(This article was published in the April 2021 Issue of Hong Kong Lawyer: http://www.hk-lawyer.org/sites/default/files/e-magazines/HKL-APR-2021/viewer/desktop/index.html?doc=05D3B64F4883E4B7B372AA907090C1D6#page/36)
The Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and of the Hong Kong Special Administrative Region (the “Arrangement”) is a major breakthrough for parties to Hong Kong seated arbitration, in the sense that it allows parties to apply to Mainland courts for interim measures in support of arbitration. No similar arrangements have been made between Mainland China and any other jurisdictions. Therefore, the Arrangement, dubbed by some as the game changer, gives unparallel benefit to choose Hong Kong as the neutral seat of arbitration for China-related disputes.
It should be noted that Mainland courts do not practise “loser pays costs” generally. An interesting question therefore arises as to whether the parties to Hong Kong arbitration may recover in arbitration, costs of obtaining interim measures in Mainland courts under the Arrangement. In fact, Mainland China is not the only jurisdiction where parties to court proceedings bear their own costs by default. The wider issue may be whether, generally, parties may recover in arbitration costs of obtaining interim measures in related court proceedings where the default costs rule is “parties to bear their own costs”.
This article will critically examine this costs recovery issue. Whilst arbitration parties from the common law world may welcome such costs recovery, it will be argued that the arbitral tribunal should be slow to exercise any jurisdiction to allow such costs recovery. Any arbitral award allowing such costs recovery may be liable to be set aside or otherwise unenforceable for contravening public policy. It will be respectfully submitted that the simplest solution is to insert an appropriate costs indemnity in the contract.
In Costs of the Arbitration and Costs of Obtaining Interim Measures (Hong Kong Lawyer, September 2020), the issue of recovering in arbitration costs of obtaining interim measures in Mainland courts was examined in the context of the Arrangement. Contrasting against the UK Arbitration Act 1996 (the “AA”), where the reference to “other costs” in the “costs of the arbitration” might be interpreted widely to cover costs in ancillary court proceedings, it was argued that the Arbitration Ordinance (the “AO”) is “silent on whether the costs incurred in court proceedings for seeking interim measures are recoverable as part of the costs of the arbitral proceedings”. It was suggested that amendments to the Arrangement should be made to allow such costs recovery in arbitration.
JURISDICTION OF ARBITRAL TRIBUNAL
Insofar as Hong Kong arbitration is concerned, the AO is actually not completely silent on the issue of recovering in arbitration costs of ancillary court proceedings. Section 74(3) of the AO provides that “[t]he arbitral tribunal may also, in its discretion, order costs (including the fees and expenses of the tribunal) to be paid by a party in respect of a request made by any of the parties for an order or direction (including an interim measure).” (emphasis added) Whilst section 74(3) does not specifically state to cover costs in respect of court applications related to arbitration, it would be redundant to interpret it otherwise, for the arbitral tribunal’s power to award costs of the arbitral proceedings generally has been dealt with under section 74(1) of the AO. Given its broad language, section 74(3) arguably covers a request for interim measures made to a court.
In the context of the Arrangement, Article 3 envisages the involvement of the arbitration institution in the application to Mainland courts for interim measures. For example, where an application for interim measure is made after the arbitration institution has accepted the arbitration case, the party’s application shall be passed on by the arbitration institution. Hence, coupled with the abovementioned sections 74(1) and 74(3), the arbitral tribunal should have jurisdiction to award costs of the parties’ requests for interim measures (with such costs of the applications to Mainland courts subsumed under the abovementioned Article 3).
In any event, “other costs” are included in the “costs of the arbitration” in the majority of the institutional and ad hoc arbitration rules (e.g. Article 34.1 of the 2018 HKIAC Administered Arbitration Rules; Article 38 of the ICC Arbitration Rules (2021); Article 40(2) of the UNCITRAL Arbitration Rules (2013)). To the extent that the term “other costs” in the AA could be interpreted widely to cover costs in ancillary court proceedings, by virtue of the arbitration rules, the arbitral tribunal should have jurisdiction to allow the recovery of such costs.
EXERCISE OF JURISDICTION
Even though a Hong Kong-seated arbitral tribunal may have jurisdiction to allow the recovery of costs in ancillary court proceedings by virtue of section 74 of the AO and/or the arbitration rules, it does not necessarily follow that it should, always or otherwise, exercise such jurisdiction. Indeed, it appears that such jurisdiction should be extremely rarely exercised, especially where the default costs rule in the court proceedings cannot be contracted out.
It should be borne in mind that the arbitral tribunal derives jurisdiction from the arbitration agreement. Where the parties may not contract out the default costs rules, the arbitral tribunal deriving powers from the parties should be slow to exercise such costs jurisdiction to the same effect. Otherwise, any such arbitral award may be liable to be set aside under section 81 of the AO or otherwise unenforceable for contravening public policy (Ralli Brothers v Compañia Naviera Sota Y Aznar  2 K.B. 287; Ryder Industries Ltd v Chan Shui Woo  1 HKC 323).
COST INDEMNITY AS THE SOLUTION
In the absence of any legislative change to the default costs rule of the court proceedings, without fettering the exercise of judicial discretion on costs in court proceedings and without contracting out the default costs rule, the simplest way to recover in full legal costs whether incurred in arbitration or court proceedings may be to insert a costs indemnity in the contract to reflect the parties’ bargain on costs position. A costs indemnity, giving a contractual right to costs, stands independently of the curial power to award costs, and parties may still enforce the costs indemnity unless precluded by estoppel or res judicata (Cervo v Kingsleys Pty Ltd  ACTSC 179).
In Abigroup Limited v Sandtara Pty Limited  NSWCA 45, the New South Wales Court of Appeal upheld the District Court judgment, and affirmed the plaintiff’s contractual right to claim the difference between “solicitor and client” costs and party and party costs pursuant to a contractual indemnity in a fresh action, even though it was only awarded party and party costs in the main proceedings. The Court of Appeal held that there was no estoppel preventing the subsequent proceeding in the District Court nor any abuse of process.
Generally, any judicial exercise of discretion on costs that does not address a separate costs indemnity does not give rise to a res judicata, or otherwise preclude enforcement of such costs indemnity. A contractual stipulation as to how costs of future litigation are to be borne as between the parties is also not vitiated by an inconsistent order for costs in that litigation (Vertzayias v King & Ors  NSWCA 215).
That said, whether a party is precluded from enforcing a costs indemnity in subsequent proceedings requires careful examination of the circumstances of each case. In particular, it depends on various factors such as the language of the indemnity, whether it was pleaded or considered in the earlier litigation (including the submissions made to the judge), why a party refrained from litigating the issue in the earlier proceedings, and the terms of the orders made in the previous proceedings (Cervo v Kingsleys Pty Ltd  ACTSC 179).
It is understandable that the arbitration community from the common law world is used to the “costs follow the event” rule, and prefers a “full recovery” of costs related to the cause of the arbitration, even though such costs are incurred in court proceedings where the default costs rule is for parties to bear their own costs. Whilst an arbitral tribunal may have jurisdiction to award costs of ancillary court proceedings, it should be slow to exercise any costs jurisdiction to allow the parties to contract out the mandatory application of the default costs rule in effect. Without fettering the court’s power to award costs, parties should consider inserting a suitable costs indemnity to fix their costs position bargained at arm’s length.
The authors would like to acknowledge the research assistance of Alex Dai (Trainee Solicitor of Oldham, Li & Nie).