Indemnity Costs in Unsuccessful Challenges to Arbitral Awards
As a general rule, costs on an indemnity basis should be exceptional, and ought to be exceptionally justified. In BTN v BTP  SGHC 38, the Singapore High Court considered the desirability of a default rule awarding costs on an indemnity basis in unsuccessful challenges to arbitral awards as a matter of course, but ultimately decided against such a default rule. This article explores the reasons for the Singapore High Court’s refusal to do so.
- The usual order for costs in court litigation is that costs are awarded and taxed on a standard basis. Therefore, an order of costs on an indemnity basis is exceptional, and has to be exceptionally justified.1CCM Industrial Pte Ltd v Uniquetech Pte Ltd (2009) 2 SLR(R) 20 at (32).
- In Airtrust (Hong Kong) Ltd v PH Hydraulics & Engineering Pte Ltd (Airtrust),2(2016) 5 SLR 103. Justice Chan Seng Onn identified the following situations justifying an award of indemnity costs:
- Where the action is brought in bad faith, as a means of oppression or for other improper purposes;
- Where the action is speculative, hypothetical or clearly without basis;
- Where a party’s conduct in the course of proceedings is dishonest, abusive or improper; and
- Where the action amounts to wasteful or duplicative litigation or is otherwise an abuse of process.
- The unifying theme of these situations which justify an award of indemnity costs is that a party’s conduct has been “so unreasonable as to justify an award of indemnity costs”. Such conduct must “reflect a high degree of unreasonableness, and cannot merely be wrong or misguided in hindsight” (emphasis added).3Airtrust at (50).
- But what of an unsuccessful application to set aside an arbitral award, or an unsuccessful attempt to resist enforcement of an arbitral award? What should the position on costs be?
- In Hong Kong, the position on costs – where there has been an unsuccessful challenge to an arbitral award – is that costs on an indemnity basis ought to be awarded as a default position. That default position finds expression in the decision of Justice Anselmo Reyes in A v R (Arbitration: Enforcement) (A v R).4(2010) 3 HKC 67.
- In A v R, the respondent resisted the enforcement of an arbitral award, alleging that enforcement would be contrary to public policy. Reyes J dismissed the application, and awarded indemnity costs to the successful award creditor. In doing so, he took into account the following considerations:
- A party seeking to enforce an award should not have to contend with a setting aside and/or refusal of enforcement application; 5A v R at (68).
- The award debtor’s attempts to set aside or resist enforcement of the arbitral award would not be complying with its obligation to the court to assist the Court in the just, cost-effective and resolution of a dispute pursuant to the Civil Justice Reform in Hong Kong;6A v R at (69). and
- A party who successfully resists the setting aside and/or refusal of enforcement application would be “subsidising the losing party’s abortive attempt to frustrate enforcement of a valid award”, which would encourage the bringing of unmeritorious challenges to the arbitral award. 7A v R at (70) and (71).
- A v R has been applied in subsequent Hong Kong cases, such as in the Hong Kong Court of Appeal decision of Gao Haiyan v Keeneye Holdings Ltd (No 2),8(2012) 1 HKC 491 which hailed this default position on costs as a “salutary practice”.9Gao Haiyan v Keeneye Holdings Ltd (No 2) (2012) 1 HKC 491 at (13).
The Decision in BTN v BTP
- In the recent Singapore High Court decision of BTN v BTP10(2021) SGHC 38. (BTN (Costs)), the issue of indemnity costs on an unsuccessful challenge to an arbitral award arose for consideration before Judge of the Appellate Division Belinda Ang.
- The defendants successfully resisted the plaintiffs’ application to set aside the arbitral award, and costs were awarded in favour of the defendants.11BTN v BTP (2020) 5 SLR 1250 at (121). On appeal, the defendants sought an order of costs on an indemnity basis, but the Court of Appeal declined to do so.12BTN (Costs) at (3). The defendants then applied to the High Court to fix the quantum of costs, and attempted again to seek indemnity costs.13BTN (Costs) at (3). Ang JAD held that it was impermissible for the defendants to do so, having failed to persuade the Court of Appeal previously.14BTN (Costs) at (3) and (11).
- Nonetheless, Ang JAD went on to explain why costs had been awarded on a standard basis rather than on an indemnity basis, and in doing so, why she had declined to follow the position in Hong Kong (as set out in A v R).
- First, the “usual course” in Singapore is to award party and party costs on a standard basis, with costs on an indemnity basis dependent on there being “exceptional circumstances” justifying a departure from the norm.15BTN (Costs) at (8). The Hong Kong position “starts from the opposite premise and decidedly reverses the burden of proof for indemnity costs in applications to set aside an arbitral award”.16BTN (Costs) at (8).
- Second, in Ang JAD’s view, the Hong Kong approach “contradicts the costs principles” set out in Order 59 of the Rules of Court.17BTN (Costs) at (9). Whilst recognising that the same considerations of ensuring a “cost-effective and efficient resolution of a dispute” apply both in Hong Kong and Singapore, Ang JAD took the position that these considerations are not “absolute trumps” in the case of Singapore, since there are other factors in Order 59 rule 5 of the Rules of Court that must be considered as well.18BTN (Costs) at (9).
- In the present case, there were no “exceptional circumstances” warranting an award of indemnity costs.19BTN (Costs) at (11).
- The decision in BTN (Costs) confirms that there should be no difference in the position on an award of indemnity costs in general court litigation and in an unsuccessful challenge to an arbitral award.
- Although the cost-effective and efficient resolution of a dispute20A v R at (69). is a laudable objective worth pursuing in and of itself, this policy objective is already achieved by adverse costs orders (on a standard basis), and the imposition of costs on an indemnity basis in egregious cases.
- Apart from the examples of unreasonable conduct identified in Airtrust and BTN (Costs), other instances where an award of indemnity costs may be justified may include attempts to initiate backdoor appeals against an arbitral award,21E.g. in BLB v BLC (2014) SGCA 40 at (4). or initiating setting aside applications which had a dim prospect of success to begin with.22E.g. in Quarella SpA v Scelta Marble Australia Pty Ltd (2012) SGHC 166.
- Thus, there is already a well-calibrated approach to costs which sufficiently incentivises parties to work towards a cost-effective and efficient resolution of the dispute, and dis-incentivises parties from engaging in unreasonable conduct, even without a default rule on indemnity costs.
- Further, there are other countervailing policy objectives as well, such that the “cost-effective and efficient resolution of a dispute” should not be considered to be “absolute trumps” (to borrow Ang JAD’s phraseology in BTN (Costs)). One such countervailing policy consideration is the need to balance the interests of access to justice and the interests of the winning party – as a corollary of which, successful parties in a litigation generally will not be able to recover the entirety of their solicitor-and-client costs. As Justice Vinodh Coomaraswamy explained in Then Khek Koon v Arjun Permanand Samtani:23(2014) 1 SLR 245 at (174).
“These unrecovered costs [arising from the difference in party-and-party costs and solicitor-and-client costs] therefore exist as a norm, rather than as an exception, to hold the balance between the interests of: (a) litigants who are able and willing ex ante to take on the worst-case risk of having to pay multiple sets of costs and who go on to win; (b) litigants who take on that risk and lose; and (c) potential litigants who might be deterred entirely from litigating by the prospect of cost-multiplication.”
- This same policy rationale should apply with equal force to challenges to arbitral awards. There is no compelling reason why failed challenges to arbitral awards should have a different rule on costs for the successful party, as compared to other court proceedings.
- Indeed, as Ang JAD observed in BTN (Costs), having a default position where indemnity costs are awarded upon an unsuccessful challenge to an arbitral award reverses the burden of proof24BTN (Costs) at (8). – by requiring the unsuccessful party to show special or exceptional circumstances which would warrant a dis-application of the default position on indemnity costs.
- Reyes J observed in A v R that a party seeking to enforce an award should not have to contend with a challenge to the arbitral award,25A v R at (69). seemingly on the basis that “[a] person who obtains an award in his favour pursuant to an arbitration agreement should be entitled to expect that the Court will enforce the award as a matter of course”.26A v R at (68).
- Reyes J’s reasoning is reminiscent of the position taken by the Singapore and English courts where a breach of an arbitration agreement is concerned.
- In Tjong Very Sumito v Antig Investments Pte Ltd27(2009) 1 SLR(R) 861 (High Court); (2009) 4 SLR(R) 732 (Court of Appeal). (“Tjong Very Sumito”), the Court was faced with an application for a stay of court proceedings in favour of arbitration, pursuant to section 6 of the International Arbitration Act. The stay was granted both at first instance and on appeal, and both Justice Choo Han Teck (at first instance) and the Court of Appeal agreed with the position taken in A v B (No 2)28(2007) 1 Lloyd’s Rep 358.:
“[T]he procedural consequence of conduct by a party to an arbitration or jurisdiction agreement which amounts to a breach of it and causes the opposite party reasonably to incur legal costs ought to be that the innocent party recovers by a costs order and/or by an award of damages the whole, and not merely part, of its reasonable legal costs. …
In my judgment, provided that it can be established by a successful application for a stay or an anti-suit injunction as a remedy for breach of an arbitration or jurisdiction clause that the breach has caused the innocent party reasonably to incur legal costs, those costs should normally be recoverable on an indemnity basis.
The conduct of a party who deliberately ignores an arbitration or a jurisdiction clause so as to derive from its own breach of contract an unjustifiable procedural advantage is in substance acting in a manner which not only constitutes a breach of contract but which misuses the judicial facilities offered by the English courts or a foreign court. In the ordinary way it can therefore normally be characterised as so serious a departure from ‘the norm’ as to require judicial discouragement”
- But the point of distinction between a breach of an arbitration agreement and an unsuccessful challenge to an arbitral award is that the former involves a breach of an agreement, whereas the latter is not necessarily inconsistent with, nor does it necessarily amount to a breach of, the arbitration agreement or the contract.
- As a matter of principle, parties must be taken to have agreed to the implications of their choice of arbitration as the mode of dispute resolution – including a party’s right to challenge an arbitral award, i.e. by applying to set aside an arbitral award, or to resist enforcement of the arbitral award.
- In light of the avenues of challenge available to the award debtor, the award debtor’s mere reliance on its rights under Singapore law cannot be said to be a “breach of contract” or a “misuse of judicial facilities” (to adopt the phraseology of A v B (No 2)) without more.
- To the contrary, a default award of indemnity costs would effectively penalise the unsuccessful award debtor, who would have relied on its legal rights, and its legitimate expectations in selecting the seat of the arbitration, to bring the setting aside application or resist enforcement of the arbitral award.
- Further, it implies that a challenge to an arbitral award is, in and of itself, inherently unmeritorious deserving of penalisation. This is undesirable, and may lead to an unintended chilling effect on any challenges to be brought at either stage. As Ang JAD observed in BTN (Costs), “an application that turns out to be unmeritorious is not necessarily an unarguable case that hints of bad faith or one that reflects no more than an attempt to delay or impede payment”.29BTN (Costs) at (16). Rather, the real question to be asked is whether the award debtor’s conduct was “so unreasonable”, or whether the award debtor’s conduct was merely “wrong or misguided in hindsight”.30Airtrust at (50).
- The decision in A v R is also at odds with other arbitration-friendly jurisdictions in penalising unsuccessful challenges to an arbitral award.
- In IMC Aviation Solutions Pty v Altain Khuder LLC,31(2011) VSCA 248. the Victoria Court of Appeal disapproved of the trial judge’s endorsement of the costs approach in A v R, stating: 32IMC Aviation Solutions Pty v Altain Khuder LLC at (335) and (336).
“[W]e can find nothing in the [Victorian Civil Procedure Act] or in the nature of the proceedings that are available under the Act which of itself warrants costs being awarded against an unsuccessful award debtor on a basis different from that on which they would be awarded against unsuccessful parties to other civil proceedings. …
In proceedings under the Act, as in other civil proceedings, costs will ordinarily be awarded against the unsuccessful party on a party and party basis unless the successful party can establish special circumstances. … Special circumstances, if they exist, are found in the facts of the case at hand, and the exercise of the judicial discretion is not otherwise conditioned on whether those facts are comprehended by a category of case or cases in which a special order has been made. The fact that an award debtor fails to establish a ground for resisting enforcement of a foreign arbitral award cannot, of itself, constitute special circumstances. Nor can a finding that the award debtor’s case was ‘unmeritorious’ if all that is meant by that expression is that the award debtor failed to persuade the Court to accept his or her evidence and submissions.”
- In similar terms is the decision of Colin Joss & Co Pty Ltd v Cube Furniture Pty Ltd.33(2015) NSWSC 829. There, Justice Hammerschlag of the New South Wales Supreme Court declined to follow the approach in A v R, stating:34Colin Joss & Co Pty Ltd v Cube Furniture Pty Ltd at (6) to (12).
“A v R was not followed by the Victorian Court of Appeal in IMC Aviation Solutions Pty Ltd v Altain Khuder LLC (2011) 38 VR 303. I also do not propose to follow it. It too does not represent the law in this State. Indemnity costs is and remains subject to the discretion, at large, of the Court. No presumption as to their award is required or warranted.”
- He specifically highlighted a challenge to an award on the public policy exception as being a narrow exception requiring the party seeking to invoke it to bear the “heavy burden of demonstrating real unfairness or real practical injustice”, 35Colin Joss & Co Pty Ltd v Cube Furniture Pty Ltd at (7). and therefore, a party who seeks to rely on it runs the risk that a failed challenge may be regarded as one which should not have been brought and thus justifying an award of indemnity costs: 36Colin Joss & Co Pty Ltd v Cube Furniture Pty Ltd at (10) to (12).
“Indemnity costs are warranted where a party maintains proceedings that it should know have no real prospects of success. When considering whether a party is in that position, it is necessary to have regard to what that party had to establish to win.
The high threshold that the public policy exception demands brings with it the enhanced risk of an indemnity costs award because a failed challenge will be more easily identified as one which should not have been brought because it was throughout destined to fail. This enhanced risk is sufficient disincentive for the making of challenges lacking true substance, without the necessity for a presumption.
In my view it ought to have been obvious to Joss that its challenge would not meet the threshold required and that it had no realistic prospect of success. None of its complaints came close to reaching that threshold. …”
- In the United Kingdom, the prevailing practice is for costs to be awarded on an indemnity basis where there is a significant level of unreasonable conduct. In Shackleton and Associates Limited v Ali Marzook Ali bin Kamil al Shamsi,37(2017) EWHC 304 (Comm). Mr Justice Teare was faced with an application to resist enforcement of an arbitral award. The defendants had previously unsuccessfully applied to set aside the arbitral award before the Paris Cour de Cassation, and then attempted to resist enforcement of the arbitral award in the English courts.
- The defendants were ultimately unsuccessful in the English courts as well. Teare J awarded costs on an indemnity basis, because the defendants “lacked any realistic defence to the enforcement of the [arbitral] award”, and were “simply doing all they could to avoid paying [the sums owed under the arbitral award]”. Crucially, Teare J stated (at ):
“I am therefore persuaded that the Defendants had no genuine defence to the claim for enforcement of the award and were simply doing all they could to avoid paying it. That takes the case out of the norm and is a very significant level of unreasonable conduct which undoubtedly justifies an order for indemnity costs. I acknowledge that this means that the requirement that the costs be proportionate to the matters in issue is removed but the recoverable costs must still be reasonably incurred.”
- The decision in BTN (Costs), in requiring “some conduct that takes the case out of the norm” before indemnity costs should be awarded,38BTN (Costs) at (15). is thus consistent with the costs approach to failed challenges to arbitral awards in other jurisdictions.
- The position in Hong Kong, as exemplified by A v R, may be considered to be something of an outlier, driven by different policy considerations and the emphasis given to the just, cost-effective and resolution of a dispute.
- BTN (Costs) confirms that costs ought to be awarded on a standard basis, consistent with the current practice for court litigation, and in line with other arbitration-friendly jurisdictions, such as Australia and the United Kingdom.
- The consistent line taken in these jurisdictions, and in Singapore, is that a failed challenge to an arbitral award does not necessarily amount to unreasonable conduct or special circumstances which would justify an award of indemnity costs. It recognises that an award debtor may legitimately seek to challenge an arbitral award, without such a course of action being a “misuse of judicial facilities” or being regarded as being “unreasonable”.
- The Court retains the discretion to award costs on an indemnity basis when the circumstances justify such an order. That provides a sufficient disincentive to award debtors from engaging in unreasonable conduct when challenging arbitral awards, such as by adopting a “kitchen sink” approach and invoking arguments which lack true substance or have no real prospect of success.
- These principles strike an appropriate balance between recognising that there may have been procedural injustice in the arbitral process and thus allowing award debtors to challenge the arbitral award because of that, and deterring hopeless challenges to the arbitral award.
All views expressed in this article are those of the author and do not represent the views of his employer.
|↑1||CCM Industrial Pte Ltd v Uniquetech Pte Ltd (2009) 2 SLR(R) 20 at (32).|
|↑2||(2016) 5 SLR 103.|
|↑3||Airtrust at (50).|
|↑4||(2010) 3 HKC 67.|
|↑5||A v R at (68).|
|↑6||A v R at (69).|
|↑7||A v R at (70) and (71).|
|↑8||(2012) 1 HKC 491|
|↑9||Gao Haiyan v Keeneye Holdings Ltd (No 2) (2012) 1 HKC 491 at (13).|
|↑10||(2021) SGHC 38.|
|↑11||BTN v BTP (2020) 5 SLR 1250 at (121).|
|↑12||BTN (Costs) at (3).|
|↑13||BTN (Costs) at (3).|
|↑14||BTN (Costs) at (3) and (11).|
|↑15||BTN (Costs) at (8).|
|↑16||BTN (Costs) at (8).|
|↑17||BTN (Costs) at (9).|
|↑18||BTN (Costs) at (9).|
|↑19||BTN (Costs) at (11).|
|↑20||A v R at (69).|
|↑21||E.g. in BLB v BLC (2014) SGCA 40 at (4).|
|↑22||E.g. in Quarella SpA v Scelta Marble Australia Pty Ltd (2012) SGHC 166.|
|↑23||(2014) 1 SLR 245 at (174).|
|↑24||BTN (Costs) at (8).|
|↑25||A v R at (69).|
|↑26||A v R at (68).|
|↑27||(2009) 1 SLR(R) 861 (High Court); (2009) 4 SLR(R) 732 (Court of Appeal).|
|↑28||(2007) 1 Lloyd’s Rep 358.|
|↑29||BTN (Costs) at (16).|
|↑30||Airtrust at (50).|
|↑31||(2011) VSCA 248.|
|↑32||IMC Aviation Solutions Pty v Altain Khuder LLC at (335) and (336).|
|↑33||(2015) NSWSC 829.|
|↑34||Colin Joss & Co Pty Ltd v Cube Furniture Pty Ltd at (6) to (12).|
|↑35||Colin Joss & Co Pty Ltd v Cube Furniture Pty Ltd at (7).|
|↑36||Colin Joss & Co Pty Ltd v Cube Furniture Pty Ltd at (10) to (12).|
|↑37||(2017) EWHC 304 (Comm).|
|↑38||BTN (Costs) at (15).|