Dispute Resolution

Leave No Stone Unturned: Contractual Indemnity As The Best Safeguard

Letter To The Hong Kong Lawyer – September 2021

In “Arbitrators’ Power to Award Costs of Ancillary Court Proceedings” (Hong Kong Lawyer, June 2021), the authors maintain that an arbitral tribunal cannot award costs incurred for obtaining interim measures in ancillary court proceedings (the “Costs of ACP”) because such costs do not constitute “costs of arbitral proceedings”.

The overlooked legislation

With due respect, the analysis set out in the earlier article “Recovering in Arbitration Costs of Ancillary Court Proceedings Revisited” (Hong Kong Lawyer, April 2021) has not been fully appreciated and again section 74(3) of the Arbitration Ordinance (the “AO”) has been overlooked.

To recap, section 74(3) of the AO expressly provides that an “arbitral tribunal may …… order costs …… in respect of a request made by any of the parties for an order or direction (including an interim measure).” (emphasis added) It appears to empower the arbitral tribunal to award costs in addition to the usual costs of arbitral proceedings under section 74(1) of the AO.

Costs of arbitral proceedings

Although the concept of “costs of arbitral proceedings” has been explored in many articles in other jurisdictions, such discussion has no relevance to the interpretation of section 74(3) of the AO, a unique provision created by Hong Kong legislators without any equivalent in foreign statutes.

In any event, in the materials cited, certain circumstances under which an arbitral tribunal may award Costs of ACP in arbitration have been identified:

1. In International Arbitration Practice Guideline (2006), it is suggested that the costs of interim measures may be recoverable in arbitration if they cannot be dealt with by the local court, or the court has referred them to the arbitration tribunal for decision.

2. Similarly, Micha Bühler (2018) accepted that Costs of ACP may be recoverable as arbitration costs so long as there is no duplication in the award of costs and that the proceedings are not in breach of arbitration agreements.

3. Prof Jeffrey Waincymer (2012) went further to say that Costs of ACP may potentially be argued to be costs of the arbitration “where it is ancillary behaviour of the successful party in supporting the arbitration, such as the costs of court-ordered provisional measures”.

Doctrinally, an arbitral tribunal’s jurisdiction to award Costs of ACP should not be contingent upon certain events unless otherwise clearly specified. In our humble submission, these writings therefore tend to support, rather than reject, the proposition that an arbitral tribunal indeed has jurisdiction to award Costs of ACP. A better proposition should be that an arbitral tribunal has jurisdiction to award costs, but such jurisdiction should be extremely rarely exercised, for obvious public policy reasons that need not be repeated here.

Realistic and practical commercial solution

Whilst it might be commendable to advocate for a foreign jurisdiction to make way for Costs of ACP to be awarded by arbitral tribunal, this approach may not be realistic where such a position is contradictory to the default costs rule in the foreign jurisdiction. In any event, it may be impracticable to change the practice of each foreign jurisdiction as well.

Consistent with the cited academic writings, in particular Waincymer (2012), it is humbly submitted that a simple and practical solution is to insert a costs indemnity in the arbitration agreement, so that Costs of ACP could be expressly recovered as damages.

Acknowledgement

The authors acknowledge the research guidance by Dantes Leung (Partner of Oldham, Li & Nie) and research input from Jerry Leung (Summer Intern of Oldham, Li & Nie). Any errors, omissions and mistakes remain the sole responsibility of the authors.

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