In Koshigi Limited & Svoboda Corporation v Donna Union Foundation & Ulmart Holdings Limited  EWHC 122, the High Court awarded indemnity costs in respect of two discontinued arbitration claims brought under section 68 of the Arbitration Act 1996 (the Act). The judgment serves as a reminder that the costs of discontinuance are usually borne by the claimant.
The underlying arbitration related to a shareholders’ dispute in which the Donna Union Foundation (DUF) sought a finding that Koshigi and Svoboda were obliged to buy out its shareholding in Ulmart. Towards the end of the proceedings, Koshigi raised questions of procedural irregularities and alleged non-disclosure on the part of the chair as giving rise to apparent bias. This claim was based on the relationship between DUF’s lead counsel and the chair of the tribunal, who at the time were sitting together on two other arbitrations.
The tribunal issued two awards:
- On the issue of liability, holding that Koshigi was obliged to acquire DUF’s shares in Ulmart;
- On the issue of valuation, setting the purchase price of the shares at US$67,159,546.
Koshigi challenged both awards under section 68 of the Act, which allows awards to be challenged on the grounds of serious irregularity, including bias. DUF applied for security as a condition of the challenge being allowed to proceed. Shortly before the security application was due to be heard, Koshigi discontinued both challenges, claiming that the awards had become unenforceable due to DUF’s alleged failure to deliver the shares. The main issues for determination by the court were therefore (1) which party should pay the costs of the discontinued proceedings and (2) on what basis, standard or indemnity, should such costs be awarded?
Costs of the challenges
The usual rule is that upon discontinuance of a claim, the discontinuing party will pay the other party’s costs. However, there is an exception to this rule where the discontinuing party can show:
“(5) …a change of circumstances to which he has not himself contributed;
(6) however, no change in circumstances is likely to suffice unless it has been brought about by some form of unreasonable conduct on the part of the defendant which in all the circumstances provides a good reason for departing from the rule.”
(Brookes v HSBC Bank plc  EWCA Civ 354)
Koshigi submitted that there should be no order as to costs because DUF had declined to comply with the arbitral awards, which they contended made the award incapable of enforcement. DUF maintained that the awards remained enforceable and no such change of circumstances existed. The court, in reaching its decision, noted that it was neither possible nor permissible to examine the facts of a case in a costs hearing. The claimant would need to show a change in circumstances brought about by some unreasonable conduct on the part of the defendant. Merely asserting that the awards were unenforceable was not enough to depart from the basic costs presumption.
The court therefore found Koshigi liable for the costs of the discontinued appeal.
Standard or Indemnity Basis?
When a party discontinues a claim, the normal order is that he should pay the costs on the standard basis (Jarvis v PriceWaterhouseCooper  BCC 670). Thus, in order for indemnity costs to be ordered, it is critical that there be “some conduct or circumstance that takes the case out of the norm” (Excelsior Commercial & Industrial Holdings Limited v Salisbury Hammer Aspden & Johnson (A Firm)  EWCA Civ 879.)
DUF submitted that bringing and then abandoning bias allegations that were “thoroughly bad” took the case out of the norm. The court agreed that Koshigi’s case of bias and non-disclosure was very weak, to the extent that the judge described it as “akin to dishonesty”. The court held that there was no doubt that security would have been ordered had the claims not been discontinued. Accordingly, those facts took the case out of the norm, which resulted in DUF being entitled to an order for indemnity costs.
The judgment provides a reminder as to the standard principles of cost allocation upon the discontinuance of a claim. Avoiding such costs will continue to be challenging unless parties can prove some form of unreasonable conduct by the other side that provides a good reason to depart from the rule. The decision also underlines the courts’ unwillingness to engage in significant fact-finding when dealing with costs, given that the court will usually have limited background as to the case itself.
The judgment should also discourage parties from bringing speculative challenges to awards on the basis of bias or other serious irregularities. A party that brings such challenges, only to withdraw them when it sees a prospect of being ordered to give security, may expose itself to an adverse award of indemnity costs, which in the present case was not unexpected.
The authors would like to acknowledge the assistance of Kiana Banafshe, intern at CMS London, in preparing this article.