A v B & Ors

Where proceedings are brought in breach of an arbitration or jurisdiction agreement, legal costs reasonably caused by that breach should normally be awarded on the indemnity basis. The approach is both compensatory and a means of marking the misuse of the court’s process. It does not depend on moral condemnation or bad faith, although exceptional circumstances may justify a standard-basis order.

The same approach applies where proceedings challenge the supervisory jurisdiction of the courts at the seat of an arbitration, and may cover costs incurred on issues which the court does not decide if the wrongful invocation of jurisdiction was their predominant cause.

The claimant had brought English proceedings against the defendants concerning a Swiss-seated arbitration and related disputes. In an earlier judgment, the court stayed the proceedings against B and set aside permission to serve C, D and Company E outside the jurisdiction: [2006] EWHC 2006 (Comm).

The defendants sought indemnity costs, interim payments and interest. The principal questions were whether breach of the arbitration and jurisdiction agreements justified indemnity costs, whether the costs claimed were recoverable despite issues having been left undecided, and whether the position differed for defendants who were not parties to the arbitration agreement.

1. The court ordered costs in favour of B, C, D and Company E on the indemnity basis. Interim payments were ordered for B and C. Interest was payable from 9 May 2006 at 8 per cent, subject to the specific orders made for each defendant.

2. Where a successful stay or anti-suit application establishes that breach of an arbitration or jurisdiction agreement caused the innocent party reasonably to incur legal costs, those costs should normally be recovered on the indemnity basis. The court adopted the rationale identified in Kyrgyz Mobil Tel Ltd v Fellowes International Holdings Ltd [2005] EWHC 1314 (Comm). Recovering only standard costs would leave an uncompensated loss and could force the innocent party into a separate damages claim.

3. The approach is consistent with the wide discretion under CPR Part 44. Indemnity costs do not require moral impropriety. Conduct which is unreasonable to a high degree, or which deliberately ignores an arbitration or jurisdiction clause to obtain a procedural advantage, may take the case outside the norm. Exceptional conduct by the successful party may nevertheless justify a standard-basis order.

4. The same reasoning applied to the agreement conferring supervisory jurisdiction on the Swiss courts. Invoking the English court to challenge the validity or scope of the arbitration breached that agreement, even where the claims were framed as applications to set aside service outside the jurisdiction.

5. The indemnity order could cover costs relating to issues which the court had not decided. The predominant cause of those costs was the claimant’s wrongful invocation of English jurisdiction, and none of the additional arguments had been unreasonably raised or was clearly without substance.

6. B and D were entitled to participate independently because the proceedings attacked their personal positions and, in B’s case, his role as arbitrator. Their separate representation and submissions were justified. The existence of funding arrangements did not displace their entitlement to compensation.

7. Company E was not a party to the arbitration agreement. Nevertheless, its joinder was unnecessary and doubly misconceived in the circumstances. That conduct took the case outside the norm and justified indemnity costs.

The judgment was a first-instance costs decision following the court’s earlier judgment staying proceedings against B and setting aside permission to serve C, D and Company E outside the jurisdiction: [2006] EWHC 2006 (Comm).