One of the guerrilla tactics sometimes deployed to undermine an international arbitration is a party’s wrongful attempt to invoke the jurisdiction of a national court to resolve a dispute. Often this is done because the party anticipates, or can improperly secure, a favourable outcome before its ‘home’ court. This may be a pre-emptive strike in anticipation of an arbitration being commenced by the other party, or it could be done to frustrate an existing arbitration. How can you effectively combat such tactics and uphold the dispute resolution process you had bargained for?

Commencing court action in deliberate disregard of a valid and binding arbitration agreement to arbitrate is a breach of that agreement. It amounts to a direct attack on the jurisdiction of an arbitral tribunal to determine the parties’ disputes. In response, the ‘innocent’ party may seek an anti-suit injunction from the arbitral tribunal in order to restrain the other party from pursuing the court action it has wrongfully commenced. This preserves the tribunal’s jurisdiction. But compensation for the breach of the arbitration agreement can also be recovered by seeking an award of damages from the arbitral tribunal.

Damages may be awarded to compensate parties for a range of breaches of an arbitration agreement. For example, Article 24(h) of the arbitration rules of the Singapore International Arbitration Centre empowers a tribunal to make an interim award for the costs of the arbitration that a party has failed to pay. In a similar vein, the English Commercial Court has recently held in BDMS Limited v Rafael Advanced Systems [2014] All ER (D)244 that a party’s failure to make payment of an advance on costs pursuant to the rules of the International Chamber of Commerce Rules 
was a substantive breach of an arbitration agreement sounding in damages.

Returning to the hypothetical example of a tactical commencement of court proceedings, what costs could a party recover by way of damages? It is clear that the innocent party can claim legal costs incurred in responding to those proceedings, or for unreasonably resisting the commencement of arbitral proceedings. For example, in Tjong Very Sumito and others v Antig Investments Pte Ltd [2009] 4 SLR(R) 732, the Singapore Court of Appeal held that where it is established that a breach of an arbitration clause has caused an innocent party reasonably to incur legal costs, those costs should normally be recoverable on an indemnity basis. Notably, the Court of Appeal warned against pursuing unmeritorious court proceedings that cause an innocent party to incur additional legal costs.

An award for legal costs incurred will go some way to compensating the innocent party for the time and cost incurred in responding to the other party’s wrongful conduct. However, the Swiss Federal Supreme Court has gone further (in case 4A_232/2013) and upheld an  award made by an arbitral tribunal for any damages that were subsequently ordered to be paid in  the wrongfully-invoked  litigation (in  other words, “damages for damages”).

In that case, an arbitral tribunal held that a party who had wrongly instituted court proceeding in Greece was in breach of an arbitration agreement, and awarded to the innocent party legal costs for the court proceedings and the amount of any payments that the Greek court may possibly order the innocent party to make. The effect of this was to nullify any economic benefit derived by the party in breach by wrongfully pursuing litigation in the face of a valid arbitration agreement. The other party sought unsuccessfully  to  resist  enforcement of the award in Switzerland.

There is no reason in principle why other courts applying the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention) would reach a different view. One exception might be the very court in which the wrongly instituted litigation had been commenced: in many cases, that court would have considered and rejected a challenge to its jurisdiction, and it is unlikely to undermine that decision by enforcing an award that renders that determination moot.

Therefore, the challenge to obtaining damages for damages may not lie at the enforcement stage, but when applying to the arbitral tribunal for such damages in the first instance. The confidential nature of arbitration proceedings makes it difficult to know how commonplace such awards of damages for damages are. It is therefore all the more unfortunate for us that the Swiss Federal Supreme Court did not explore the arbitral tribunal’s reasoning for awarding damages for damages in any great detail. The tribunal in that case was comprised of highly experienced and well regarded arbitrators; an award by Lord Hoffman, a former Law Lord of the English Supreme Court, leading Swiss arbitrator Pierre-Yves Gunter and Irish Senior Counsel Michael M Collins is bound to have been illuminating. It remains to be seen in future case reports how far other tribunals and enforcing courts will go to compensate a party when it is forced to engage in litigation that is pursued in plain disregard of an agreement to arbitrate.