Sino Dragon Trading Ltd v Noble Resources International Pte Ltd (No 2)  FCA 1169 (29 September 2016)
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FEDERAL COURT OF AUSTRALIA
SINO DRAGON TRADING LTD
NOBLE RESOURCES INTERNATIONAL PTE LTD
FILE NO: NSD 1333 of 2016
BEFORE: Beach J
DATE OF JUDGMENT: 29 September 2016
CATCHWORDS: ARBITRATION – international commercial arbitration – indemnity costs – whether there is or should be a rule requiring costs to be assessed on an indemnity basis other than in special circumstances, where a party unsuccessfully challenges an arbitral award under article 34 of the UNCITRAL Model Law on International Commercial Arbitration – considerations of public policy – whether indemnity costs should be awarded – indemnity costs ordered as to part
THE COURT ORDERS THAT:
- In relation to paragraph 3 of the orders made on 13 September 2016, the applicant pay two-thirds of the costs ordered to be paid on an indemnity basis and the remaining one-third on a party/party basis.
- On 13 September 2016, I dismissed the originating application of Sino Dragon seeking to set aside the Final Award of the arbitral tribunal pursuant to article 34(2) of the UNCITRAL Model Law. On 16 September 2016, I published my reasons for that dismissal (Sino Dragon Trading Ltd v Noble Resources International Pte Ltd  FCA 1131). The present reasons should be read with my earlier reasons using the same defined terms.
- I also ordered that Sino Dragon pay Noble Resources’ costs on a party/party basis, but gave liberty to Noble Resources to seek indemnity costs, with a timetable for written submissions. Noble Resources has so applied, and the parties have filed written submissions.
- In my view, Sino Dragon should pay a substantial part of the costs of the proceedings on an indemnity basis. In order to explain my reasoning, it is necessary to address the following questions:
(a) First, is there a special rule in terms of indemnity costs that ought to be applied to proceedings which have unsuccessfully sought to set aside an arbitral award under article 34(2) of the UNCITRAL Model Law? If so, what is it?
(b) Second, if there is no such special rule, how are the principles discussed in Colgate-Palmolive Company v Cussons Pty Ltd  FCA 536; (1993) 46 FCR 225 and s 43 of the Federal Court of Australia Act 1976 (Cth) to be applied to a failed article 34(2) challenge and specifically to the case before me?
IS THERE A SPECIAL RULE?
- Noble Resources contends for a special rule in the following terms: absent special circumstances, indemnity costs should be ordered where a party unsuccessfully challenges an arbitral award under article 34 of the UNCITRAL Model Law. Now this is a reversal of the usual position and effectively provides for a rebuttable presumption in favour of indemnity costs, rather than the usual converse where party/party costs are ordered absent special circumstances to justify an order on an indemnity basis (see Colgate-Palmolive Company at 232 to 234 per Sheppard J). I am using the phrase “special circumstances” in terms of the usual position not as a prescriptive proviso, but rather as a convenient label to describe any and all relevant circumstances that might justify an indemnity costs order, recognising that the Court’s discretion is at large. Now it will be appreciated that Noble Resources’ formulation effectively shifts the onus. Under its formulation the unsuccessful party must establish special circumstances as to why an indemnity costs order ought not be made. Under the usual position, it is for the successful party to establish special circumstances as to why an indemnity costs order ought be made.
- What is the justification for Noble Resources’ formulation and its reverse onus? Noble Resources says that it is justified by the character and context of international commercial arbitration, the “exceptional nature” of an article 34 challenge, public policy and international precedent. Although Noble Resources’ contentions have force, I do not accept them.
- First, the UNCITRAL Model Law and the International Commercial Arbitration Act 1974 (Cth), which gives it domestic force, are silent on how costs are to be dealt with in an article 34 challenge. So, one is not in the territory of the desirability of a uniform or universal interpretation or application of an international instrument. The present question is a matter both in form and in substance exogenous to such an instrument.
- Second and relatedly, what can be gleaned from this silence is that it was intended that it would be the law of the forum where the article 34 challenge was being pursued that would determine the principles to be applied to any indemnity costs question.
- Third and relatedly, if it be accepted as it must be that underlying indemnity costs questions are questions of public policy, it is the public policy of the forum, not something nebulous and internationalised. Indeed, in a related but different context, both the Act (s 8(7)(b)) and the UNCITRAL Model Law (article 34(2)(b)(ii)) recognise the significance of the public policy of the forum, albeit for assessing other questions. Accordingly, as the law of the forum dictates the principles to be applied in assessing the indemnity costs question, with public policy underpinning such principles, it is not inconsistent with any international instrument or precedent that the public policy of the forum, ie Australia, be considered and applied. I will put to one side for the moment what that public policy is in the light of the Act and the UNCITRAL Model Law.
- Fourth, what I have said is consistent with international precedent. For example, Colman J in A v B (No 2)  1 Lloyd’s Rep 358 and Reyes J in A v R  HKCFI 342;  3 HKLRD 389 were applying their respective laws of the forum, supported by the public policy of each such forum. Accordingly, any rule that they were propounding was justified in that setting. Indeed Colman J was not applying the UNCITRAL Model Law or even s 9 of the Arbitration Act 1996 (UK). So, the question in the present case is not whether there should be some uniform international approach, but rather whether the law of the forum that I am applying in relation to indemnity costs, with reference to the public policy of this forum, justifies modification taking into account considerations of the type discussed by Colman J and Reyes J or more generally such public policy considerations as can be gleaned from ss 2D and 39 of the Act and the UNCITRAL Model Law.
- There is one other matter that fortifies this conclusion. 72 States with a total of 102 jurisdictions have incorporated the UNCITRAL Model Law into their domestic law but it can hardly be said that there is a uniform public policy underpinning costs or even a “costs follow the event” approach. For example, some jurisdictions in the United States of America (California, Connecticut, Florida etc) that have adopted the UNCITRAL Model Law have quite different public policy considerations underlying costs questions. I am only aware of the position in Hong Kong and Singapore (in addition to A v R, see also Gao Haiyan v Keeneye Holdings Ltd (No 2)  HKCA 43;  1 HKC 491 at  to  per Tang VP, Pacific China Holdings Ltd (in liquidation) v Grand Pacific Holdings Ltd (No 2)  HKCA 332;  6 HKC 40 at , ,  to  per Tang VP and Tjong Very Sumito v Antig Investments Pte Ltd  SGCA 41;  4 SLR 732 at  and  per V K Rajah JA).
- Generally, I do not consider that any modification is justified or necessary to the extent of expounding a new rule which carries a reverse onus. There are a number of reasons for this, some of which are elucidated by Hammerschlag J in John Holland Pty Ltd v Kellogg Brown & Root Pty Ltd (No 2)  NSWSC 564 at  to  and Colin Joss & Co Pty Ltd v Cube Furniture Pty Ltd  NSWSC 829 at  to , with further elaboration by Edelman J in the setting of article 13(3) in Sino Dragon Trading Ltd v Noble Resources International Pte Ltd (No 2)  FCA 1046 at  to . It is convenient to set out my own discussion of these and other themes.
- First, there is no legislative intent manifested on the face of the Act to recognise any special category for an award of indemnity costs; and it is not as if the legislature chose not to speak on any costs question at all relating to arbitration (cf s 27). Moreover, the legislature can be taken to have adopted the UNCITRAL Model Law (s 16) with knowledge that it was a matter to be dealt with by legislative or common law principles exogenous to the Act and the UNCITRAL Model Law.
- Second, there is no special reason why failed article 34 challenges should have any favoured rule on costs for the successful party with a reverse onus operating against the unsuccessful party, as compared with any other non-arbitration context where there are limited rights of review or appeal in challenging the primary decision and where such a challenge has failed. I will put to one side for the moment the different question as to whether the different context may justify a different application of current principles.
- Third, and relatedly, much has been made of the argument that arbitration takes place under contractual arrangements and that collateral challenges are inconsistent with, if not in breach of, such arrangements. Such an argument breaks down at various levels:
(a) If one has a case where it is not reasonably in doubt that there is an arbitration agreement between party A and party B, and party B in breach of the agreement has pursued or seeks to pursue court proceedings, then on a stay application at the suit of party A or an anti-suit injunction one can perhaps appreciate an arguable foundation for a special costs rule. But that is not the present context. One is here dealing with an article 34 challenge to set aside an arbitral award. That involves no inconsistency with the arbitration agreement let alone any breach thereof. The parties to the arbitration agreement can be taken (applying objective contractual theory) to have contracted in the knowledge of and with an awareness that either party was entitled to pursue an article 34 challenge that had reasonable prospects of success. After all, the arbitration agreement would have been entered into within the setting of the UNCITRAL Model Law, including the non-derogable rights contained therein. An analogous point may be made in relation to the mirror image provisions of s 8 of the Act dealing with any opposition to the enforcement of a foreign arbitral award. Another way to describe the same point is to say that the parties can be taken to have contracted on the assumption that any arbitral award made in accordance with the contractual arrangements would not suffer from the vices or deficiencies described in article 34(2) but that if it did, either party was entitled to reasonably exercise its rights under article 34(2).
(b) Further, in the context of a stay application or anti-suit injunction, I agree with both Hammerschlag J and Edelman J that such a scenario still does not justify a special rule. There is no compelling reason to create a special rule for costs flowing from a breach of an arbitration agreement as compared with, say, a breach of a contractual release or a covenant not to sue, as Hammerschlag J explained in John Holland at . Further, an award of costs should not be a proxy for damages, as Edelman J explained in Sino Dragon at  to . Further, if damages are in substance what is sought to be recovered, then this should be pursued in a separate action rather than positing and promulgating a special costs rule.
- Fourth, sections 2D (a), (b), (c) and (e) of the Act are not inconsistent with present cost principles and do not justify any special rule with a reverse onus. But they may justify a different application of existing principles in the present context. A similar point may be made concerning s 39(2).
- Fifth, if there is to be such a special rule, when is it to be applied? The stay context (s 7) is quite different to proceedings resisting enforcement (s 8) or the mirror image article 34 challenge. Different again is the article 13(3) challenge discussed by Edelman J. Is it suggested that the special rule is to apply to all such diverse contexts? And how is this justified? But if it is not justified so that any special rule only applies to some of these contexts, that makes any such rule even less attractive. To posit a special rule for only some of these contexts lacks conceptual coherence or harmony. It is better to use the present principles with no reverse onus, and to deal with the different contexts through different applications of those same principles.
- Sixth and relatedly, it has been suggested that a special rule should apply because of the “heavy burden” on a party seeking to establish that enforcement of an arbitral award would be “contrary to public policy” (s 8(7)(b)) or seeking to set aside an award on the analogous ground under article 34(2)(b)(ii) including endeavouring to establish real unfairness or real practical injustice. But assuming that there is such a heavy burden, that does not justify a special rule, but it would be a matter to take into account in the application of existing costs principles. The successful party to a failed challenge on such a ground may more readily contend that the challenge had no reasonable prospects of success, given that the bar was so high (see Hammerschlag J’s analysis in Colin Joss at  to ). If such a contention was accepted, that may be relevant to an indemnity costs order applying current principles as modulated by my observations in the next section. In any event, there is something even more conceptually unattractive about suggesting a special rule for only some grounds of challenge but not others (cf article 34(2)(a)). Adopting such a suggestion leads to fragmentation and conceptual incoherence. It is preferable not to formulate a different rule, but rather to deal with these matters as different applications of existing principles.
- Seventh, it has not been demonstrated that the existing principles cannot accommodate the above considerations as matters relevant to the application thereof as is discussed in the next section.
- Eighth, the Victorian Court of Appeal in IMC Aviation Solutions Pty Ltd v Altain Khuder LLC  VSCA 248; (2011) 38 VR 303 at  to  and  to  has also eschewed any special rule with a reverse onus. But as to their application of existing principles to the case before them as discussed in , I would not express the matter in the same terms as will become apparent from the next section of my reasons, save for the first sentence. It is convenient to set out  so that it can be contrasted with what I have said below:
In proceedings under the Act, as in other civil proceedings, costs will ordinarily be awarded against the unsuccessful party on a party and party basis unless the successful party can establish special circumstances. The principles for determining the existence of special circumstances are well established. Special circumstances, if they exist, are found in the facts of the case at hand, and the exercise of the judicial discretion is not otherwise conditioned on whether those facts are comprehended by a category of case or cases in which a special order has been made. The fact that an award debtor fails to establish a ground for resisting enforcement of a foreign arbitral award cannot, of itself, constitute special circumstances. Nor can a finding that the award debtor’s case was “unmeritorious” if all that is meant by that expression is that the award debtor failed to persuade the court to accept his or her evidence and submissions.
- For the above reasons, I do not accept Noble Resources’ contention as to the existence of a special rule, which in effect reverses the onus by requiring the unsuccessful party to establish special circumstances as to why an indemnity costs order ought not to be made.
APPLICATION OF CURRENT PRINCIPLES
- It is convenient to begin with the following general observations.
- First, the Court has a broad discretion on costs under s 43 of the Federal Court of Australia Act 1976 (Cth). The general position, as Edelman J explained in Sino Dragon at , is that party/party costs are usually ordered except where circumstances otherwise warrant. The justice of the case might require departure from the usual position, or some special or unusual feature may be present that justifies such a departure.
- Second, the types of categories which usually justify a favourable exercise of discretion to order indemnity costs are not closed. It may be accepted that there are well-established categories, but such categories do not constitute the complete set.
- Third, it is not attractive to suggest that the exercise of discretion has boundary constraints and content that may only be found in the facts of the case at hand, and that the exercise of discretion cannot be informed by the category of case in question. There are a number of reasons for this. Indemnity costs orders are often based upon the category of case, for example, where payment of the costs of litigation may come out of a fund or assets controlled by a trustee, liquidator or receiver. Contempt proceedings are another example of such a category of case where indemnity cost orders are usually made. These examples are sufficient to negate the unqualified suggestion that the category of the case cannot be looked at or that it only has secondary significance at most. Further, to separate the facts of the case at hand from its category gives rise to unreal distinctions. The facts of any case can only be assessed in the light of its relevant category. Further, and more generally, given that the justice of the case can be looked at with the relevant discretionary universe not closed, the fact that well-established categories may have only focused on the facts of the individual case including egregious conduct of the unsuccessful party, rather than the category, does not foreclose looking at the category and elevating its significance for some types of cases such as an article 34 challenge.
- Fourth, and relatedly, it is deficient not to look at article 34 proceedings (and the costs consequences that should attend them) by reference to public policy considerations. After all, public policy considerations underlie costs principles including indemnity costs; see Allsop CJ, “Public Policy in the New York Convention and the Model Law”, paper presented to an Australian Maritime and Transport Arbitration Commission seminar on 10 November 2014 at  to . There is no good reason why indemnity costs questions in the context of article 34 proceedings and what the justice of the case requires in litigation of this type should not be informed by:
(a) the objects set out in s 2D and the considerations set out in s 39(2) of the Act;
(b) the limited grounds for challenge under article 34;
(c) the fact that the parties’ dispute has been resolved under contract with the arbitral award being the contractually provided for outcome (Ye v Zeng (No 5)  FCA 850 at  per Allsop CJ); and
(d) in the context of (a) to (c), the public policy of discouraging article 34 challenges (and the mirror s 8 proceedings opposing enforcement) that have no reasonable prospects of success, particularly where it may be said that such challenges that do not have such prospects are discordant with the agreed contractual setting for the relevant dispute resolution mechanism.
- In my view, a category of circumstances justifying an order for indemnity costs is where an unsuccessful article 34 challenge is made which has been found not to have reasonable prospects of success, whether or not the unsuccessful party knew or ought to have known this at the inception of the challenge; what I mean by “reasonable prospects” is more than “real prospects” and resonates with the analogous concept in s 31A of the Federal Court of Australia Act 1976 (Cth). Of course, if the unsuccessful party knew at inception that it had no reasonable prospects of success, then an indemnity costs order may be justified as falling within a pre-existing category in any event. As to whether the unsuccessful party “ought to have known” at inception, I do not consider that this needs to be shown to justify an indemnity costs order. A party launching an article 34 challenge should take positive steps to ensure that at inception it does have reasonable prospects of success taking into account both the law and the evidentiary foundation available to it. It should bear the risk accordingly, whatever actual or constructive knowledge it has at inception.
- Let me make a related point that I have touched on earlier. The narrower the particular ground of challenge under article 34 and the higher the bar set to succeed on such a challenge, the higher the probability of failure and accordingly the higher the likelihood of establishing that the particular ground had no reasonable prospects of success (cf Hammerschlag J in Colin Joss at  and ). Another way to express the point is to take the protean concept of “reasonable” in the phrase “reasonable prospects of success” and to say that the narrower the ground and the higher the bar, the greater the strength of the argument needed to support the particular ground of challenge to be then characterised as having “reasonable prospects of success”.
- There are some other observations that should be made:
(a) First, the successful party would still bear the onus of establishing no reasonable prospects of success.
(b) Second, what I have posited would discourage the bringing of unmeritorious article 34 challenges.
(c) Third, it may be accepted that in ordinary litigation an unsuccessful party’s failure to surmount the summary disposition threshold is not of itself a basis for an indemnity costs order. But article 34 challenges are not ordinary litigation. And by reason of the public policy considerations that I have referred to earlier and as analysed by Allsop CJ extra-judicially in the paper cited informing what the justice of the case requires, what I have posited in  is apposite.
- There is one further observation that should be made before applying what I have said in  to the case before me. Reyes J in A v R at  was influenced by the consideration that “(i)f the losing party is only made to pay costs on a conventional party-and-party basis, the winning party would in effect be subsidising the losing party’s abortive attempt to frustrate enforcement of a valid award”. But the phrase, “frustrate enforcement of a valid award” is contestable in an article 34 challenge. After all, its purpose is to show that there is no valid award and that, accordingly, nothing is being frustrated. Moreover, given that the arbitration agreement was by definition entered into within the contextual setting of the UNCITRAL Model Law, including the parties’ rights under article 34, the objectively ascertained intention of the parties can be taken to have contemplated and condoned an article 34 challenge by one party, providing that it had at least reasonable prospects of success. Further and in any event, the subsidisation point has less force once it is appreciated (as I have said earlier) that the successful party can separately pursue a damages claim for breach of contract if it chooses. Finally, it is not appropriate to subject a party to the potential for an indemnity costs order so as to create a disincentive to pursue an article 34 challenge where the challenge has reasonable prospects of success. Public policy may require creating a disincentive, but the proportionate disincentive is to discourage challenges that have no reasonable prospects of success.
- In accordance with what I have said, the question is whether any, and if so which, of Sino Dragon’s grounds of challenge lacked reasonable prospects of success.
- In my view, the first ground of challenge dealing with the Pang email did not have reasonable prospects of success. It seemed to me to be a confected jurisdictional issue when in reality it was a contractual merits question. Moreover, Sino Dragon’s contractual arguments were wrong. But in any event, there was no free-standing ground of challenge to the Final Award based on legal error available to Sino Dragon. Finally, the arguments raised on the Pang email before the arbitral tribunal were not ultimately pressed as a jurisdiction question before that tribunal.
- As to the third ground of challenge concerning the impartiality of the arbitrators, this also lacked reasonable prospects of success. There were numerous failed earlier challenges. Further, Sino Dragon confused the legal tests. But in any event, whatever legal test was applied, Sino Dragon still failed.
- As to the second ground of challenge dealing with the technical issues in respect of the video conference facilities, I am not prepared to say that it had no reasonable prospects of success.
- In all the circumstances, I consider that the justice of the case requires that Sino Dragon should pay two-thirds of Noble Resources’ costs on an indemnity basis. Although much of the time at the hearing was taken up with the second ground of challenge, Noble Resources had to prepare written submissions and an affidavit addressing all issues and to appear at trial to deal, if necessary, with all of these issues. As it transpired, at trial I did not require counsel for Noble Resources to address me on the first and third grounds of challenge.
- I will make an appropriate order to reflect these reasons.