Court confirms that parties who unsuccessfully challenge arbitral awards will pay costs on an indemnity basis

Background

On 29 June 2011, the Court of First Instance (“CFI”) granted an application of Pacific China Holdings Ltd (“Pacific China”) Holdings Ltd to set aside an International Chamber of Commerce (ICC) arbitral award (“the Award”) made against it in favour of Grand Pacific Holdings Ltd (“Grand Pacific”) for US$55 million. The Award was set aside under Article 34 (2) of the UNCITRAL Model Law (which is incorporated in Hong Kong’s Arbitration Ordinance) on the grounds that Pacific China had been unable to present its case and/or that the arbitral procedure had not been in accordance with the parties’ agreement.

By a unanimous decision, on 9 May 2012, the Court of Appeal reversed the CFI’s decision and reinstated the Award. On 19 February 2013, the Court of Final Appeal (“CFA”) refused to grant Pacific China leave to appeal to the CFA, the Court of Appeal having previously also refused leave.

The decisions of the Court of Appeal and CFA have further cemented and enhanced Hong Kong’s reputation as an attractive arbitration seat. More details on the decisions of the Court of First Instance, Court of Appeal and CFA can be found in Issue 1 of 2013 of our Construction and Arbitration Newsletter.

Decision on costs

On 23 July 2012, the Court of Appeal decided on the costs of the unsuccessful challenge. In its ruling, the Court of Appeal followed the principle that, in the absence of special circumstances, a party that is unsuccessful in setting aside an arbitral award in Hong Kong shall pay the successful party’s costs on an indemnity basis. The Court of Appeal left open, however, in what circumstances to allow the Court to depart from the indemnity costs principle in such cases.

The indemnity basis is the most generous basis and allows the successful party to recover all of its legal costs incurred, unless they are of an unreasonable amount or have been unreasonably incurred, with any doubt in this regard being resolved in favour of the successful party.

The Court of Appeal adopted the rationale for awarding costs on the most generous basis previously laid down by Reyes J in A v R [2010] 3 HKC, as follows:-

• A party who obtains an award in its favour should be entitled to expect that the Court will enforce the award as a matter of course. Applications by a party to appeal against or set aside an award or for an order refusing enforcement should be exceptional events. Where a party unsuccessfully makes such application, it should in principle expect to have to pay costs on a higher basis. This is because a party seeking to enforce an award should not have had to contend with this type of challenge.
• Further, if the unsuccessful party is only made to pay costs on a conventional party-and-party basis, the successful party would in effect be subsidising the unsuccessful party’s unsuccessful attempt to frustrate enforcement of a valid award. The successful party would only be able to recover about two-thirds of its costs of the challenge and would be out of pocket as to one-third. This is despite the successful party already having successfully gone through an arbitration and obtained an award in its favour. The unsuccessful party, in contrast, would not be bearing the full consequences of its unsuccessful application.
• Such state of affairs would only encourage the bringing of unmeritorious challenges to an award. It would turn what should be an exceptional and high-risk strategy into something which was potentially “worth a go”.
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• Accordingly, in the absence of special circumstances, the court will from now on normally award costs against an unsuccessful party on an indemnity basis.

On 16 August 2013, the CFA refused to grant Pacific China leave to appeal to the CFA against the Court of Appeal’s decision on costs, thereby confirming that parties, who are unsuccessful in setting aside arbitral awards made in Hong Kong, will generally be ordered to pay costs on an indemnity basis.