At first glance the Court of Appeal’s decision in Gater Assets Ltd v Nak Naftogaz Ukrainiy  - preventing a defendant in court proceedings from being awarded security for his costs - may seem surprising. However, on closer examination the decision ensures that a defendant does not obtain an unfair advantage simply by sitting back and waiting for proceedings to be brought against him rather than acting proactively and commencing proceedings himself.
Enforcement proceedings under the Arbitration Act 1996 were brought by a creditor who had obtained an arbitration award under the New York Convention against the defendant for over £40 million. The defendant resisted the enforcement of the award on the ground that it had been procured by fraud and sought security for its costs of the enforcement proceedings.
The judge at first instance was satisfied that:
- The debtor was a defendant to the claims being made by the award creditor (a requirement if security for costs is to be ordered).
- There was at least a prima facie case of fraud.
- The court rules relating to ordering security for costs applied to an arbitration claim to enforce a New York Convention award under the Arbitration Act 1996, section 101.
- Due to the very large sums involved it was appropriate to use the court’s discretion under the court rules to award security for costs.
Security for costs in the sum of £250,000 was ordered and in default of payment the claim to enforce the arbitration award would be struck out.
The creditor was unhappy that the debtor, who had failed to instigate proceedings objecting to the award itself, could obtain security for costs against the creditor who was now seeking to enforce it. The creditor argued that:
- There was no power to order security for costs in relation to enforcement proceedings of a foreign judgment or award.
- If the debtor had followed the stipulated procedure and instigated proceedings to challenge the validity of the award, then the debtor would have been bringing a claim and therefore potentially vulnerable to an application for security for costs being made against him by the creditor.
- Within enforcement proceedings there was no “claim” being brought, because the claim had been successfully established in the arbitration proceedings.
The majority of the Court of Appeal decided that:
- The court rules do not expressly permit the application of the security for costs regime to the statutory enforcement of an arbitration award. The court was not clear whether such a power existed against an award creditor in enforcement proceedings.
- Even if the court did have power to order security it should be reluctant, as a matter of principle, to do so save in exceptional circumstances.
In this case the ordering of security for costs was wrong in principle because it was unjust in all the circumstances. The judge had wrongly exercised his discretion because:
- Under a domestic award the judgment debtor should have commenced a new action if it wished to object to it. Then, as the claimant it would not be entitled to security for costs.
- Under a domestic award a debtor who sits back and waits for enforcement is not permitted by the Arbitration Act 1996 to be in a better position than if it challenged the irregularity of the award timeously and would not be allowed in principle to obtain security for costs.
- The court could not impose a more onerous condition on an award creditor who was seeking to enforce a New York Convention award under the Arbitration Act. To do so would be in breach of Article III of the New York Convention.
Whether there is jurisdiction to award security for costs against a creditor seeking to enforce an arbitration award was not finally resolved (but doubted). The Court of Appeal made it clear that the court should not be exercising its discretion to make such an order in these circumstances. The proper procedure, if a debtor wishes to oppose enforcement of an arbitration award or foreign judgment, is to instigate proceedings immediately after the award/judgment has been made.