Associate Editor, Arbitration Corporate Law Review
Amishi Aggarwal [i],
In CDM v. CDP as well as BTN v. BTP, Singapore courts recently affirmed that costs in cases of unsuccessful applications to set aside awards would be allocated on a party-and-party basis absent exceptional circumstances. In both cases, the default position in this regard in Hong Kong, which entails the imposition of a rebuttable presumption in favor of indemnity costs, was considered. These cases have stirred up the debate regarding the suitability of the two bases of cost allocation in failed applications to set aside arbitral awards. In light of this debate, this post: firstly, examines the position of the Indian arbitration law on costs considering the legislative intent; secondly, analyzes the position of various arbitration-friendly jurisdictions, with a special focus on Hong Kong; and, finally, suggests a costs regime for cases involving unsuccessful applications to set aside awards for India.
The Indian Position on Costs
The 2021 amendments to the Indian Arbitration and Conciliation Act, 1996 are retrogressive, shifting away from the pro-arbitration intent of the 2015 amendments. One provision in the Act, which was untouched by the 2021 amendments and inserted through the 2015 amendments, is Section 31A. Section 31A deals with the costs to be awarded in relation to arbitral or court proceedings. The Law Commission of India, in its 246th Report, recognized the need for a different costs regime in arbitration than that in litigation. It recommended following the loser-pays rule, and justified it on the ground that it “provides economically efficient deterrence against frivolous conduct and furthers compliance with contractual obligations.”
Hence, the legislative intent behind Section 31A was to discourage frivolous conduct and dilatory practices through an award on costs. However, the way it is drafted suggests that the courts have discretion in deciding whether costs are to be awarded. Consequently, the general practice is that the courts do not make any order regarding costs at all, leaving the parties to pay their own expenses. This is averse to the intention of the legislature, a cardinal consideration in the interpretation of statutory provisions. Additionally, such conduct of the courts indirectly encourages dilatory tactics by the parties, as they would only have to pay their own costs.
Juxtaposing the Hong Kong position with that of other jurisdictions
It is an accepted norm in most arbitration-friendly countries to award costs on unsuccessful set aside applications, and the only difference is in the terms of the basis of assessment of such costs. The rule with respect to costs in general proceedings in most countries is that standard costs are to be awarded unless special circumstances can be shown that necessitate an award of indemnity costs. Hong Kong has taken the approach that all applications which unsuccessfully attempt to set aside an arbitral award fall in this category of “special circumstances”, as the arbitral award is expected to be enforced “as a matter of course”. In A v.R, Reyes J. justified this approach in his judgment stating that “if the losing party is only made to pay costs on a conventional party-and-party basis, the winning party would in effect be subsidizing the losing party’s abortive attempt to frustrate enforcement of a valid award”.
On the other hand, courts in other jurisdictions like Australia, England, USA and Singapore follow the usual course of awarding standard costs save for special circumstances even in failed set aside applications. Instead of proceeding with the default presumption of awarding indemnity costs, these courts consider the reasonableness of the case, conduct of the unsuccessful party, and the high threshold of grounds for resisting enforcement before awarding indemnity costs. However, the threshold of reasonableness, and hence, the application of this rule, is different in different jurisdictions.
Is the Hong Kong position pro-arbitration or simply too pro-enforcement?
The Hong Kong approach has been commended for being in line with the pro-enforcement bias of the courts in relation to New York Convention awards,[i] objects and considerations of its arbitration legislation, limited grounds of challenge, and the public policy discouraging Article 34 challenges. It is argued that by agreeing to arbitrate their disputes, parties mutually agree to respect the enforcement of the award. A default rule of indemnity costs incentivizes the parties to voluntarily comply with the award, while also discouraging unmeritorious challenges against the award. Therefore, indemnity costs work as an effective tool against unjustified protracted attempts at delaying and diluting enforcement of an arbitral award on mere dissatisfaction with the tribunal’s conclusions. Indemnity costs bolster the principle of finality in arbitration, restoring its effective and expeditious nature as a dispute resolution mechanism.
It is common for unsuccessful parties to treat arbitration as merely the first step to litigation and challenge the award on one ground or another. It would indeed be paradoxical if the party that has successfully refuted an unmeritorious challenge against the award is only paid standard costs and made to pay the rest of the costs for itself. Hence, the Hong Kong approach sends out a very strong signal in favour of the arbitral process as well as the contractual sanctity embodied in the arbitration clause.
Since the rationale behind awarding indemnity costs would be universally applicable in all the countries that have adopted the New York Convention, it begs the question of whether indemnity costs should be awarded as a norm in unsuccessful set aside applications everywhere.
Hong Kong’s default rule of awarding indemnity costs in all unsuccessful enforcement challenges has the possibility of being counter-productive. As explained in the Then Khek Koon case, the rationale behind recognizing standard costs as the norm is that it balances the interests of access to justice with the interests of the winning party. The Hong Kong approach can deter reasonable enforcement challenges from being brought to the court. The pertinent point here is that the Hong Kong approach treats any and every enforcement challenge as anti-arbitration. On the contrary, many of these challenges bring into light glaring procedural lapses. Enforcement of arbitral awards rendered pursuant to a faulty arbitral procedure can undermine arbitration as a dispute resolution mechanism.
One of the reasons cited by Reyes J. to justify awarding indemnity costs was that the parties’ agreement to arbitrate represents a commitment to accept the award as final and binding, and an enforcement challenge goes against this initial commitment of the parties. However, such an argument ignores the fact that finality of the award is subject to the possibility of procedural deficiencies that can result in a challenge under Article 34, which is well within the rights of the losing party. An award debtor’s mere reliance on its statutory rights should not make them liable to be penalized through indemnity costs. Mere failure of the award debtor’s challenge does not compulsorily mean that its case was unreasonable and should not have been brought in the first place.
More importantly, the objectives sought by the Hong Kong approach can be achieved through the default rule of standard costs absent exceptional circumstances. Where a party engages in guerilla tactics to delay or resist enforcement, indemnity costs can (and must) be awarded against it. Furthermore, the high threshold set for non-enforcement acts as a deterrent against challenging the award. Therefore, the fact that courts still have the discretion to award indemnity costs itself dis-incentivizes parties from engaging in unreasonable conduct. This approach avoids the disadvantages of the Hong Kong approach, while reserving its advantages.
Reconsidering the Indian position
Interpreting Section 31A of the Indian Act in accordance with the intention of the legislature, as explained above, clearly indicates that the courts should always make an order of costs. As the UNCITRAL Model Law is silent on the costs to be awarded, the public policy of the forum is the main consideration in making a decision with respect to costs. India has adopted the New York Convention and the Model Law. Section 31A was introduced with the objective of introducing a new costs regime in arbitration, in line with the judgment in Salem Advocate Bar Association case. In this case, the court lamented the fact that in most cases, parties are made to bear their own costs, and recommended imposing “heavy costs” if a party delays the process. Furthermore, the very objective of the 2015 amendments, which inserted Section 31A, was to make India more arbitration-friendly.
Hence, it would be apposite for the Indian courts to award costs in every case, and individually consider each case to decide the quantum, while reserving the discretion to award indemnity costs under Section 31A. However, the 2021 amendments have expanded the grounds for setting aside of awards under Article 34, signaling a fundamental distrust of the arbitral process. The onus is on the judiciary to strike a balance between the interests of the potential litigants who want to challenge the award based on a legitimate procedural defect and those compelled to defend a valid award against an unmeritorious challenge.
[i] The pro-enforcement bias is evident particularly in the fact that the court has discretion to allow enforcement of an award even though an Article V ground has been met (See China Nanhai Oil and Brunswick Bowling).
Amishi Aggarwal and Tanmay Gupta are third year students at NALSAR University, Hyderabad. They have a keen interest in arbitration. For any discussion related to the article, they can be contacted via mail at email@example.com and at firstname.lastname@example.org. Tanmay Gupta is an Associate Editor of the Arbitration & Corporate Law Review Blog.