Indemnity costs may be ordered against a plaintiff who commences litigation in breach of a valid arbitration agreement.

Earlier this year, the Supreme Court of Western Australia in Pipeline Services WA Pty Ltd v ATCO Gas Australia Pty Ltd stayed court proceedings and referred the parties to arbitration under an arbitration agreement in accordance with section 8 of the Commercial Arbitration Act 2012 (WA) (Act). In doing so, the Court rejected Pipeline's extensive submissions against the stay.

The Court recently granted orders in the proceedings that Pipeline pay the legal costs incurred by ATCO in resisting the stay application and enforcing the arbitration agreement on an indemnity basis. An order for indemnity costs allows a successful party to recover all of its reasonably incurred legal costs, including disbursements, not just costs at the relevant court rates. Such an order is ordinarily awarded only in exceptional circumstances, such as where a party has maintained an action with no real prospect of success.

This decision serves as a deterrent to parties commencing litigation proceedings where there is a valid arbitration agreement in the relevant contract.

The Court's grant of indemnity costs

ATCO claimed indemnity from Pipeline for legal costs it incurred arising from Pipeline's persistent and sometimes 'desperate', 'without substance' or 'hopeless' attempts to combat the mandatory stay of proceedings under section 8 of the Act. On this basis, the Court ordered that Pipeline pay ATCO's costs to indemnify ATCO for actual (but reasonable) costs incurred in enforcing its contractual right to refer the dispute to arbitration. Reasons for the Court's decision include:

  • Unless a party has represented by words or conduct that it would not rely on an arbitration agreement, the reasonable legal costs incurred by the innocent party in enforcing the arbitration agreement will ordinarily be the direct consequence of the breach of the arbitration agreement and therefore recoverable as damages for that breach.
  • Pursuant to the mandatory wording of section 8 of the Act, the Court must refer a dispute before it to arbitration, unless it finds that the dispute does not fall within the arbitration agreement, or that the agreement is null and void, inoperative or incapable of being performed.
  • The Court held that the principle enunciated in A v B [2007] EWHC 54 (a decision from the High Court of England and Wales) applies in Western Australia, being that costs could be awarded to an innocent party applying for a stay in favour of an arbitration agreement (the availability of indemnity costs does not require any special circumstances beyond breach of the arbitration agreement).

The Court's reasoning is consistent with both Australia's positive approach to the UNCITRAL Model Law on International Commercial Arbitration 1985, which applies both in England and Wales, and Western Australia, and with the object and purpose of the Act which 'requires the courts to support and enforce arbitration agreements'.

Summary

Following Pipeline, there is now greater protection afforded to defendants who seek to enforce an arbitration agreement where proceedings have been commenced in the courts. Nevertheless, a party enforcing such a right must ensure, among other things, that:

  • the dispute the subject of the court proceedings is capable of being resolved by arbitration;
  • the party promptly pursues its rights to arbitrate in accordance with the arbitration agreement;
  • the party does not waive its entitlement to rely upon an arbitration agreement; and
  • not to induce the opposing party to believe that it will not rely upon the arbitration agreement.

Plaintiffs risk indemnity costs being ordered against them where, for example, they commence proceedings on the basis that they consider the relevant arbitration agreement to be unenforceable, or where they are compelled to commence proceedings in lieu of an arbitration agreement in the face of expiring limitation periods.

Pipeline serves as yet another reminder that the Supreme Court of Western Australia is arbitration friendly and pro-enforcement.