Cost recovery
In common law courts, costs are usually assessed on either a ‘standard’ or ‘indemnity’ basis. On the standard basis, the onus is on the receiving party to prove that the costs claimed are reasonable. Where costs are assessed on an indemnity basis, the costs claimed are presumed to be reasonable, unless the paying party proves otherwise. Some common law courts have departed from the usual rules on standard and indemnity costs when it comes to assessing costs arising out of failed applications to set aside arbitral awards. In CDM, the Court of Appeal has rejected the arguments for such a departure.
Default position in Hong Kong to grant indemnity costs
The established practice of the Hong Kong courts is that “it is fair that if a party was unsuccessful in setting aside or resisting enforcement of the arbitral award, in the absence of special circumstances, he should pay costs on an indemnity basis” (Pacific China Holdings Ltd (in Liquidation) v Grand Pacific Holdings Ltd [2012] 6 HKC 40, Hong Kong Court of Appeal). The rationale for this approach is set out in the earlier decision of A v R [2010] 3 HKC 67:
- A party which obtains a favourable award pursuant to an arbitration agreement is entitled to enforce the award as a matter of course. Applications to appeal or set aside an arbitral award should be regarded as exceptional. Absent special circumstances, the court will award indemnity costs where such applications are unsuccessful.
- Under the Hong Kong Civil Justice Reform, an unmeritorious challenge against an award is incompatible with the award-debtor’s duty to assist the court in “the just, cost-effective and efficient resolution of a dispute.”
- An order of standard costs would have the unfortunate effect of the winning party “subsidising the losing party’s abortive attempt to frustrate enforcement of a valid award” because the losing party would “not be bearing the full consequences of its abortive application.”
Singapore’s principles-based approach
In CDM, the Court of Appeal has affirmed that the principles-based approach to indemnity costs, which applies to civil litigation generally, applies equally to setting aside proceedings. The Court expressed reluctance to treat arbitration separate from other claims or to consider setting aside applications as exceptional circumstances warranting indemnity costs.
In CDM, the respondent (award-creditor) sought to persuade the Singapore Court of Appeal to adopt the Hong Kong position and make an order of indemnity costs against the appellant (award-debtor), who had failed to set aside an arbitral award. In its judgment on 5 May 2021, the court declined to award costs on an indemnity basis. This clarification comes on the heels of a similar decision of the Singapore High Court in BTN v BTP [2021] SGHC 38 (BTN).
Preceding decision in BTN
In BTN, the successful claimants in the arbitration sought indemnity costs following the defendant’s unsuccessful application to set aside the arbitral award. The Court explained why it did not subscribe to the Hong Kong approach, and applied the costs principles set out in the Singapore Rules of Court:
- Under those Rules, the usual course in Singapore is to award a successful litigant party-and-party costs on a standard basis. Costs are only awarded on an indemnity basis where there are exceptional circumstances warranting departure. The Court reasoned that the Hong Kong approach reverses the burden of proof (i.e., requiring special circumstances to depart from indemnity costs as the default) in contradiction of these costs principles.
- The practice of awarding indemnity costs in Hong Kong was to give effect to Hong Kong’s Civil Justice Reform and its underlying objectives of cost-effective and efficient dispute resolution. While these considerations are acknowledged in Singapore when evaluating how a party conducted its case, they are not “absolute trumps”, and various non-exhaustive factors in the Rules of Court must be considered when the court exercises its broad discretion “to make an exceptional award of indemnity costs”.
- Critically, there must be existence of some conduct that takes the case “out of the norm” to warrant indemnity costs. Applications to set aside an award or to resist enforcement are not treated as an exceptional circumstance.
The Singapore Court of Appeal’s decision in CDM
The Court agreed with the reasoning in BTN and held that every instance of an unsuccessful challenge to an award could not be presumptively considered an exceptional circumstance warranting indemnity costs. Case law and the Rules of Court did not support the presumption of indemnity costs purely based on subject matter. While the category of "exceptional circumstances" attracting indemnity costs is “not closed”, an award of indemnity costs turned on a “highly fact-specific assessment of the totality of the facts and circumstances” and required the Court to consider whether a party behaved “unreasonably”.
The Court confirmed that arbitration is not offered different treatment from other claims, and a party seeking relief even in the context of an application to set aside an arbitral award, was, like any other litigant, a party before the Court, and bound by the same rules.
It disagreed with the reasoning underpinning the Hong Kong position, whereby any enforcement challenge was tantamount to the parties reneging on the recognition that an award is final and binding. The Court noted that this “fails to recognise that the limited avenues available to challenge an arbitral award are statutorily provided for in the same way as a right of appeal against a decision of the court below”.
Comment: a developing divergence in approach
The judgment in CDM is a welcome clarification of the position as to costs orders arising from applications to set aside arbitral awards. It affirms the consistency of approach to be taken by the Singapore courts in not treating setting aside proceedings in and of themselves as exceptional proceedings within the wider context of civil litigation. This does not preclude indemnity costs being ordered in appropriate cases, but sets the bar for such an order at the same level as other civil litigation. This approach is to be contrasted with the position in Hong Kong, where applications to set aside awards are considered themselves to be exceptional, thus invoking the indemnity costs principle. In doing so, the Hong Kong approach invokes a policy that appears to be aimed at discouraging hopeless challenges.
Common law courts are likely to develop diverging approaches to these costs principles. For example, the Supreme Court of Western Australia has very recently signalled a shift in approach towards active discouragement of meritless applications to set aside awards. In Venetian Nominees Pty Ltd v Weatherford Australia Pty Ltd [2021] WASC 137 (5 May 2021), the Court had this to say on the subject:
“Curial challenges attempted against non-appealable award decisions continue to bedevil and undermine legislative policy endeavours to entrench arbitration as a quick, relatively inexpensive and final medium for private dispute resolutions. Unfortunately, too many unsuccessful arbitration participants still see it as worth their while to ‘roll the dice’ by manufacturing a pathway to a court, where strained procedural unfairness arguments rise to the fore as something of a last refuge of the desperate. Here, such challenges have been productive of delay to the successful party enjoying the fruits of the award and have necessitated an allocation of resources – equivalent to what would otherwise have been devoted to the hearing of a full blown appeal by way of a rehearing. This farcical position should no longer be entertained. Where the backdoor strategy is unsuccessfully deployed in future it should be met with a punitive costs sanction.”
The approach to costs in the context of setting aside applications will continue to be an area to watch.
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Client Alert 2021-142
