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Legal Update

Indemnity Costs in Arbitration Extended

11 December 2015
Mayer Brown JSM Legal Update

It is now the established practice of the Hong Kong Courts to order indemnity costs to be paid by an unsuccessful party who (i) appeals against an arbitration award; (ii) applies to set aside or; (iii) resists enforcement of such an award, unless special circumstances can be shown.

In A v. R (Arbitration: Enforcement) (2009) 3 HKLRD 389, Reyes J. explained that a party who obtains an arbitration award in his favour should be entitled to expect that the Court will enforce the award as a matter of course. An unsuccessful challenge to an award should result in an order for indemnity costs. The successful party should not have to subsidise about one-third of the costs of the unsuccessful application which would result from a party and party costs order being made. Furthermore, the making of such an unsuccessful application is incompatible with a party's obligation to assist the Court in the just, cost effective and efficient resolution of a dispute under Order 1A Rule 3 of the Rules of the High Court. This approach (absent special circumstances) has been approved by the Hong Kong Court of Appeal (e.g., Gao Haiyan v. Keeneye Holdings Ltd. (No.2) (2012) 1 HKC 491).

Mimmie Chan J. adopted a similar practice in Chimbusco International Petroleum (Singapore) Pte. Ltd. v. Fully Best Trading Ltd., reported at (2015) HKEC 2573, in circumstances where (i) the Plaintiff in the case initially failed to agree to a stay of Hong Kong proceedings by reason of an agreement to arbitrate in Singapore the disputes the subject of the proceedings and (ii) disputed the Defendant's application for indemnity costs. Mimmie Chan J. held that the fact that challenges to an arbitration agreement, or to the arbitral award, are not unarguable does not constitute special circumstances. The arbitration agreement in that case was not null and void, inoperative or incapable of being performed; hence the Court was obliged to stay the Hong Kong proceedings pursuant to Hong Kong's obligations as a party to the New York Convention, Article II and Section 20 of the Arbitration Ordinance Cap.609. By issuing Hong Kong proceedings, delaying an agreement to a stay and arguing the question of costs, the Plaintiff took the risk of having to pay indemnity costs – which was so ordered.

So far the Hong Kong Courts have not provided guidance as to what "special circumstances" would result in a less stringent order for costs being made. What is clear is that it will be difficult to establish such circumstances.


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