Chemicals - Guerrilla tactics: resulting in indemnity costs awards?

• United Kingdom

• Industrials - Chemicals

11-05-2017

Ireland is on the cusp of major changes to the way we deploy modern dispute resolution practice and procedures. The Court system has seen radical changes which are being implemented (subject to formal enactment) with two Statutory Instruments which were introduced in 2016, changing and updating the practices and procedures to be used for the Conduct of Trials and for Case Management of Trials[1]. Essentially these Statutory Instruments are introducing “New Court Rules”, which will impact on relevant disputes arising from the chemicals sector. Equally, Irish Arbitration law saw major changes in 2010 with the adoption of the 2010 Arbitration Act, and the adoption of the Model Law Code, and the effective abolition of a different approach and procedure for domestic and international arbitrations under Irish Law. Following this, there have been strong moves from the Irish Arbitration community to mark Ireland out as a seat of choice for international arbitration. Given the core nature of international arbitration to the chemicals sector, the changes to Irish Arbitration law are certainly of interest to the industry, and worthy of note.

These changes allow Ireland to stand out in the dispute resolution landscape.

Traditionally arbitration has been heralded as a more attractive and advantageous form of dispute resolution to traditional litigation; however the rise in the use of guerrilla tactics in international arbitrations is now seen as a poignant and real threat to disputing parties continuing to avail of arbitration over Court litigation. Commentators are increasingly citing the use of guerrilla tactics as being of such significance that they are an “international phenomenon”[2], with such a phenomenon potentially impacting on the arbitration of disputes within the chemicals sector.

In this article we focus on how courts internationally are reacting to clear use of guerrilla tactics being deployed in arbitration, which become the subject of an appeal. We have in particular examined the differing approaches in Hong Kong, England and Australia by the courts penalising parties by imposing indemnity costs awards to curb the unnecessary and inappropriate use of guerrilla tactics. We also examine how this trend is developing in the Irish courts, and the clearly stated reluctance of the Irish judiciary to interfere or alter an arbitrator’s award, save in the most exceptional of circumstances.

The term “guerrilla tactics” was coined by Michael Hwang in 2005. For Mr Hwang, the term described those whose aim was “to exploit the procedural rules for their own advantage, seeking to delay the hearing and (if they get any opportunity) ultimately to derail the arbitration so that it becomes abortive or ineffective”[3]. The tactics deployed included, delay tactics, excessive and unnecessary document production requests, excessive numbers of witnesses, cross-examination, and refusal to meet deadlines, to name but a few. It is clear that when the use of guerrilla tactics are deployed, the integrity of the entire arbitral process is seriously threatened, with the potential for many of the benefits associated with the process being lost.

Noting that that chemicals industry is the UK’s largest manufacturing exporter, the rise in international trade in the chemicals sector generally, and the core nature of international arbitration to the chemicals sector, the differing approaches of the courts in Hong Kong, England and Australia to deploying indemnity costs awards as a penalty for the use of guerrilla tactics in arbitral proceedings is examined below:

A Hong Kong Perspective

Hong Kong has long retained a reputation as a favourable centre for arbitration. The Working Party on Civil Justice Reform (“CJR”) reviewed the civil rules and procedures of the High Court of Hong Kong and recommended changes in 2009. The effect being, where a party has been unsuccessful in challenging an arbitral award, the courts have ordered (in the absence of special circumstances) that party should pay costs on an indemnity basis. Thus a party that unsuccessfully challenges an award must generally pay costs on the more onerous indemnity basis, as opposed to the typical "party-and-party" basis[4].

Today should either party (defendant or plaintiff) make an offer of settlement to a claim (known as a “sanctioned offer” or payment pursuant to Order 22 of the Rules of the High Court), there would be consequences in terms of costs and interest where the party concerned failed to do better than the sanctioned offer or payment.

The Court of First Instance (“CFI”) first applied the principle in relation to resisting enforcement in the case of A v. R[5] . In this case it was recommended that parties should comply with arbitration awards and deemed enforcement of them as a ‘matter of course’ and appeals to set aside an award or order refusing enforcement should be only permitted in the most exceptional of events.

This principal was later confirmed in a number of cases[6] and more recently in the case of Peter Cheung & Co v. Perfect Direct Limited & Yu Guolin[7] . Here, the Hong Kong CFI extended the principle of indemnity costs to cases where a party attempts to delay the enforcement of an arbitral award. Even though the judgment was not a direct challenge to an arbitral award, the CFI found that the purpose of the action was "clearly an attempt to delay the enforcement of an arbitral award" and therefore indemnity costs should be awarded to deter such behaviour[8].

This approach, albeit harsh, usually resulted in the court, where it considered it appropriate, ordering costs on an indemnity basis. The use of the term ‘special circumstances’ does leave a discretional interpretation open to judicial interpretation.

Accordingly the courts in Hong Kong appear to favour seeking to deter losing parties, who have deployed guerrilla tactics from seeking recourse and sanctuary in the Hong Kong courts – limited sympathy is evident.

An English perspective

In England, the question of the award of indemnity costs is usually influenced by the conduct of the parties or the circumstances of the case, where the case is taken out of the norm, such that it justifies an order for indemnity costs[9].

The case of Exfin Shipping (India) Ltd. v. Tolani Shipping Co Ltd[10] is an example of the English Courts imposing an indemnity costs order against an unsuccessful applicant seeking to set aside an arbitral award. In reaching its determination the court found that the applicant advanced unmeritorious arguments and the party had acted in its own perceived commercial interest and consequently should pay the commercial price for doing so.

In addition to the Exfin case another important case of note is that of A v B (Costs)[11]. Here, A entered into a contract with C to arbitrate various disputes between them. B was appointed as the arbitrator. A then commenced proceedings in England against B alleging that the arbitration clause was void and sought an injunction restraining B from continuing to act as Arbitrator. Colman J stayed the proceedings commenced by A, holding that A was under a contractual obligation to arbitrate its dispute with B. In relation to the issue of costs, A was ordered to pay the respondent’s costs on an indemnity basis.

More recently, the guiding principles on how the English courts interpret indemnity costs were summarised by Andrew Smith J. in the case of Fiona Trust & Holding Corporate v. Yuri Privalov[12]. This case identified the scenarios that would warrant an imposition of costs on an indemnity basis. These included, inter alia, pursuit of allegations despite the lack of any foundation in the documentary evidence for those allegations, incidences where large scale expensive litigation is pursued to exert commercial pressure, and pursuing unjustified cases or putting forward unreasonable allegations.

The approach taken in these cases, is unusual and it appears that the UK courts still favour a more conservative approach, where they will only interfere and exercise their jurisdiction in imposing an indemnity costs penalty after significant judicial deliberation and in exceptional circumstances. Although the guidelines identified in the Fiona Trust case are likely to considered by the judiciary going forward, they will only be exercised by imposing an indemnity costs award in the most exceptional of cases.

A principled Australian approach

In contrast to Hong Kong, Australia has adopted a more conservative approach when it comes to the area of indemnity costs. In Australia, indemnity costs have been utilised as a punitive measure against dilatory tactics in litigation in the context of fraud or misconduct, however this principal has not been extended to specifically include arbitration.

Two lines of authority have evolved in recent times in relation to the issue of whether indemnity costs should be imposed on unsuccessful challenges to arbitration agreements or resistance to enforcement of awards. Overall the Australian courts have not been receptive to the approach adopted in Hong Kong regarding the imposition of indemnity costs in the context of both international and domestic arbitrations. Instead the approach adopted is a more principles based approach to the imposition of indemnity costs[13].

One line of authority stems from the case of A v B, which was followed in Pipeline Services WA Pty Ltd v ATCO Gas Australia Pty Ltd[14], where the court described the reasoning in the judgment of Colman J as “impeccable”. The second line of authority stems from an apparent rejection of the Hong Kong approach, as demonstrated in a number of cases, including IMC Aviation Solutions Pty Limited v Altain Khuder LLC, where the Victoria Court of Appeal overturned the trial judge’s order to award indemnity costs, having applied the Hong Kong approach[15].

In a recent case of John Holland Pty Ltd v Kellogg Brown & Root Pty Ltd (No 2)[16] an application for indemnity costs was declined. Here, the successful parties sought costs on an indemnity basis, relying again on the English decision of A v B (Costs). In this instance the judge noted that approach was not appropriate to be adopted in Australia and reinforced the principal that there was sufficient power in the court to award the indemnity costs in any circumstances where it is warranted and the observation that true support for commercial arbitration neither necessitates nor justifies abandonment of this principle[17].

However the Australian courts seem reluctant to go down the road of embracing the concept of imposing Indemnity costs, but will do so in the most exceptional of case.

The Irish approach

In a 2010 report by the Law Reform Commission[18] it was stated the emergence in Ireland (and internationally) of alternative dispute resolution processes has been associated with real problems of delays in the court system. The Commission went further and accepted that any long delays in the court process involve clear barriers to justice.

In Ireland tolerance for the use of delay tactics by parties in the Court process has been steadily decreasing, this process has culminated by the introduction of New Court Rules referred to above; albeit they await full implementation, they are aimed at enhancing the effectiveness of the administration of justice in the Courts.

Equally the Irish Courts have shown a marked desire to support the arbitral process and not to interfere in an arbitral award, save in the most extreme of cases. In the most recent cases over the last 3 years the Courts have been resolute in this approach.

The case of Fayleigh v Plazaway Limited [19] Judge Costello in the High Court succinctly stated the position as being, “the law on setting aside awards of arbitrators is very clear, it is an uphill task for the person who wants to overturn the award”.

In Ireland parties can only apply to the High Court in very limited circumstances to set aside awards. These are very specific grounds that include incapacity, invalidity of agreement, failure to give adequate notice for arbitration, and that the dispute is not capable of settlement by arbitration or is in conflict with public policy. The 2013 judgment in Snoddy v Mavroudis[20] is particularly significant as it demonstrates the respect in which the arbitral process is held by the Irish Courts, and it evidences that in the absence of one of the grounds available for setting aside an award, the Irish High Court will not interfere in the arbitral process which the parties had agreed to participate in.

Despite this desire to support arbitration, there is little to no evidence as of yet, that the Irish courts are willing to follow the international example of awarding indemnity costs awards against applicants seeking to set aside arbitral awards, even where they are shown to have deployed guerrilla tactics and acted in bad faith.

In case of Des Hennessy Building Contractors Limited v O’Beirne[21] the applicants had failed to appeal an arbitrator’s decision on his jurisdiction. Instead, the applicants argued the failure to appoint the arbitrator in accordance with the terms of the arbitral agreement remained a matter that could be raised by them by way of opposition and/or defence to the enforcement of the award. The applicants brought their challenge on what appeared to be thin grounds, and the Court categorically rejected the challenge, upholding the Award. The challenge appeared to be designed to delay matters, but this was not a matter in issue before the Court. As such it remains uncertain how the Irish Courts will assess the question of imposing indemnity costs, and if they will be more inclined to follow the Hong Kong, English or Australian approach. However, it can be said that unlike Hong Kong and the Working Party review completed in 2009, did not indicate that there was any policy movement toward the imposition of costs on an indemnity basis to deter challenges motived by delay, or unethical challenges.

This aside, it is only a question of time to have to decide the matter one way or another. Logic would dictate that indemnity cost awards may be the next logical step for a judiciary who publically support Arbitration and Arbitrator’s awards, as the courts will not want guerrilla tactics being seen as permissible at the expense of Arbitration. The slightly more conservative approach of the English Courts would seem the more likely first step to be followed in Ireland.

[1] SI 254 of 2016 and SI 255 of 2016

[2] Mohanty, G & Raina, S [year] Use of costs on indemnity basis to combat dilatory tactics in Arbitration – advocating the Hong Kong approach. Indian Journal of Arbitration Law, Volume III, Issue 1.

[3] Horvath, J Gunther & Stephen Wilske {2013} “Guerilla Tactics in International Arbitration”

[4] Chapman, S, Tai, M & Young, B [2016] Hong Kong Court of First Instance extends indemnity costs principle to actions that delay enforcement of arbitral awards. Arbitration notes, Herbert Smith Freehills.

[5] [2009] 3 HKLRD 389

[6] Gao Haiyan & Anor v. Keeneye Holdings Ltd & Anor (No 2) and was applied in the court of final appeal in the case of Pacific China Holdings Ltd v. Grand Pacific Holdings Ltd.

[7] (HCMP 2493/2012) ("HCMP Action") and New Heaven Investments Limited & Rondo Development Limited v. Yu Guolin (HCA 115/2013) ("HCA Action")

[8] Chapman, S, Tai, M & Young, B [2016] Hong Kong Court of First Instance extends indemnity costs principle to actions that delay enforcement of arbitral awards. Arbitration notes, Herbert Smith Freehills.

[9] Mohanty, G & Raina, S [year] Use of costs on indemnity basis to combat dilatory tactics in Arbitration – advocating the Hong Kong approach. Indian Journal of Arbitration Law, Volume III, Issue 1.

[10] [2006] EWHC (Comm) 1090, 13(Eng.)

[11] [2007] EWHC 54 (Comm); [2007] 1 Lloyd’s Rep 358.

[12] [2011] EWHC (Comm) 664 (Eng)

[13] Tseng. J [2017] A principled approach to indemnity costs in International Arbitration in Australia. International Arbitration law Review.

[14] [2014] WASC 10.

[15] Tseng. J [2017] A principled approach to indemnity costs in International Arbitration in Australia. International Arbitration law Review.

[16] [2015] NSWSC 565

[17] Chung, L, Macknay, L, Robertson, D [2015] NSW Supreme Court refuses indemnity costs on successful application for referral to arbitration. Herbert Smith Freehills, dispute resolution.

[18] Law Reform Commission, November 2010, Report Alternative Dispute Resolution: Mediation and Conciliation

[19] [2015] IESC 92

[20] [2013] IEHC 285

[21] [2015] IEHC 596