The Federal Court of Australia has rejected a line of English, Hong Kong, Singaporean and Australian authority which holds that litigants who unsuccessfully challenge an arbitration agreement should normally be penalised with indemnity costs.
Sino Dragon Trading Ltd v Noble Resources International Pte Ltd (No 2)  FCA 1046 (23 September 2015) -]]>http://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2015/2015fca1046]]>
The issue is still not resolved, with two clearly inconsistent lines of international authority continuing to co-exist. However, the judgment fairly encapsulates the issues and brings resolution closer. The issues raised may also have relevance to civil law jurisdictions.
Background – the line of authority arising from A v B
In common law countries a successful litigant is usually entitled to a partial indemnity for its costs (known as costs on the “party/party basis”, or the “ordinary basis”). The litigant may only be awarded a full indemnity for its costs if exceptional circumstances justify such an award.
However in 2007, Colman J in the English case of A v B1held that a different principle is applicable where the court is required to intervene in support of an arbitration clause:
“…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”.2
The decision of Colman J has been followed by several first instance decisions in Hong Kong,3 and at least one appellate decision in Singapore.4 It was also followed last year by an Australian court.5 Thus there is a line of authority holding that indemnity costs are generally appropriate whenever it is necessary to restrain or deal with proceedings commenced in breach of an arbitration agreement.
However, other Australian courts have declined to follow A v B, including two decisions at first instance6 and the Victorian Court of Appeal in IMC Aviation Solutions Pty Ltd v Altain Khuder LLC, wherein Hansen JA and Kyrou AJA held:
“…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.”7
Thus there were two competing and inconsistent lines of authority on this issue when Edelman J was required to consider it afresh in September this year.
The plaintiff Sino Dragon is a Hong Kong company. The respondent Noble Resources is a Singaporean subsidy of the Noble Group. The companies entered a contract on 9 January 2014 in which Sino Dragon agreed to buy 170,000 dry metric tonnes (DMT) of iron ore from Noble Resources for a base price of US$119 per DMT, inclusive of freight to China. The governing law of the contract was stipulated as the law of Western Australia. The contract provided that any “dispute, controversy or claim arising out of, under, in connection with or in relation to this Contract” would be referred to arbitration by three arbitrators in Australia under the UNCITRAL Arbitration Rules.
On 1 May 2014, Noble Resources served a notice of arbitration on Sino Dragon. It estimated its claim at A$1.9 million, proposed ACICA as the appointing authority, and nominated the first arbitrator. Various dealings and procedural disputes between the parties followed. In August 2015, Sino Dragon applied to the Federal Court of Australia for orders which included removal of two arbitrators.
The decision on the application - judicial criticism
On 17 September 2015, Edelman J rejected the challenge to the arbitrators on the basis that there was either no power, or it would be inappropriate to exercise power, to make each of the orders sought by Sino Dragon. His Honour was critical of Sino Dragon:
“It is unfortunate that this application was brought in the teeth of the express provisions of the International Arbitration Act and the Model Law. The necessary consequence of this application is the interruption of the orderly arbitration process. This application creates the potential for unnecessary delay to an arbitration which is not complex …. However, the potential disruption has been minimised by the considerable co-operation of solicitors and counsel which permitted this substantial application to be prepared, heard, and decided within two weeks”.8
Noble Resources seeks indemnity costs
After this adverse judicial comment, Noble Resources sought an order that Sino Dragon indemnify it for its costs of the application.
Edelman J rejected the line of cases based on A v B and concurred with the reasoning of the Victorian Court of Appeal in Altain Khuder. He considered that the A v B approach encourages collateral disputes related to the question of costs, such as whether there was conduct which led a party to believe that the chosen forum could be ignored, or which broke the chain of causation. The legislature could have created such a special category of costs in the International Arbitration Act, but did not do so.
Edelman J also noted the argument put forward by two judges in the line of cases arising from A v B, that the basis for normally awarding indemnity costs is that they are seen as “a proxy for damages for breach of an arbitration agreement”.9 His Honour held that there are fundamental problems with this approach, including: (i) those damages for breach of the arbitration agreement have not been pleaded, and (ii) the party liable has not been given the opportunity to lead evidence or make submissions concerning remoteness of damage, mitigation, or the scope of its liability for damage.
Edelman J accepted that courts frequently order costs on the indemnity basis where there is an unsuccessful challenge to recognition or enforcement of an arbitral award pursuant to the New York Convention. However he held that this was a difference of context, rather than a difference of principle: the grounds on which recognition or enforcement can be challenged are narrow and therefore a failed challenge will be more easily identified as one which should not have been brought in the first place.
Whether indemnity costs should be awarded on usual principles
Edelman J then considered whether an award of indemnity costs was justified in this case on the usual common law principle. He held that it was not. The special circumstances in which a court may decide to make such an award are not closed but include: (i) particular misconduct by a party that causes unnecessary loss of time; (ii) proceedings commenced for some ulterior motive or in wilful disregard of known facts or clearly established law; or (iii) an imprudent refusal of an offer to compromise. In this case, although he had held that Sino Dragon’s application was doomed to fail, yet this was not a conclusion that could be easily reached without benefit of hindsight. It was only late in the hearing that this became apparent. Noble Resources had never written to Sino Dragon stating that its application was misconceived – although it was not obliged to do so, yet the fact that it had not done so combined with the complexity of the submissions by each side indicated that it was not apparent to either party, at least initially, that the application was hopeless.
His Honour therefore ordered that Sino Dragon pay the costs of the original hearing and of the costs hearing on the ordinary or party/party basis.
It is inevitable that this issue will arise again in the near future, given the frequency with which the aid of the courts is sought to impugn or defend arbitration agreements.
The argument (rejected by Edelman J in this case) that costs are a proxy for damages where an arbitration agreement has come under challenge, broadens the potential applicability of this issue beyond common law jurisdictions. Civil lawyers may consider that such an argument could give a basis for taking costs outside of codified costs provisions. If so, this is arguably a further reason for rejecting any association between costs and damages.
It is respectfully submitted that Edelman J’s reasoning is correct, and that there is no strong reason of principle for making a special rule about costs where an arbitration clause or agreement is under challenge. Nevertheless, the number of contrary cases emanating from several jurisdictions indicates that it may be some time before this is generally accepted.
1 EWHC 54 (Comm);  1 Lloyd’s Rep 358
2At 361 ; emphasis added
3A v R  HKCFI 342;  3 HKLRD 389, 400-401  –  (Reyes J); Wing Hong Construction Ltd v Tin Wo Engineering Co Ltd  HKCFI 1994 at –  (Saunders J); Taigo Ltd v China Master Shipping Ltd  HKCFI 530 at  –  (Saunders J).
4Tjong Very Sumito and Others v Antig Investments Pte Ltd  SGCA 41 at,  (the Court)
5Pipeline Services WA Pty Ltd v ATCO Gas Australia Pty Ltd  WASC 10(S) at  p er Martin CJ
6Ansett Australia Ltd v Malaysian Airline System Berhad (No 2)  VSC 156 ; John Holland Pty Ltd v Kellogg Brown & Root Pty Ltd [No 2]  NSWSC 564 at  – 
7 VSCA 248; (2011) 38 VR 303, 391-392 
8Sino Dragon Trading Ltd v Noble Resources International Pte Ltd (No 1)  FCA 1028 (17 September 2015) at 
9By Colman J in another case, National Westminster Bank plc v Rabobank Nederland  EWHC 1742;  1 All ER (Comm) 243, 246 , 252-253 , and by Martin CJ in Pipeline Services WA Pty Ltd v ATCO Gas Australia Pty Ltd  WASC 10(S) at