In the case of X v Y Queen’s Bench Division (Commercial Court), 07 May 2013 the court has grappled with the options available to a claimant against a respondent seeking to challenge an award. In this case, the Respondent, X, had taken every step possible to avoid payment of damages and costs awarded against them in previous awards by an English seated arbitral tribunal. X now sought to challenge a fourth award in the English courts under s67 and s68 of the Arbitration Act (the Act). Y asked the court for: (i) security for its costs in resisting such applications; and (ii) for payment into court of the sums awarded to it under the fourth award.

Clearly sympathising with Y’s plight, the court ordered that security for costs should be granted given the illiquidity of assets against which costs could be enforced and the absence of any assurance by X that costs would be paid. However, payment into court was found to be a step too far. It was not for the court to require payment into court to assist one party to enforce an award. In this case, whilst the s67 and s68 challenges might delay enforcement, Y had a freezing injunction in place over assets in Australia which should enable it to enforce the awards eventually.

Background

The application arose out of a freight contract between X and Y for the shipment of 6 cargoes of coal between 2008 and 2012. The contract provided for disputes to be resolved by arbitration in London. Due to the crash in the freight market some of these cargoes were not shipped.

On 15 March 2010 Y commenced arbitration against X. The arbitral tribunal made three initial awards during the course of 2011 and 2012: the first on jurisdiction, the second holding X in breach of contract and the third awarding Y US$7.8m damages for shipments in 2009 and 2010. X sought to challenge these awards in the English courts and the Indian courts, obtaining anti-suit injunctions from both the English and Indian courts. Y obtained a freezing order and anti-suit injunction against X in Australia where X had assets (coal mines and subsidiary companies). On 30 November 2012 the Tribunal made a fourth award finding that X was in breach of contract for 2011 shipments and awarded Y further damages and costs totally over US$6m.

X sought to challenge this fourth award under s67 of the Act (on jurisdiction) and s68 (serious irregularity). In response, Y sought two orders under s70 of the Act: (i) that X be required to pay the sum of £120,000 as security for Y’s costs of resisting such challenges; and (ii) that X be required to pay into court the sum of £3,814,673.43, being the total sums awarded to Y under the fourth award.

The Decision

  1. Security for costs

Teare J accepted that under s70(6) of the Act the court could order an applicant under sections 67 or 68 to provide security for costs. While there was no formal fetter on the court’s discretion to order security for costs, it would be rare for security to be required if the applicant has sufficient assets to meet any order for costs. In this case, Teare J considered the fact that X was a substantial concern in India with assets in Australia. However, these assets were not liquid as they were shares in a subsidiary. Furthermore, X had clearly decided not to honour any of the awards made against it and had not provided a witness statement expressing a willingness to pay costs or explaining how liability for costs could be readily enforced against it. In the absence of security, there was a very real risk that any costs order made against X would not be enforced without considerable delay and expense. The order for security for costs was therefore granted.

  1. Payment into court

Under s70(7) of the Act, the court may order that money payable under an award be paid into court while such an award is being challenged. Teare J followed the guidance in the case of A v B [2011] 1 Lloyds Reports 363 in holding that there is a threshold requirement that the party making the s70(7) application must demonstrate that any s67 challenge is “flimsy or otherwise lacking in substance“. Teare J considered the facts in this case and held that this threshold had been met. No such threshold requirement applied to the s68 challenge.

The next question to consider was whether the challenge to the award would prejudice Y’s ability to enforce that award. Y drew the court’s attention to the various steps taken by X to challenge and resist enforcement of each of the previous three awards and submitted that it was to be inferred that X would do the same with the fourth. Y argued that it was likely that X would use the s67 and s68 applications to ask the Indian courts to extend the injunctions it had already issued on the enforcement of the other three awards. Countering that position, X argued that Y had already obtained a freezing order in Australia and that there was no risk that X’s asset in that country would be dissipated. Section 70 jurisdiction was not intended to improve the ability of a party to enforce an award – rather, the aim was to stop a party from diminishing its ability to honour an award.

Teare J held that while “the conduct of X in refusing the honour the arbitration awards does not attract any sympathy“, the challenges to the award did not materially prejudice Y’s ability to enforce the award. They might delay enforcement, but Y’s freezing order in Australia remained intact and enforcement could proceed there. By contrast, a payment into court would assist Y to enforce the fourth award and “whilst it may be said to be desirable“, that was not a good reason on the authorities for ordering such a payment. The application was denied.

Comment

The case shows the fine balance to be struck by the courts in supporting arbitration. The court carefully considered the scope of its discretion under s70 and, despite a very clearly expressed dissatisfaction with X’s behaviour in seeking to avoid payment of damages and costs, granted only the order for security for the costs of resisting the challenge.

It is interesting to note that the same assets were in consideration in both the security for costs and the payment in applications. In both instances, any award in Y’s favour would be enforced against X’s shareholdings in Australia over which Y had a freezing injunction. The illiquidity of those assets pointed the court towards granting the application for security for costs. However, the presence of a freezing injunction over those same assets was held to be sufficient to protect the enforcement of the arbitral awards without the need for payment into court.

This seems slightly inconsistent, particularly given Teare J’s view that despite the illiquidity of its assets, “X could probably be made to pay [the costs award] in the end“: an analysis similar to that adopted when dismissing the application for payment into court. It seems likely that X’s refusal to demonstrate its willingness to pay the costs of an English court challenge and the cost and expense of enforcing any costs award swung the balance in favour of Y in the application for security for costs. In contrast, the larger sums at stake and the understandable reluctance to be seen to assist one party in enforcing an award swung the balance against ordering that payment in be made.