GAO HAIYAN AND ANOTHER v. KEENEYE HOLDINGS LTD AND ANOTHER

CACV 79/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 79 OF 2011

(ON APPEAL FROM HCCT NO. 41 OF 2010)

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BETWEEN

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DECISION ON COSTS

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Hon Tang VP:

1.  On 2 December 2011, we set aside the order of Reyes J made on 12 April 2011 whereby he set aside leave to enforce the Arbitral Award by the Xi'an Arbitration Commission No. 2232 of 2009 dated 3 June 2010 ("the Award"). We also made an order nisi that the Applicants should have the costs both before this court and at first instance.

2.  The Applicants, by their written submission dated 16 December 2011, asked that costs be on an indemnity basis.  They also sought a certificate for three counsel both for the appeal and at first instance.

Indemnity Costs

3.  Since the advent of Civil Justice Reform ("CJR"), costs have been awarded, in connection with proceedings arising out of or in connection with arbitral proceedings, on an indemnity basis.  Reyes J, who was at the time in charge of the Construction and Arbitration List, explained why in A v R [2010] 3 HKC 67 at p 79:

"67. Parties should comply with arbitration awards.  A person who obtains an award in his favour pursuant to an arbitration agreement should be entitled to expect that the Court will enforce the award as a matter of course.

68. Applications by a party to appeal against or set aside an award or for an Order refusing enforcement should be exceptional events.  Where a party unsuccessfully makes such application, he should in principle expect to have to pay costs on a higher basis.  This is because a party seeking to enforce an award should not have had to contend with such type of challenge.

69. Further, given the recent introduction of Civil Justice Reform (CJR), the Court ought not normally to be troubled by such type of application.  A party unmeritoriously seeking to challenge an award would not be complying with its obligation to the Court under Order 1A Rule 3 to further the underlying objectives of CJR, in particular the duty to assist the Court in the just, cost-effective and efficient resolution of a dispute.

70. If the losing party is only made to pay costs on a conventional party-and-party basis, the winning party would in effect be subsidising the losing party's abortive attempt to frustrate enforcement of a valid award.  The winning party would only be able to recover about two-thirds of its costs of the challenge and would be out of pocket as to one-third.  This is despite the winning party already having successfully gone through an arbitration and obtained an award in its favour.  The losing party, in contrast, would not be bearing the full consequences of its abortive application.

71. Such a state of affairs would only encourage the bringing of unmeritorious challenges to an award.  It would turn what should be an exceptional and high-risk strategy into something which was potentially 'worth a go'.  That cannot be conducive to CJR and its underlying objectives.

72. Accordingly, in the absence of special circumstances, when an award is unsuccessfully challenged, the Court will henceforth normally consider awarding costs against a losing party on an indemnity basis.  The respondent will here pay the applicant’s costs on an indemnity basis."

4.  Saunders J, who subsequently took over the Construction and Arbitration List, had consistently adopted the same approach. See: for example Wing Hong Construction Ltd v Tin Wo Engineering Co Ltd, unreported, HCCT No 13 of 2010, 3 June 2010, where he said:

"11. They are however applications which are exceptional events.  The whole principle of arbitration is that a person who obtains an award in his favour is entitled to expect that the Court will enforce the award as a matter of course.  It is not necessary for a party successfully resisting an application seeking to challenge the award, to establish the application itself as an abuse of process to justify indemnity costs.  The nature of arbitration is such that, having regard to the underlying objectives in the RHC, an unsuccessful application to challenge an arbitrators award will normally attract indemnity costs against the applicant."

5.  The Respondents in their written submissions dated 22 December 2011 and 3 January 2012 respectively, submitted that in justifying an award of indemnity costs, there must be some "special or unusual feature" in a case such that an award of indemnity costs would be appropriate, relying on what Li CJ said in Town Planning Board v Society for Protection of the Harbour Ltd (No 2) (2004) 7 HKCFAR 114 at para 15.  But the learned Chief Justice went on to say:

"17. In these and other cases, courts have emphasised the undesirability of attempting to define the circumstances in which orders for indemnity costs are to be made.  It has been said that

'… the discretion is not to be fettered or circumscribed beyond the requirement that taxation on an indemnity basis must be "appropriate".'"

6.  The Respondents also relied on Karaha Bodas Co Llc v Perusahaan Pertambangan Minyak Dan Gas Bumi Negara (otherwise known as Pertamina) (unreported, FACV 6/2008, dated 6 February 2009), which was also concerned with enforcement of an arbitral award, where indemnity costs were refused.  There Ribeiro PJ said:

"4. As to the first point, the factual reasons for not raising fraud earlier have been explained by Pertamina and were not subject to challenge as such, the argument focusing on the Ladd v Marshall principles.  There is therefore no basis for suggesting any impropriety in the lateness of the allegation.  Pertamina plainly misjudged the evidential foundations for making the fraud allegation, but we do not consider that a sufficient basis for departing from the usual party-and-party rule in the present case.

5. Turning to the second matter, as Pertamina points out, this is not a case where the court process has been abused with a view to delaying enforcement of the award.  Pertamina had discharged the award in full before the hearing in the Court of Appeal below. We do not consider the need to encourage prompt settlement of arbitration awards a basis for departing from the usual rule in this case.

6. We accordingly direct that the order nisi for Pertamina to pay the costs of and occasioned by the appeal on a party-and-party basis be made absolute.

7.  Karaha Bodas preceded the CJR.  We must give effect to the underlying objectives of CJR when we exercise our powers.  We have to consider whether the new practice of ordering indemnity costs in these proceedings is appropriate having regard to CJR.

8.  In this context, it may be relevant to note that under O 22, a party who has failed to do better than a sanctioned payment or sanctioned offer may be ordered to pay costs on an indemnity basis.  O 22 r 23(4)(a).  So a party who believes that the other party is likely to be successful in part may protect himself by making a sanctioned payment or offer.  For example, a defendant who is sued, say, for $1,000,000, and pays into court $100,000, may be given costs on an indemnity basis, if the plaintiff recovers less or nothing. 

9.  There is no similar mechanism where a party believes (correctly so, as it turns out) that he would be wholly successful such that he made no sanctioned payment or offer.  It is perhaps paradoxical that a defendant who is faced with a claim against which he has a complete defence should normally only obtain costs on a party and party basis. 

10.  Be that as it may, the provisions for possible indemnity costs in the event of failure to do better than a sanctioned payment or a sanctioned offer strongly support the underlying objective of CJR. 

11.  In my view, such provisions also support the view that under CJR, the court may be more ready to consider it appropriate to award indemnity costs.

12.  Experienced judges in charge of the Construction and Arbitration List have adopted the approach that, in proceedings arising out of or in connection with arbitral proceedings, in the absence of special circumstances, the court will normally consider it appropriate to order costs on an indemnity basis.

13.  For the reasons given by Reyes J, I believe that is a salutary practice. 

14.  I do not believe there are special circumstances which should persuade me that indemnity costs are inappropriate.  The fact that the Respondents' case is not unarguable is not a special circumstance.  Had it been clearly hopeless, that would have been an additional reason for ordering indemnity costs.  

15.  I would order costs against the Respondents on an indemnity costs.

Three counsel

16.  The Applicants were represented by four counsel at first instance and three counsel before us, whereas the Respondents were represented by two counsel on both occasions.  It is said that the value of the subject matter of the proceedings is very substantial.  It is said to be complex.  But there is nothing exceptional about the complexity.  This is not a case where I would give a certificate for three counsel.  Whether on a taxation on an indemnity basis, such costs might be recovered must be left to be considered by the taxing master under O 62 r 28 para (4A).

Hon Fok JA:

17.  I agree.

Hon Sakhrani J:

18.  I also agree.