Once again, the Hong Kong courts have made this place a more hostile environment for arbitration guerrillas.  Punishment for arbitration guerrillas was swiftly laid down in another pro-arbitration decision by Mimmie Chan J (the Judge in charge of the Construction and Arbitration List of the High Court) in Chimbuso International Petroleum (Singapore) Pte Ltd v Fully Best Trading Limited (“Chimbuso“).

In Chimbuso, the plaintiff commenced proceedings against the defendant in the Hong Kong Court of First Instance in November 2014, seeking repayment of sums overdue under a fuel oil supply agreement.  The defendant applied to stay the court proceedings because there was an agreement referring all disputes to arbitration in Singapore by the SIAC under the Singapore Bunker Claims Procedure.  The plaintiff initially objected to the stay on the basis that the arbitration agreement was null and void, inoperative and/or incapable of being performed because it lacked sufficient certainty to constitute a legally binding agreement.  In a surprising turn of events, on November 2015, the plaintiff conceded to the defendant’s application for stay.

The remaining question for the Court was whether the plaintiff ought to bear the defendant’s costs arising from the plaintiff’s concession and if so, whether these costs should be assessed on an indemnity basis, which is much harsher than the usual party and party basis.

Mimmie Chan J observed that in Hong Kong, an unsuccessful applicant who challenged an arbitral award either by appeal, an application to set it aside or to resist enforcement of an arbitral award was already obliged to pay costs on an indemnity basis, even though the grounds of challenge were arguable.  This was because:

  1. a party who obtains an arbitral award is entitled to expect that the court will enforce it;
  2. an application to challenge an arbitral award is an exceptional and high risk strategy and an unsuccessful challenger should expect to pay costs assessed on a higher basis;
  3. if costs were assessed on the usual party and party basis, the winning party would usually be out of pocket for one-third of its costs, which means that the losing party is not bearing the full consequences of its unsuccessful challenge; and
  4. an unsuccessful challenger of an arbitral award would not be complying with its duties under the Civil Justice Reform to assist the court in the just, costs effective and efficient resolution of disputes.

Mimmie Chan J held that the same considerations would also apply to a party who breached an arbitration agreement by commencing court proceedings.  Hence, her Ladyship held that indemnity costs should be imposed on the defendant as a matter of course, unless the defendant can show “special circumstances” why indemnity costs should not be imposed, which it failed to do so.

Commentary

Costs is always a weapon of choice whenever a judge wishes to express its disapproval of a losing party’s conduct.  Although orders for indemnity costs are only made in exceptional circumstances where a losing party has been guilty of some fraud during the proceedings, this decision by Mimmie Chan J recognizes that unsuccessful challenges to arbitral awards and breaches of an arbitration agreement are well deserved exceptions to the rule.

Even though the Court of Appeal of Victoria (Australia) in IMC Aviation Solutions Pty Limited v Altain Khuder [2011] VSCA 248 declined to go as far as the Hong Kong court, it is heartening to note that the English courts and the Singapore courts have been imposing indemnity costs on arbitration guerrillas who bring court proceedings in breach of arbitration agreements (see A v B (No 2) [2007] 1 Lloyd’s Rep 358 and Tjong Very Sumito and others v Antig Investments Pte Ltd [2009] 4 SLR(R) 732)

The Hong Kong court’s hostile attitude towards such arbitration guerrillas goes back a long way.  Reyes J led the charge for indemnity costs in A v R (Arbitration: Enforcement) [2009] 3 HKLRD 389 by first imposing indemnity costs on applicants who unsuccessfully tried to set aside an arbitral award unless “special circumstances” can be shown.  The Court of Appeal set the bar higher when it held in Gao Haiyan v Keeneye Holdings (No. 2) [2012] 1 HKLRD 627 that even if the grounds of challenge were arguable so much so that the first instance judge was persuaded to uphold the challenge, this was not enough to avoid the fate of an indemnity costs order.

It is unfortunate that no Hong Kong court has provided guidance on what such “special circumstances”.  After the ruling in Gao Haiyan v Keeneye Holdings, it is hard to fathom what could constitute “special circumstances”.  However, silence may be golden since the uncertainty will cause arbitration guerrillas to feel more hesitant when they make their next move.