Facts
The plaintiff (P) commenced an action against the first defendant (D1) and second defendant (D2) for breaches of a surety bond (the Bond) and against D2 for damages for breach of a construction contract (the Contract). D2 applied for a stay of the action in favour of arbitration (the Stay Application) under an arbitration agreement (the Arbitration Agreement) contained in the Contract. D2 also sought a case management stay of the action against D1 in the event that a stay is granted in respect of the action against D2.
Decision on stay and order nisi on costs
Upon hearing the parties, the Honourable Mimmie Chan J (the Judge) granted a stay in respect of the claims against both D1 and D2 on the basis that the Arbitration Agreement clearly extended to P’s action against D2 and it would also be just to grant a case management stay for the action against D1 on the ground that the Bond was a guarantee of D2’s liability under the Contract. The Judge made an order nisi that the costs of the Stay Application be paid by P to D2 on a party and party basis
Variation of the costs order nisi
Both P and D2 applied to vary the costs order nisi. P argued that there should be no order as to costs, while D2 applied for costs to be awarded on an indemnity basis.
The Judge decided to vary the costs order nisi to allow D2 only 50 per cent of the costs of the Stay Application on a party and party basis, for the following reasons:
- The Judge clarified that the order nisi did not provide for indemnity costs because the Stay Application was made not only in respect of P’s claims against D2 under the Arbitration Agreement, but also in respect of the claims against D1 under the Bond that contained no arbitration clause. This was a departure from the normal rule that indemnity costs would be ordered in respect of an unsuccessful challenge of an arbitration agreement.
- As there was no arbitration agreement between P and D1 and the stay granted was a case management stay, there was no special circumstance or basis for ordering indemnity costs. Further, D2 only produced an undertaking by D1 (the Undertaking) on the day before the hearing of the Stay Application to abide by any award made in the arbitration as to D2’s liability under the Contract. The Undertaking was an important consideration in the Judge’s decision to grant the case management stay.
- The authorities made it clear that a stay under an arbitration agreement would be granted once a prima facie case of the existence of an arbitration agreement was established. It was therefore unnecessary for D2 to file evidence on the details of the underlying disputes, much of which was totally ignored at the hearing of the Stay Application. The Judge therefore held that P should not be penalised in respect of the costs incurred by D2 in relation to such unnecessary evidence. There was also an unexplained delay in D2’s production of the Undertaking.
- Having regard to all the above circumstances, the Judge decided on a broad-brush basis that D2 should only be allowed 50 per cent of the costs of the Stay Application on a party and party basis.
Conclusion
This case reinforces the normal rule in Hong Kong that a failed application to challenge an arbitral award or an arbitration agreement will attract an indemnity costs order. However, the Hong Kong court is prepared, in some circumstances, to depart from the normal rule or discount the costs awarded. In this case, the stay applied for was partly a case management stay, which does not normally lead to an indemnity costs order. The Hong Kong court also refused to award costs in relation to the preparation of unnecessary evidence. This case shows that the Hong Kong court is flexible in its approach towards costs and will make costs orders that are appropriate, taking into account the particular circumstances of each case.
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Client Alert 2021-280
