Discontinuance Costs in Arbitration Appeals

Sections 67 – 69 of the Arbitration Act 1996 (the Act) provide the bases on which an arbitral award may be appealed. In all cases, the bar to a successful challenge is very high. Who pays the costs of the litigation if the appeal is discontinued?

In January 2019 the case of Koshigi Limited & Svoboda Corporation v Donna Union Foundation & Ulmart Holdings Limited [2019] EWHC 122 came before the High Court.  The case contains a number of interesting points relating to the costs of discontinuing arbitration appeal proceedings.

Background

The arbitration underlying the Koshigi appeal, which related to a shareholder’s dispute in respect of Ulmart, was presided over by a three-person panel, the tribunal, selected by the London Court of International Arbitration. The Donna Union Foundation (‘Donna Union’) sought a finding that Koshigi and Svoboda were obliged to buy out its shareholding.
The tribunal issued two awards:

1. On liability dated 21 March 2018, finding that the claimants were obliged to buy Dona Union’s shares in Ulmart;
2. On valuation dated 18 April 2018, holding that the price for the purchase should be $67,159,546.

The claimants appealed both of these awards under section 68 of the Act, which allows awards to be challenged on the grounds of serious irregularity, including bias.  They relied, amongst other things, on the relationship between Donna Union’s lead counsel and the chair of the tribunal, a failure to disclose the relationship and certain procedural irregularities as giving rise to apparent bias.  The chair of the tribunal was then sitting as co-arbitrator with Donna Union’s lead counsel on two other arbitrations, and had recently appointed him to advise the board of an international arbitration centre, of which the chair of the tribunal was chairman. 

The claimants discontinued both appeals. 

Discontinuance Costs

Where a party discontinues its case, there is a presumption that the discontinuing party will pay the other party’s costs (see CPR 38.6).  This general rule can be displaced where the discontinuing party can show:

“(5)     …a change of circumstances to which he has not himself contributed

(6)      however, no change in circumstances is likely to suffice unless it has been brought about by some form of unreasonable conduct on the part of the defendant which in all the circumstances provides a good reason for departing from the rule.”

(per Moore-Bick LJ in Brookes v HSBC Bank plc [2011] EWCA Civ 325)

The claimants in Koshigi argued that, despite the awards being in the defendant’s favour, Donna Union had failed to comply with the arbitral awards and demonstrated that it had no intention of complying.  The awards had, the claimants argued, become incapable of enforcement, or were unlikely to be enforced.  There was therefore no longer a reason to have the awards set aside. Donna Union argued conversely that the awards remained enforceable.

In his judgment Sir William Blair noted that it would be impossible, and impermissible for the court at a cost hearing to examine the facts of a case in detail. While there was clearly a significant amount in dispute between the parties, that was a matter for enforcement proceedings. Merely asserting that the claimants had a reasonable belief that the awards were unenforceable was not enough to displace the basic costs presumption. The claimants were therefore ordered to pay the costs of discontinuing the appeal.

Standard or Indemnity Basis

When a party discontinues a claim, the general rule is that costs will be paid on the standard basis (per Lightman J in Jarvis v PriceWaterhouseCooper [2001] BCC 670). In order to obtain costs on an indemnity basis:

“…there must be some conduct or circumstance which takes it out of the norm.  That is the critical requirement.”

(Excelsior Commercial & Industrial Holdings Limited v Salisbury Hammer Aspden & Johnson (A Firm) [2002] EWCA Civ 879 at [32])

Donna Union however said that its costs should be paid on an indemnity basis.  It argued that the claimant’s allegations of bias (the basis of its appeal) were “thoroughly bad” and in any event subsequently waived by the claimant’s conduct of the arbitration. The situation was therefore ’out of the norm and, as the judge stated, akin to dishonesty.

The judge agreed that the claimant’s case in relation to bias was very weak and might have led to an indemnity costs order had the appeal been continued. This did not however change the basic rule for costs relating to discontinuing proceedings.  He therefore ordered costs to be assessed on the standard basis.

Comment

Avoiding discontinuance costs will always be difficult.  It will require demonstrating some form of unreasonable conduct on the part of the other side in general. This may include, for example, the late introduction of a defence which results in the case being discontinued (Webb v Environment Agency 5 April 2011, unreported) or discontinuance as the claim has become irrelevant due a concession by the other party (R v Bassettlaw DC Ex p. Aldergate Estates Limited, 17 April 2000, unreported). 

Given the decision in Koshigi it may be considered that, if there is a dispute over the factual background relating to alleged unreasonable conduct, the court will not look too far into the facts.  This is not surprising as a costs hearing is not intended to handle significant fact finding and, when dealing with discontinuance costs, it often has no grasp of the background to the case.  Unless the unreasonable conduct can be demonstrated easily, it is likely that the normal order as to costs will remain.
With regard to the arguments regarding standard and indemnity costs, the judgement makes a good deal of sense. If indemnity costs were to be awarded simply due to the underlying case being weak, then a significant incentive for discontinuing part or all of a weak case would be removed. This could lead to parties continuing with a weak case, incurring significant additional costs and wasting the court’s valuable time.

In any event, a party discontinuing a case simply because it is weak is hardly unusual.  In order for a case to be “out of the norm” something more is required - for example in Mireskandari v Law Society [2009] EWHC 2224 (CH) where indemnity costs were awarded as the claim was both hopeless and conducted in an unreasonable manner.  Inevitably cases will arise which are out of the norm, but they are likely to be few and far between.