FEDERAL COURT OF AUSTRALIA

Sino Dragon Trading Ltd v Noble Resources International Pte Ltd (No 2)

[2015] FCA 1046

THE COURT ORDERS THAT:

1.    The Applicant pay the First Respondent’s costs of the application to be taxed if not agreed.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

Introduction

1    This is an application for indemnity costs. The application was made by counsel for Noble Resources at the handing down of my reasons for decision in the substantive application. Counsel for Sino Dragon was not present, and the solicitor representing Sino Dragon sought to have counsel respond to the application. I made orders that short written submissions be filed and that this application for indemnity costs be determined on the papers.

2    The substantive application concerned a challenge by the applicant, Sino Dragon, to the appointment of Mr Bonnell and Mr Kay Hoyle as arbitrators. Other orders were sought in relation to procedural issues in the arbitration. My reasons for decision in the substantive application in this matter were given on 17 September 2015. I dismissed the application on the basis that there was no power for any of the orders sought to be made and any power that existed should not be exercised. The essential reason for lack of power was that the applicant had not followed the procedures required by the International Arbitration Act 1974 (Cth) and the UNCITRAL Model Law on International Commercial Arbitration (the Model Law). In relation to the challenge to Mr Bonnell and Mr Kay Hoyle those procedures were affected by the agreement of the parties (in their contract) that the arbitration is to be conducted in accordance with the prevailing UNCITRAL Arbitration Rules: Sino Dragon Trading Ltd v Noble Resources International Pte Ltd [2015] FCA 1028.

3    There are essentially three issues on this application. The first is whether a rule should be applied that requires indemnity costs to be ordered, save in exceptional circumstances, where an unsuccessful application is brought in breach of an arbitration clause. The second is whether there is any policy which would require the award of indemnity costs by analogy with cases which have unsuccessfully attempted to resist enforcement of an award. The third is whether the court should, in its general discretion, award indemnity costs.

Is there a rule requiring indemnity costs unless there are exceptional circumstances?

4    A central basis upon which the application for indemnity costs is brought in this case derives from the decision of Colman J in A v B [2007] EWHC 54 (Comm); [2007] 1 Lloyd’s Rep 358. That decision has led to conflicting approaches taken in a number of courts. If the decision in A v B had not been applied in subsequent cases, and if it had not been reinforced by a later decision of Colman J to which I refer below, the general applicability of the observations of Colman J in that case might have been open to doubt. He described the primary application from which indemnity costs were sought as “the most unusual arbitration dispute I have ever encountered, either personally or in the law reports”: A v B [2006] EWHC 2006 (Comm); [2007] 1 Lloyd’s Rep 237, 240 [1]. The strength of that remark is underscored by the fact that his Lordship had served 15 years on the Commercial Court, 30 years at the commercial bar, and became a leading arbitrator on his retirement in 2007. The unusual facts involved in the dispute in the primary application before Colman J had given rise to an application, which was granted, to set aside a claim and service of it upon the defendants outside the jurisdiction. The claim had been brought in breach of a Swiss arbitration agreement.

5    In his decision concerning costs of that extremely unusual dispute, in A v B [2007] EWHC 54 (Comm); [2007] 1 Lloyd’s Rep 358, Colman J ordered the payment of indemnity costs. He explained, at 362 [15], that indemnity costs were appropriate if a party “deliberately ignores an arbitration or a jurisdiction clause so as to derive from its own breach of contract an unjustifiable procedural advantage”. His Lordship said that in such a case the party “is in substance acting in a manner which not only constitutes a breach of contract but which misuses the judicial facilities offered by the English courts or a foreign court”. He also referred to some of the extreme circumstances of the case including personal allegations which impeached the professional competence and integrity of B as a solicitor and arbitrator.

6    This would have been sufficient for the award of indemnity costs. However, a more general basis for the award of indemnity costs was also advanced by counsel before Colman J. That basis was that indemnity costs were generally appropriate where proceedings were commenced in breach of an arbitration agreement. This was said to be because the damages which flow from the breach of that agreement are normally all the costs reasonably incurred by the party entitled to a stay of the proceedings but that the damages recoverable for such a breach would not be calculated by reference to costs assessed on the ordinary basis. His Lordship appeared to support this submission, saying that (at 361 [11]):

provided that it can be established by a successful application for a stay or an anti-suit injunction as a remedy for breach of an arbitration or jurisdiction clause that the breach has caused the innocent party reasonably to incur legal costs, those costs should normally be recoverable on an indemnity basis.

7    In Pipeline Services WA Pty Ltd v ATCO Gas Australia Pty Ltd [2014] WASC 10(S), Martin CJ followed the approach in A v B which he described as “impeccable” ([18]).

8    A similar approach has also been taken in several first instance decisions in Hong Kong: A v R [2009] HKCFI 342; [2009] 3 HKLRD 389, 400-401 [68] – [72] (Reyes J); Wing Hong Construction Ltd v Tin Wo Engineering Co Ltd [2010] HKCFI 1994 at [8] – [14] (Saunders J); Taigo Ltd v China Master Shipping Ltd [2010] HKCFI 530 at [13] – [16] (Saunders J). And the approach of in A v B has also been followed in Singapore: Tjong Very Sumito and Others v Antig Investments Pte Ltd [2009] SGCA 41 at [19], [71] (the Court).

9    However, other than in the decision of Martin CJ in Pipeline Services WA Pty Ltd, it does not appear that there was any substantial argument in the Hong Kong or Singaporean cases about the correctness of the decision of Colman J in A v B. More fundamentally, the Hong Kong and Singaporean cases concerned very different circumstances from that which arose in A v B. Those cases were concerned with an application for leave to appeal from an arbitral award, or with the resistance of enforcement of an arbitral award. As I explain in the next section of these reasons, that context gives rise to different considerations.

10    It is possible that the decisions of Colman J and Martin CJ could be distinguished in this case on the basis that they concerned applications for a stay which were brought in breach of an arbitration agreement. In contrast, this case concerned a challenge to an arbitrator which was brought contrary to the required procedure in the Model Law and applications for orders which were essentially procedural and were also brought contrary to the requirements of the Model Law. Some of the considerations upon which their Honours relied to develop the indemnity costs approach in the context of the stay applications in breach of an arbitration agreement do not apply as readily to cases which do not involve breach of an arbitration agreement. However, neither Noble Resources nor Sino Dragon sought to distinguish the decisions on this basis. And there are statements by Colman J and Martin CJ that suggest that their Honours intended the principles to be of wider application to arbitrations.

11    Counsel for Noble Resources relied upon the decisions of Colman J and Martin CJ. Nevertheless, quite properly, he referred to the court to a series of cases in which those decisions have either been doubted or not followed.

12    In Ansett Australia Ltd v Malaysian Airline System Berhad (No 2) [2008] VSC 156 [22], Hollingworth J doubted whether the statement of principle by Colman J represented the law in Victoria. Her Honour did not need to reach a final decision because even if the approach of Colman J had been applied, she would have refused indemnity costs ([23]).

13    In Altain Khuder LLC v IMC Mining Inc & Anor (No 2) [2011] VSC 12, the primary judge in the Supreme Court of Victoria applied the A v B approach, referring to the Hong Kong cases. The Court of Appeal rejected the A v B approach. On appeal in IMC Aviation Solutions Pty Ltd v Altain Khuder LLC [2011] VSCA 248; (2011) 38 VR 303, 391-392 [335], Hansen JA and Kyrou AJA said:

With great respect to his Honour, we can find nothing in the [International Arbitration Act] or in the nature of the proceedings that are available under the Act which of itself warrants costs being awarded against an unsuccessful award debtor on a basis different from that on which they would be awarded against unsuccessful parties to other civil proceedings. Accordingly, his Honour acted on a wrong principle in embracing the approach that has been adopted by the Hong Kong Court of First Instance. We note also that the Civil Procedure Act 2010 was not in force when his Honour heard this proceeding. Even if it were in force, it would not have warranted the order he made. (footnotes omitted)

14    In the next section of these reasons I explain the different considerations that apply in relation to a claim for costs against an award debtor. It is sufficient at this point to express agreement with Hansen JA and Kyrou AJA that the A v B approach—creating a different principle rather than merely being a context within which the usual principles are applied—does not find any support in the International Arbitration Act or in the Model Law.

15    The approach in A v B was again rejected in John Holland Pty Ltd v Kellogg Brown & Root Pty Ltd [No 2] [2015] NSWSC 564. At [31] – [39], Hammerschlag J gave eight reasons why the approach in A v B is “unsound and insupportable in principle”. With respect, his Honour’s criticisms are unanswerable:

First, the imposition of bespoke categories and presumptions in favour of an award of indemnity costs is contrary to the accepted starting point that costs are on the ordinary basis. It displaces the usual presumption that indemnity costs will not be awarded except where there is a special entitlement or some relevant unreasonable action including relevant misconduct in connection with the conduct of the proceedings. It makes the ordinary basis the exception, not the rule. It is an unwarranted fetter on the Court’s wide discretion.

Secondly, there is no logical or rational reason for the creation of categories restricted to the breach of arbitration or forum agreements. Such bargains have no greater sanctity than other bargains, including releases and covenants not to sue which, like arbitration and forum agreements, restrict the right to resort to curial proceedings.

Thirdly, in all cases of breach of contract where the successful party only obtains an order for costs on the ordinary basis, it is left uncompensated for the difference between the amount assessed on that basis and the full indemnity basis.

Fourthly, the approach makes no allowance for a correlative presumption that a party who wrongly asserts the existence or applicability of an arbitration or forum agreement should be mulcted with indemnity costs.

Fifthly, the approach encourages collateral disputes related to the question of costs such as whether there was conduct which had the potential to lead a party to believe that the chosen forum could be ignored or which broke the chain of causation. Characterising costs as damages also gives rise to questions of mitigation. The approach is inimical to the achievement by the Court of the overriding purpose under the CPA to facilitate the just, quick and cheap resolution of the real issues in the proceedings.

Sixthly, the precise reach of the presumption is unclear. As articulated in paragraph [11] of A v B, all that is required is breach by one party, causing the other reasonably to incur costs. This is an objective test. As articulated in paragraph [15], the guilty party must deliberately ignore an arbitration or jurisdiction clause so as to derive an unjustifiable procedural advantage. This incorporates a subjective element.

Seventhly, the Legislature could have, but did not, create or recognise any such categories for an award of indemnity costs in the Act.

Finally, there is sufficient power in the Court to award indemnity costs in any circumstances where it is warranted.

16    There is a supplementary point that arises in relation to the third consideration mentioned by Hammerschlag J. In Pipeline Services WA Pty Ltd Martin CJ had suggested at [18] that a reason why indemnity costs should be awarded in cases of this nature is because

it is at least arguable that the rule in Berry v British Transport Commission [[1962] 1 QB 306] would preclude the innocent party from claiming the difference between costs allowed after taxation on a party and party basis, and reasonable costs actually incurred by way of damages in subsequent proceedings. Further and in any event, requiring the innocent party to commence subsequent proceedings to recover that gap in costs would be productive of unnecessary litigation, inefficient and unjust.

17    The point being made by Martin CJ appears to be that the innocent party should be entitled to indemnity costs because the innocent party should not be required to bring separate proceedings for breach of the arbitration agreement in order to recover its legal costs incurred as a result of the breach of that agreement. In other words, the court should award indemnity costs effectively as a proxy for an order for damages for breach of an arbitration agreement. In another decision of Colman J, to which Martin CJ did not refer, his Lordship explained that this had indeed been his intention in A v B, for indemnity costs to serve as a proxy for damages in a separate, unprosecuted action for breach of the arbitration agreement: National Westminster Bank plc v Rabobank Nederland [2007] EWHC 1742; [2007] 1 All ER (Comm) 243, 246 [8], 252-253 [25].

18    With respect, it is a surprising course for a court to award indemnity costs as a proxy for damages where (i) those damages for breach of the arbitration agreement have not been pleaded, (ii) the party liable has not been given the opportunity to lead any evidence on the issue, and (iii) the party liable has not made submissions, potentially based on evidence, concerning remoteness of damage, mitigation, or the scope of its liability for damage. Even if these matters could be addressed at the costs hearing, effectively as a split trial of liability and damages, then this would raise all the concerns that usually accompany splitting a trial of liability and damages: Tepko Pty Ltd v Water Board [2001] HCA 19; (2001) 206 CLR 1, 55 [170] (Kirby and Callinan JJ; McHugh J generally agreeing). These difficulties are further exacerbated in circumstances where the damages issue being split from the trial or application will often not have been pleaded and the split will only occur after the trial or application.

19    Even if it were to be assumed that the taxation exercise, rather than the costs hearing, could somehow engage with the type of arguments that might be made concerning mitigation or remoteness of damage, there remain issues such as how the taxing officer should deal with issues such as claims for interest on damages at the relevant rate for damages? Further still, there might be a substantial difference even between the award of indemnity costs and the full costs incurred, which might not be too remote and might not have involved a failure to mitigate. Unless another action were to be brought by the successful party, the award of indemnity costs in heavily contested proceedings could have the effect of penalising the successful party by depriving it of the full damages to which it might otherwise be entitled. The late author of McGregor on Damages (19th ed, Sweet & Maxwell, 2014) pp 769 [20-007], 798 [20-063] points to this as a reason why the abandonment of the old learning, described below, is mistaken.

20    Perhaps an even greater difficulty with seeing the indemnity costs approach as a proxy for a damages award is understanding why there should be a difference only in the context of arbitration concerning the long-standing rule that costs arising from a breach of an agreement can be recovered as damages in a separate action: see Smith v Compton (1832) 3 B & Ad 407; 110 ER 146; Bramley v Chesterton (1857) 2 CBNS 592; 140 ER 548; Collen v Wright (1857) 3 El & Bl 647; 120 ER 241; Hammond v Bussey (1888) 20 QBD 79. Any suggestion of an amelioration of that rule, permitting only recovery of taxed costs, had never excluded those breaches which involved arbitration agreements: Berry v British Transport Commission [1962] 1 QB 306, 322 (Devlin J).

21    For these reasons, I reject the submission that where a challenge to an arbitrator is brought, or some procedural challenge made, in breach of an arbitration agreement then indemnity costs should be awarded unless exceptional circumstances arise.

Is there a policy supporting an award of indemnity costs by analogy with challenges to enforcement?

22    Different considerations arise where the application to the court concerns a challenge to the recognition or enforcement of an arbitral award. These considerations are, however, considerations of context rather than differences of principle.

23    The reason why different considerations of context apply is because it is well accepted that the grounds upon which recognition or enforcement can be challenged are narrow. Those grounds, in Article 36 of the Model Law, include a public policy ground: Article 36(1)(b)(ii). But, the public policy exception is narrow and reserved for the most serious of cases. Hence, in one recent case, Colin Joss & Co Pty Ltd v Cube Furniture Pty Ltd [2015] NSWSC 829, relying on the public policy exception, Hammerschlag J awarded indemnity costs saying (at [11]) that the

high threshold that the public policy exception demands brings with it the enhanced risk of an indemnity costs award because a failed challenge will be more easily identified as one which should not have been brought because it was throughout destined to fail. This enhanced risk is sufficient disincentive for the making of challenges lacking true substance, without the necessity for a presumption.

24    Noble Resources sought to rely upon the Colin Joss decision in support of an award of indemnity costs in this case. To the extent that Noble Resources was submitting that the decision in Colin Joss meant that different principles concerning indemnity costs should apply in this case from the usual principles, then I do not accept that submission. The application by Sino Dragon was not one which sought to resist recognition or enforcement of an arbitral award. However, the submission might have been intended only to suggest that the circumstances of this application also involved a narrow basis for the Court’s power so that, based on the usual principles, indemnity costs should be awarded because the likely failure of the challenge should have been easily identified. That submission is considered in the next section of these reasons.

Should indemnity costs be awarded in this case based on the usual principles?

25    The Court has a broad discretion to order costs under s 43 of the Federal Court of Australia Act 1976 (Cth). The usual principles in this Court concerning an award of indemnity costs were set out by Sheppard J in Colgate-Palmolive Company v Cussons Pty Limited [1993] FCA 536; (1993) 46 FCR 225, 232-235. Those principles have been applied on many occasions, including after the passage of the Federal Court Rules 2011 (Cth). In particular, the court should only make an order for the payment of costs on some basis other than a party and party basis where the circumstances of the case warrant it. This might be because the justice of the case might require it or because some special or unusual feature in the case justifies the court in departing from the ordinary practice.

26    The categories in which the discretion may be exercised are not closed but some of the circumstances which may warrant the exercise of the discretion to award indemnity costs include:

(1)    evidence of a particular misconduct that causes loss of time to the court and the other parties;

(2)    proceedings which were commenced for some ulterior motive;

(3)    proceedings which were commenced in wilful disregard of known facts or clearly established law;

(4)    the making of allegations that ought never to have been made, or the undue prolongation of a case by groundless contentions;

(5)    an imprudent refusal of an offer to compromise; or

(6)    an award against a contemnor.

27    In Hamod v New South Wales [2002] FCAFC 97; (2002) 188 ALR 659, 665 [20], Gray J (with whom the other members of the court agreed) said:

Indemnity costs are not designed to punish a party for persisting with a case that turns out to fail. They are not awarded as a means of deterring litigants from putting forward arguments that might be attended by uncertainty. Rather, they serve the purpose of compensating a party fully for costs incurred, as a normal costs order could not be expected to do, when the court takes the view that it was unreasonable for the party against whom the order is made to have subjected the innocent party to the expenditure of costs.

28    The circumstances in this case do not justify an indemnity costs order for five reasons.

29    First, the issue upon which the application was ultimately decided in relation to the bias challenge concerned a construction of Article 13(2) of the Model Law which meant that the challenge should first be decided by the appointing authority before the issue could be raised before this Court under Article 13(3). But that construction was only clearly advanced in oral submissions by counsel for Noble Resources. Even in written submissions filed on the day before the application, the objection by Noble Resources to the “competency of the court to hear the application” had focused upon a submission that Sino Dragon had not complied with the time limits in Article 13(3) of the Model Law.

30    By mentioning that this point was raised late, I make no criticism of counsel. Evidence, court bundles, and substantial submissions were prepared in a very short period of time. But the late raising of this point indicates that although it might be said, with hindsight, that the challenge was doomed to fail this is not a conclusion that could easily be reached without the benefit of hindsight and with the extreme time pressure upon both Sino Dragon and Noble Resources.

31    Secondly, there is the timing of when the application for indemnity costs was made. Generally, a party should make submissions on costs during a hearing: Harding v Deputy Commissioner of Taxation [2008] FCA 1516; (2008) 172 FCR 469, 473 [13] citing Hanave Pty Ltd v LFOT Pty Ltd [1999] FCA 572. In Siminton v Australian Prudential Regulation Authority (No 2) [2008] FCAFC 113 [4], the Full Court of this Court said that “[n]ormally the Court would assume that a successful litigant desired that costs would follow the event. If some different course was to be urged then it should be foreshadowed”. Justice Buchanan has expressed the rationale as being that “the Court should be in a position to deal with the question of costs in its judgment unless there is a particular reason to reserve that question for later, and separate, consideration”: Tristar Steering & Suspension Australia Ltd v Industrial Relations Commission of New South Wales (No 2) [2007] FCAFC 95; (2007) 159 FCR 274, 280 [26].

32    Thirdly, in none of the correspondence which was before me was there any suggestion by Noble Resources to Sino Dragon that any of its applications were so weak that they should be abandoned, with the risk otherwise of indemnity costs. Of course, a decision to send such correspondence should never be lightly taken and where it is taken the reasons for the weakness of the claim should be able to be succinctly and precisely expressed. The lack of that correspondence, coupled with very substantial submissions by Noble Resources on the merits of the bias challenge suggests that the point was not immediately seen as doomed to failure due to a lack of power. The same can be said of the procedural issues concerning the issue of a subpoena or orders for production of documents. Those claims were not strong but that is an assessment that is more easily made with hindsight.

33    Fourthly, as I observed in my judgment on the main application in this matter, both parties acted with great expedition and apparent co-operation in bringing this matter to be heard by the Court within only two weeks. This was done despite a considerable volume of evidence and careful submissions on some points which were not simple.

34    Fifthly, some of the main discretionary factors relied upon by Noble Resources in its application for indemnity costs concern the strength of Sino Dragon’s submissions concerning the challenge to the appointment of the arbitrators. Those are not matters which I addressed in my reasons and they are not matters upon which I consider it necessary or appropriate to comment. It suffices to say that I do not accept that Noble Resources would necessarily have had to respond to these matters if its submission concerning the power of this Court had meant that these claims were inevitably doomed to fail on the basis of lack of power by this Court.

Conclusion

35    Indemnity costs should not be ordered in this case.

36    There is no dispute that the usual order should be made requiring Sino Dragon to pay the costs of Noble Resources, to be taxed if not agreed.

Associate:    

Dated:    23 September 2015