Unmeritorious attempt to resist enforcement penalised by indemnity costs order

In the first of two recent decisions relating to the enforcement or challenge of arbitration awards (the second is discussed below), the Hong Kong High Court has cautioned parties against mounting unmeritorious challenges to arbitration awards.

In A v R, the Respondent sought to resist enforcement of an arbitration award relying on the public policy exception in s.44 of the Arbitration Ordinance (Cap. 341). The dispute concerned a sales commission agreement and a failure by the Respondent to pay the Applicant commission for referral of a customer. The Applicant successfully pursued arbitration proceedings in Denmark and an award was published in its favour ordering the Respondent to pay US$3 million (together with interest and costs).

The Applicant sought to enforce the award in Hong Kong. The Respondent argued, amongst other things, that a liquidated damages clause in the agreement was void as a penalty clause and consequently to enforce the award would be oppressive as it would require the Respondent to pay an amount which was substantially in excess of any loss actually incurred. Reyes J dismissed the Respondent’s application as unmeritorious and ordered the Respondent to pay the Applicant’s costs on the indemnity basis.

Of interest is the consideration Reyes J gave to the Civil Justice Reform (CJR). The CJR was rolled out in Hong Kong on 2 April and aims to increase the cost-effectiveness of civil litigation proceedings, reduce delays, and to ensure the fair distribution of court resources. These objectives require the courts actively to manage cases at an earlier stage and require the parties to help the courts to do so. In A v R the Court concluded that by mounting an unfounded challenge to an arbitration award, a party would be failing to comply with its obligation to further the underlying objectives of the CJR, in particular the duty to assist the Court in the just, cost-effective and efficient resolution of a dispute. As a result, an indemnity costs order would automatically follow, unless special circumstances applied.

(A v R (HCCT 54/2008))