CLAIMANT FAILS TO RECOVER THE COSTS OF ITS APPLICATION TO REMOVE AN ARBITRATOR, WHERE THE ARBITRATOR HAD RESIGNED BEFORE THE TRIAL IN THE ENGLISH HIGH COURT

In a recent decision (available on an anonymised basis here), the English High Court (the “Court”) considered a claimant (“C”)’s claim for its costs of an application under section 24 (“s24”) of the Arbitration Act 1996 (the “Arbitration Act”) for the removal of an arbitrator (“X”) from LCIA arbitration proceedings (the “LCIA Arbitration”). X had already resigned and C’s claim for costs remained the only issue to be determined by the Court. The decision is of interest for its focus on a rarely invoked provision of the Arbitration Act, and the unusual circumstances surrounding the claim for costs.

Background

X was appointed by the LCIA on an expedited basis in the LCIA Arbitration between C and D. X dismissed an application by C for interim measures, following which C filed a challenge against X with the LCIA Court on the ground that X had failed to treat the parties fairly and impartially in the decision. X refused to resign and gave reasons for doing so. This prompted a second challenge by C, claiming X’s reasons gave rise to justifiable doubts as to their independence and impartiality. C also claimed that X had made a false or misleading statement in their CV about their prior experience as an arbitrator.

Both challenges were rejected by the LCIA Court. C proceeded to apply to the Court under s24 for an order to remove X from the LCIA Arbitration, an order that X was not entitled to payment of their fees, and an order against D for the costs of the s24 application and of the LCIA Arbitration.

During the Court proceedings, C’s solicitors made a report to the Solicitors Regulation Authority (“SRA”) in respect of the matters arising in the s24 application, on the basis that SRA rule 3.9 (which came into force on 25 November 2019) required solicitors to report to the SRA “any facts or matters that you reasonably believe are capable of amounting to a serious breach of their regulatory arrangements … by any person … regulated by them … of which you are aware”.

A few days later, X offered to resign on the proviso that they would retain their fees to date. The offer was made without prejudice save as to costs and included a detailed explanation of why X considered the s24 application to be unfounded. C confirmed that it would not require repayment of X’s fees if X resigned, but noted that X might be ordered to pay or contribute to the costs of the application for removal. Following X’s resignation, C requested that the Court make an order that X pay the costs of the s24 application on the basis that “[X]’s conduct, both as Arbitrator which formed the grounds for the Application, and in robustly defending these proceedings until late in the day, warrants an order that [they] pay the costs”.

The applicable principles

In English court proceedings, the general rule is that the unsuccessful party will be ordered to pay the costs of the successful party, but the court may make a different order. In deciding what order (if any) to make about costs, the court must have regard to all the circumstances, including (a) the conduct of all the parties in relation to the litigation; (b) whether a party was only partly successful; and (c) any payment into court or admissible offer to settle.

Where there has been no trial, the judge may not be in a position to reach a decision on those matters. This will however depend on the circumstances of each case. Where a claimant has achieved what he sought in his claim, the court will not refuse the claimant his costs simply on the ground that such success was not obtained by way of a court order after a contested hearing.

The Court’s decision

C’s application for costs failed for the following reasons.

The Court held that, despite X’s resignation, C was not to be regarded as the ‘successful party’ for costs purposes as against either X or D. The Court found, on the evidence, that X had retired not because of the s24 application or its perceived merits, but because of C’s referral to the SRA – due to the practical implications of the SRA referral, what it indicated about C’s attitude towards X, and the risk of a perception of bias were X to continue acting as arbitrator in the LCIA Arbitration while the SRA referral was pending. The Court also found that D played no part in X’s resignation and thus could not on any view be regarded as having conceded the claim.

The question was therefore whether it was “tolerably clear” that C would have succeeded in its s24 application. As the Court noted, prior case law suggests that the removal of an arbitrator is an “extreme step” that is only likely to occur in “the rarest of cases”. Having considered the case law on bias and the evidence in this case, the Court found that, on the contrary, C was far more likely to have failed.

Finally, the Court considered the various attempts which had been made by the parties to settle the case, and found that C had rejected reasonable settlement offers from D and X (the “Defendants”) which would have enabled the matter to be resolved at far less cost.

The Court went on to consider whether C should be ordered to pay the Defendants’ costs of the application. The Defendants were represented on a pro bono basis, apart from junior counsel for X, which meant that any costs award in the Defendants’ favour over and above junior counsel’s fees would be paid to charities. C, though a philanthropic enterprise, did not appear to have been represented on a pro bono basis and would therefore in any event already have to bear its own legal costs. In the circumstances, the Court concluded that justice was best served in this case by making an order that C pay the costs of the Defendants’ representation which was not provided on a pro bono basis, but that there otherwise be no order as to costs.

Comment

Applications to the English courts under s24 to remove an arbitrator are rare. Of those applications, the removal of an arbitrator is only likely to occur in “the rarest of cases”. In this case, the parties had identified only two examples of successful s24 applications where a costs order had been made against the arbitrator, and as the Court pointed out, these were “exceptional” cases on their facts.

The English courts’ attitude is mirrored by that of many arbitral institutions. The LCIA’s online database of challenges (available here) also shows the limited prospect of a successful arbitrator challenge. Parties are accordingly reminded of the need to approach an arbitrator challenge with care (whether under the applicable arbitration rules or in the courts) and consider the strength of their potential challenge carefully.

For more information, please contact Chris Parker, Partner, Naomi Lisney, Senior Associate, or your usual Herbert Smith Freehills contact.