdiction, and on the rules to be adopted. Chan J held that the fact that a challenge to an arbitration agreement or award is not unarguable, does not constitute a special circumstance.

The CFI further held that any silence or inactivity on the part of the defendant after its part payment of the sum claimed by the plaintiff, could not be unequivocal admission of its liability for payment of the balance, nor of its agreement to waive the Arbitration Agreement and to proceed with legal action instead. In the circumstances, there was no reason why the plaintiff should have commenced legal proceedings in Hong Kong, as opposed to arbitration in Singapore.

Accordingly, the CFI ordered the plaintiff to pay the costs of the defendant's Stay Application on an indemnity basis.

Comment

This decision is the latest in a series of clear messages from the Hong Kong court that it will not brook any unmeritorious interference with the arbitral process. The Hong Kong courts have consistently signaled their disapproval of such conduct, and indicated their willingness to sanction parties who engage in it.  As such, Chan J's decision is to be welcomed by users of arbitration.

For further information, please contact Simon Chapman, Partner, May Tai, Partner, Tiffany Chan, Associate, Briana Young, Professional Support Lawyer or your usual Herbert Smith Freehills contact.