The possibility of costs awards against arbitrators: a claimant’s application to recover costs following an arbitrator’s withdrawal

By Lyndon Smith, Partner, Fenwick Elliott

The recent case of C Ltd v D and X [2020] EWHC 1283 (Comm) (21 May 2020) considered whether the Claimant (“C”) was entitled to recover costs following an arbitrator’s withdrawal from a London Court of International Arbitration (“LCIA”).  

C argued that in reaching a decision on its application for interim relief, the arbitrator  and second defendant (“X”) failed to treat C fairly and impartially.  C highlighted X’s lack of experience in sitting as an arbitrator; something which C believed was not clear from X’s curriculum vitae (“CV”).

C applied to have X removed under section 24 of the Arbitration Act 1996 (Power of a Court to remove an Arbitrator).  C also made a complaint to the Solicitor’s Regulatory Authority (“SRA”).  This ultimately led to X resigning on the basis that X’s position had become untenable.

Following on from this, C was of the view that it should not be liable for the costs of the application and therefore made an application to the Court for X and the First Defendant (“D”) to pay the costs of C’s section 24 application.  (note: X was the Second Defendant).

Background

C and D are both companies which carry out activities with philanthropic aims.  C designs software and has created a mobile software application and database for use by refugees to help them identify and locate support services.  D is a non-profit organisation which seeks to find and protect lost, abducted and displaced children.

C and D entered into a licence agreement on 29 August 2017 whereby C licensed a platform to D for it to be adjusted so as to make it more user-friendly to children.  D secured a large grant (around €1.3m) to pursue the configuration.  However, shortly after the release of the modified application, D sought to terminate the licence agreement for reasons that C maintained were unjustified.  Following failed attempts to mediate, C commenced an arbitration in which it sought (i) the balance of the fee under the licence agreement (€51,061.81), (ii) damages (in the region of €115,000) and (iii) a declaration that the intellectual property of the modified application belonged to C.

C applied to the LCIA to appoint an arbitrator on an expedited basis.  The LCIA appointed X on 29 November 2018 and X’s CV was provided to the parties with the Notice of Appointment.

X had 35 years of experience as counsel, solicitor and mediator in commercial disputes, including LCIA proceedings.  It was common ground that the LCIA was aware that X had not been appointed as an arbitrator in an LCIA arbitration prior to this appointment and it was X’s position that the appointment had been accepted because of X’s considerable expertise as a mediator and familiarity with the specialist subject matter of the claim.

X’s CV set-out, what were termed: “Examples of cases X has been involved with either as counsel or Arbitrator include…”  

Neither party to the arbitration challenged X’s appointment at the time, nor were they involved in X’s selection or appointment.

C made an application for interim measures and a hearing took place on 8 March 2019 but the application was dismissed by X.  

C had concerns about X’s treatment of its submissions and filed a challenge (“the first challenge”) with the LCIA Court, complaining that X had failed to treat the parties fairly and impartially and that this might have arisen due to X’s lack of experience as an arbitrator.

X responded refuting the claims and refused to resign.  X refuted the allegations of bias or impartiality and pointed out experience in LCIA arbitrations as counsel, and concluded by referring to the fact that their CV had been provided to the parties on appointment and there were no objections made at that stage.

C was surprised that X’s response did not mention any experience as an arbitrator other than referring back to their CV and after enquiring with the LCIA, it was confirmed to C that X had not been appointed as an arbitrator in other LCIA arbitrations.  

C filed a further challenge (“the Second Challenge”) with the LCIA Court on 7 May 2019 alleging that X’s response to the First Challenge gave rise to justifiable doubts as to their independence and impartiality and, further, that X had made an allegedly false or misleading statement regarding their experience on their CV.

On 27 June 2019, the former Vice-President of the LCIA Court, Professor John Uff QC, considered and rejected the First and Second Challenges.  He concluded that C was already on notice of X’s lack of experience from the date of X’s appointment or shortly thereafter and the question of whether X had ever sat in a non-LCIA arbitration was one which had occurred to or should have occurred to C.  The challenge was therefore out of time.  It was also inexplicable why the matter was not pursued as soon as X was appointed and, finally, the appointment of arbitrators was a matter for the LCIA Court who can be expected to investigate the arbitrator’s general experience and specific experience in arbitration matters.  

Undeterred, C issued a claim on 12 July 2019 for an order under section 24 of the Arbitration Act 1996 to remove X from the arbitration proceedings and requested that X should not be entitled to be paid any fees.  C also sought an order against D for the costs of the application and of the arbitration proceedings.

X and D indicated their intention to contest the claim.

In October 2019 D agreed to X being removed as arbitrator but on the condition that no order be made as to costs and that the resignation should not affect or provide a basis for challenging the decisions X had made to date or procedural steps already performed.  

C declined to accept D’s offer that there should be no order as to costs of the section 24 application and made a counter-offer to settle the entire arbitration.

In January 2020, C’s solicitors made a report to the SRA in respect of the same matters arising out of the section 24 application.  This led to X’s resignation on the basis that their position as arbitrator was no longer tenable.

In April 2020, C made an application that X and D pay the costs of the section 24 application.

Applicable principles

Costs when matters are resolved prior to trial

Under Rule 44 of the Civil Procedure Rules (“CPR”), the costs payable by one party to another are at the discretion of the Court, with the general rule being that the unsuccessful party will be ordered to pay the costs of the successful party, although the Court may make a different order.

In deciding the decision regarding what order, if any, is made about costs, CPR 44.2(4) provides that the Court must have regard to all the circumstances including conduct of the parties and whether a party was partly successful.

R (Boxall) v London Borough of Waltham Forest [2001] 44 CCLR 258 (cited by Sedley LJ at paragraph 23 in Members v London Borough of Southwark [2009] EWCA Civ 594)  provides the following additional guidance by stating that Courts have the “power to make a costs order when the substantive proceedings have been resolved without a trial …….. there will be cases where it is obvious which side would have won had the substantive issues been fought to a conclusion …….. in the absence of a good reason to make any other order the fall back is to make no order as to costs”.

Lord Neuberger in R (M) v Croydon London Borough Council [2012] 1 WLR 2607 made the point that when parties settle all issues in a dispute except for costs, “the parties take the risk that the court will not be prepared to make any determination other than that there be no order for costs” (paragraph 47).  However, Lord Neuberger then went on to refer to three different categories of cases relating to costs where proceedings were resolved without trial, as set-out by Chadwick LJ in BCT Software Solution Ltd v C Brewer & Sons Ltd [2004] FSR 9, and that with regard to the third category, there was a powerful argument that the default position should be no order for costs although in some cases it may well be sensible to look at the underlying claims and consider who would have won if the matter had not settled.  

This approach has since been followed in Emezie v Secretary of State for the Home Department [2013] 5 Costs L.R. 685 in which Sir Stanley Burnton said, referring to R (M) v Croydon, “The starting point now is whether the claimant has achieved what he sought in his claim” (paragraph 4). 

Costs awards against arbitrators 

Section 29(1) of the Arbitration Act 1996 provides that, absent a finding of bad faith, “an arbitrator is not liable for anything done or omitted in the discharge or purported discharge of his or her functions”.

In Cofely v Bingham [2016] EWHC 240 (Comm), the Court removed Mr Anthony Bingham as arbitrator after he had responded inappropriately to enquiries about his connections with a party’s solicitor.  The Court exercised its discretion by ordering that both defendants (including Mr Bingham as arbitrator) should be liable for Cofely’s costs, other than the cost of the application notice and the supporting witness statement.

Therefore, in principle, it is correct that section 29 does not preclude an arbitrator from being ordered to pay costs in relation to a section 24 application that has been opposed.  Nonetheless, costs awards against arbitrators are extremely rare.  Cofelyitself is an exceptional case where the Court found the arbitrator to have been accepting repeat instructions from a party, amounting to a significant proportion of his business, and that his response to the claimant’s attempts to establish the facts as to his relationship with that party were aggressive and hostile.  

Discussion 

Successful party

C argued that it was the successful party in the proceedings against both X and D.  It submitted, among other things, that:

• given the resignation of X, C had secured the outcome it had sought;
• D was an unsuccessful defendant.  It contested the Second Challenge that was made to the LCIA Court and filed an Acknowledgement of Service indicating an intention to contest the section 24 application and then fought on until X conceded their position;
• the Court should not look behind the stark result of X’s resignation and cannot hope to know the details of X’s motivations for resignation; the result speaks for itself;
• the SRA referral was no barrier to the Court resolving the section 24 application and there was no need for X to resign before the section 24 hearing took place.  

Notwithstanding this submission, the Judge did not accept C’s submission that it was the successful party.  The mere fact that X retired as arbitrator clearly cannot of itself mean that C should be treated as the successful party as against X and D for costs purposes.  Some regard, therefore, had to be given to the reasons for retirement and the evidence indicated that X retired in the light of C’s referral to the SRA and not because of the section 24 application or its perceived merits.  Prior to that, X had opposed the section 24 application.  The position only changed after C’s referral to the SRA in January 2020.  This represented a significant escalation of the matter.  An SRA investigation could reasonably be expected to take a year or more to resolve and be demanding and stressful during this time.  There was no assurance that the Court’s decision on the section 24 application would resolve the matter and sitting as an arbitrator during an ongoing SRA investigation could also have created a reasonable perception of bias.

The Judge was also of the view that the tone of C’s referral to the SRA was more that of a direct attack on X rather than a neutral report.  It was therefore entirely unsurprising that X came to the conclusion that it would be inappropriate to continue as arbitrator in light of C’s evident approach towards X and the potential of a burdensome and long-running SRA process in parallel with the arbitration.

For these reasons, the Judge concluded that C was not to be regarded as the “successful party” for costs purposes as against either X or D.  Also, D played no part in X’s resignation and therefore could not be regarded as having conceded the claim.

Merits of the section 24 application 

This case came closest to the third category referred to by Lord Neuberger in R (M) v Croydon (paragraph 60) where the natural starting point was that there should be no order for costs, unless it was clear who would have won the case had gone to trial.  Here the Judge considered that it was likely C would have lost the section 24 application.  

In considering C’s section 24(1)(a) claims about doubts as to X’s impartiality, the Judge made reference to case law on the test for bias.

The facts were that X had told the LCIA at the outset that they had no prior experience sitting as an arbitrator, and with regard to X’s CV, C could not have been misled for the simple reason that following the expedited appointment of a tribunal, at C’s request, X’s lack of experience as an arbitrator would not have provided any ground on which C could have challenged X’s appointment.

The Judge therefore concluded that any cause for complaint on C’s part about X’s CV and background (i) would not have provided any justifiable doubts about X’s impartiality and (ii) would not have amounted to a failure by X “properly to conduct the proceedings” and, in any event, would not have caused substantial injustice to C. 

For these reasons, the Judge concluded that it could not be tolerably clear that C’s section 24 challenge would have succeeded.  Indeed, it was far more likely to have failed.

Attempts made to settle the case

With regard to the settlement offers made by both D and X, to settle with parties bearing their own costs, the Judge found these to be reasonable offers which, at least given the outcome of the section 24 application, could now be seen to be offers that ought to have been accepted.  

It was unfortunate that C pursued the application, incurring ever-increasing costs. 

Conclusions

For the reasons set out above, C’s application for costs failed.  C was not the “successful party” as against either D or X and it was not clear that C would have succeeded in its section 24 application.  Rather, it was likely to have failed.

With regard to the question of whether C should be ordered to pay the defendants’ costs of the application, the Judge noted that both D and X were represented on a pro bono basis, apart from junior counsel for X, meaning that any costs award in the defendants’ favour, over and above junior counsel’s fees, would be paid to charities. 

Nonetheless, even though it was probable that C would have failed in its section 24 application, C thought it appropriate to take into account the fact that C operated in the philanthropic sector and therefore the Judge was not attracted by the idea of a substantial costs award requiring a large payment from one philanthropic enterprise (C) to others.  

In the circumstances, the Judge concluded that justice was best served by making an order that C pay the costs of X’s junior counsel (who was not provided on a pro bono basis) in respect of the section 24 application but otherwise there be no order as to costs.

Takeaway

The key takeaway from this case is that section 29 of the Arbitration Act 1996 does not preclude an arbitrator from being ordered to pay costs in relation to a section 24 application that has been opposed. However, costs awards against arbitrators are extremely rare.  The case of Cofely is the obvious exception where the Court found the arbitrator to have been accepting repeat instructions from a party, amounting to a significant proportion of his business.

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