Dire costs consequences of challenging an arbitral award – Gao Haiyan & Anor v Keeneye Holdings Ltd & Anor (2012)

Think twice before challenging an arbitral award. The Court of Appeal recently awarded indemnity costs to the Applicants against the Respondents for their unsuccessful attempt to challenge the award of the Xian Arbitration Commission. Indemnity costs is the highest scale for recovery of costs. It requires the losing party to pay the entire costs of the winning party, except those of an unreasonable amount or unreasonably incurred. Honourable Tang VP said that since the advent of Civil Justice Reform (“CJR”), costs have been awarded in connection with proceedings, arising out of or in connection with arbitral proceedings on an indemnity basis, for the reasons stated by Reyes J in A v. R, HCCT 54/2008, 30 April 2009, namely:

1. Parties should comply with arbitration awards.
2. 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, he should in principle expect to have to pay costs on a higher basis.
3. A party unmeritoriously seeking to challenge an award would not be complying with its obligation to the court to further the underlying objectives of CJR, in particular the duty to assist the Court in the just, cost effective and efficient resolution of a dispute.
4. If the losing party is only made to pay costs on the conventional party-and-party basis, the winning party would only recover about two-thirds of his costs of the challenge and would be out of pocket as to one third. This would only encourage the bringing of unmeritorious challenges to an award.
5. Accordingly, in the absence of special circumstances, when an award is unsuccessfully challenged, the court will from now on normally consider awarding costs against a losing party on an indemnity basis.

Indemnity costs are usually only awarded in cases where the application is totally without merit. However, following this decision, it appears that the test is different for applications to resist enforcement of arbitral awards. It is difficult to see how it can be said that the Respondents’ case was totally without merit when at least the trial judge at first instance found in favour of the Respondents’ application to set aside enforcement. This case highlights the inherent risks to a party resisting enforcement of arbitral awards.