John Holland Pty Limited v Kellogg Brown & Root Pty Ltd

Judgment

On 22 April 2015 I determined that John Holland and KBR are to be referred to arbitration under s 8(1) of the Commercial Arbitration Act 2010 (NSW) ("the Act") and that John Holland's proceedings against Atlantis are to be stayed (John Holland Pty Limited v Kellogg Brown & Root Pty Ltd [2015] NSWSC 451).
I invited submissions on whether the proceedings against KBR should be stayed or dismissed, and on costs. The parties provided written submissions and there was brief oral argument.
This judgment should be read in conjunction with the principal judgment. Defined terms there have the same meaning here.

Costs

Both KBR and Atlantis submit that John Holland should be ordered to pay their costs on the indemnity basis.
John Holland acknowledges that both the KBR Motion and the Atlantis Motion were successful. It puts that costs, on the ordinary basis, should follow the event on both.
KBR and Atlantis urge the Court to adopt the approach taken in A v B [2007] EWHC 54 (Comm) that provided it can be established by a successful application for a stay or anti-suit injunction as a remedy for breach of an arbitration or jurisdiction clause that the breach has caused the innocent party to incur legal costs, those costs should normally be recoverable on an indemnity basis.
In A v B Colman J said the following: [9] …if a costs order in favour of a successful applicant for a stay or for an anti-suit injunction directed to giving effect to an arbitration agreement or an English jurisdiction clause must, save in exceptional cases be confined to costs on the standard basis, there would necessarily be a part of the successful applicant's costs of the application which it had properly incurred but could not recover by such an order because of the restrictive process of assessment. This unindemnified portion of costs would then be loss which could only be recovered as damages for breach of the jurisdiction or arbitration agreement, if such a damages claim were permissible. Where the cause of action for relief enforcing the agreement by stay or injunction in the English court and the cause of action for damages for breach of that agreement are, as they normally will be, the same, the effect of those authorities such as Berry v. British Transport Commission, supra, referred to in Union Discount v. Zoller, supra, will be to prevent separate proceedings for damages by reference to unrecovered costs, notwithstanding the breach of the arbitration or jurisdiction agreement. [10] This would give rise to a fundamentally unjust situation. There can be no question but that the procedural consequence of conduct by a party to an arbitration or jurisdiction agreement which amounts to a breach of it and causes the opposite party reasonably to incur legal costs ought to be that the innocent party recovers by a costs order and/or by an award of damages the whole, and not merely part, of its reasonable legal costs. Against that background, it is necessary to ask whether there is any sustainable policy consideration which would require that unless there were some special circumstances, excluding the fact that it was an arbitration or jurisdiction agreement that had been broken, the successful party should have to forgo part of its costs or alternatively to bring a separate claim for damages to cover any shortfall on assessment of costs. The relevant considerations point very strongly indeed against either result. To forgo part of the loss would be unjust. To be placed in a position where the balance of the recoverable damages could not be quantified until after the costs had been formally assessed would involve delay in obtaining compensation properly due and a formalistic and cumbersome procedure which would in itself involve more costs and judicial time. Where the defendant who had been improperly impleaded in the English courts was outside the jurisdiction, no claim for damages could be brought in the English courts without submitting to the jurisdiction. [11] In my judgment, provided that it can be established by a successful application for a stay or an anti-suit injunction as a remedy for breach of an arbitration or jurisdiction clause that the breach has caused the innocent party reasonably to incur legal costs, those costs should normally be recoverable on an indemnity basis. [15] The conduct of a party who deliberately ignores an arbitration or a jurisdiction clause so as to derive from its own breach of contract an unjustifiable procedural advantage is in substance acting in a manner which not only constitutes a breach of contract but which misuses the judicial facilities offered by the English courts or a foreign court. In the ordinary way it can therefore normally be characterised as so serious a departure from "the norm" as to require judicial discouragement by more stringent means than an order for costs on the standard basis. However, although an order for indemnity costs will usually be appropriate in such cases, there may be exceptional cases where such an order should not be made. Although the requirement that the successful party should establish that the claimed costs were caused to be reasonably incurred (subject to the reversed evidential burden of proof in CPR 44.4(2)(b)) by the breach of the jurisdiction clause or arbitration clause will normally cater for those cases where the true cause of the expenditure on costs is the conduct of the successful party, there may be other cases in which an order for indemnity costs would not be appropriate. Without wishing to confine this flexibility in any way, it is not difficult to envisage that departure from the normal approach might be justified in a case where conduct on the part of the successful party has led the party in breach to believe that the chosen forum can be ignored. Further there may be cases in which the general conduct of the successful party, although not breaking the chain of causation, would nevertheless justify its being deprived of an order for indemnity basis costs. In such cases the need to reflect judicial disapproval of such conduct might justify an order for costs on the standard basis.
In Australia this approach has apparently found favour only in Western Australia where, in Pipeline Services WA Pty Ltd v Atco Gas Australia Pty Ltd [2014] WASC 10 at [18] Martin CJ described Colman J's reasoning as impeccable. The approach has also been followed in Singapore; see Tjong Very Sumito and Others v Antig Investments Pte Ltd [2009] SGCA 41 at [19] and [71]. However, its correctness has been doubted in Victoria; Ansett v Malaysian Airline System (No 2) [2008] VSC 156 at [22].
In the context of applications by a party to appeal against or set aside an arbitral award or for an order refusing enforcement, a similar approach has been taken at first instance in Hong Kong, commencing with the judgment of Reyes J in A v R [2009] 3 HKLRD 389 and followed in Wing Hong Construction Ltd v Tin Wo Engineering Co Ltd [2010] HKEC 918 at [8] - [14] and Taigo Ltd v China Master Shipping Ltd [2010] HKCFI 530 at [13] - [16].
The reasoning in A v R was succinctly summarised by Warren CJ in IMC Aviation Solutions Pty Ltd v Altain Khuder LLC (2011) 38 VR 303 at 319 [56] as follows: …That decision was based upon three considerations. First, award creditors should be entitled to expect that enforcement courts will enforce awards made in their favour and applications to resist enforcement should be exceptional. Secondly, unsuccessful award debtors would be in breach of their overarching obligations under the Hong Kong Civil Justice Reform ('CJR') to assist the court in achieving just, cost-effective and efficient resolution of disputes. Thirdly, the losing award debtor should bear the full costs consequence of bringing an unsuccessful application to dissuade them from pursuing 'unmeritorious challenges.'
The trial judge adopted the approach taken in A v R. This did not find favour with the Court of Appeal. Warren CJ found it unnecessary to express a view on whether the approach should be followed in Victoria. However, at [335] Hansen JA and Kyrou AJA said: With great respect to his Honour, we can find nothing in the [International Arbitration Act] or in the nature of the proceedings that are available under the Act which of itself warrants costs being awarded against an unsuccessful award debtor on a basis different from that on which they would be awarded against unsuccessful parties to other civil proceedings. Accordingly, his Honour acted on a wrong principle in embracing the approach that has been adopted by the Hong Kong Court of First Instance. We note also that the Civil Procedure Act 2010 was not in force when his Honour heard this proceeding. Even if it were in force, it would not have warranted the order he made.
I decline to follow the A v B approach. I respectfully agree with the comments of the majority of the Victorian Court.
Sections 56(1) and (2) of the CPA provide: (1) The overriding purpose of this Act and of rules of court, in their application to civil proceedings, is to facilitate the just, quick and cheap resolution of the real issues in the proceedings. (2) The court must seek to give effect to the overriding purpose when it exercises any power given to it by this Act or by rules of court and when it interprets any provision of this Act or of any such rule.
Section 98(1) of the CPA provides: Subject to rules of court and to this or any other Act: (a) costs are in the discretion of the court, and (b) the court has full power to determine by whom, to whom and to what extent costs are to be paid, and (c) the court may order that costs are to be awarded on the ordinary basis or on an indemnity basis.
The section gives the Court a wide discretion. In Oshlack v Richmond River Council (1998) 193 CLR 72 at 81 [21] - [22] Gaudron and Gummow JJ said of s 69(2) of the Land and Environment Court Act 1979 (NSW), which is in the same terms as s 98(1) of the CPA: [21] The provisions of s 69 of the [Land and Environment] Court Act which confer upon the Court the discretion exercised by the primary judge attract the application of the general proposition that it is inappropriate to read a provision conferring jurisdiction or granting powers to a court by making conditions or imposing limitations which are not found in the words used. The necessity for the exercise of the jurisdiction or power by a court favours a liberal construction. Considerations which might limit the construction of such a grant to some different body do not apply. [22] The terms of s 69(2) contain no positive indication of the considerations upon which the Court is to determine by whom and to what extent costs are to be paid. The power conferred by the section is to be exercised judicially, that is to say not arbitrarily, capriciously or so as to frustrate the legislative intent. However, subject to such considerations, the discretion conferred is, to adapt the words of Dixon J, unconfined except in so far as "the subject matter and the scope and purpose" of the legislation may enable an appellate court to pronounce the reasons given by the primary judge to be "definitely extraneous to any objects the legislature could have had in view".
Part 42 r 42.1 of the Uniform Civil Procedure Rules 2005 (NSW) ("UCPR") provides: Subject to this Part, if the court makes any order as to costs, the court is to order that the costs follow the event unless it appears to the court that some other order should be made as to the whole or any part of the costs.
Part 42 r 42.2 of the UCPR provides: Unless the court orders otherwise or these rules otherwise provide, costs payable to a person under an order of the court or these rules are to be assessed on the ordinary basis.
Part 42 r 42.5 of the UCPR provides: If the court determines that costs are to be paid on an indemnity basis: (a) in the case of costs payable out of property held or controlled by a person who is a party to the proceedings: (i) in the capacity of trustee, executor, administrator or legal representative of a deceased estate, or (ii) in any other fiduciary capacity, all costs (other than those that have been incurred in breach of the person's duty in that capacity) are to be allowed, and (b) in any other case, all costs (other than those that appear to have been unreasonably incurred or appear to be of an unreasonable amount) are to be allowed.
The A v B approach is not the law in this State. Despite the praise lavished upon it, for the reasons which follow (and which are not in any order of precedence), I consider it to be unsound and insupportable in principle.
First, the imposition of bespoke categories and presumptions in favour of an award of indemnity costs is contrary to the accepted starting point that costs are on the ordinary basis. It displaces the usual presumption that indemnity costs will not be awarded except where there is a special entitlement or some relevant unreasonable action including relevant misconduct in connection with the conduct of the proceedings. It makes the ordinary basis the exception, not the rule. It is an unwarranted fetter on the Court's wide discretion.
Secondly, there is no logical or rational reason for the creation of categories restricted to the breach of arbitration or forum agreements. Such bargains have no greater sanctity than other bargains, including releases and covenants not to sue which, like arbitration and forum agreements, restrict the right to resort to curial proceedings.
Thirdly, in all cases of breach of contract where the successful party only obtains an order for costs on the ordinary basis, it is left uncompensated for the difference between the amount assessed on that basis and the full indemnity basis.
Fourthly, the approach makes no allowance for a correlative presumption that a party who wrongly asserts the existence or applicability of an arbitration or forum agreement should be mulcted with indemnity costs.
Fifthly, the approach encourages collateral disputes related to the question of costs such as whether there was conduct which had the potential to lead a party to believe that the chosen forum could be ignored or which broke the chain of causation. Characterising costs as damages also gives rise to questions of mitigation. The approach is inimical to the achievement by the Court of the overriding purpose under the CPA to facilitate the just, quick and cheap resolution of the real issues in the proceedings.
Sixthly, the precise reach of the presumption is unclear. As articulated in paragraph [11] of A v B, all that is required is breach by one party, causing the other reasonably to incur costs. This is an objective test. As articulated in paragraph [15], the guilty party must deliberately ignore an arbitration or jurisdiction clause so as to derive an unjustifiable procedural advantage. This incorporates a subjective element.
Seventhly, the Legislature could have, but did not, create or recognise any such categories for an award of indemnity costs in the Act.
Finally, there is sufficient power in the Court to award indemnity costs in any circumstances where it is warranted.
True support for commercial arbitration neither necessitates nor justifies abandonment of principle.
This is not a case where there should be an award of indemnity costs. To the contrary, it is one where justice dictates that the award should be on the ordinary basis.
John Holland's opposition to the KBR motion was, although unsuccessful, reasonable. Part of its opposition was that it (as one of Colman J's exceptions contemplate) had been led by KBR to believe that the chosen forum could be ignored. It was a challenge of substance. Only a Court could decide it; see Mio Art Pty Ltd v Mango Boulevard Pty Ltd and Ors (No 3) [2013] QSC 95 at [13].
As to Atlantis, John Holland's challenge to that part of the Atlantis Motion which sought a referral under s 8(1) succeeded. It was Atlantis which, in breach of the Atlantis Contract, claimed a referral to arbitration. Indeed, if the A v B approach gave a correlative entitlement to indemnity costs with respect to a successful challenge, Atlantis should have to pay John Holland's costs on the indemnity basis in respect of this issue.
I record that Atlantis put a submission that John Holland should pay its costs on the indemnity basis for the reason that, as it put it, John Holland took a commercial risk in commencing proceedings when it knew both that it had no agreement to the contrary with Atlantis and that it was bound by the alternative dispute resolution provisions in the Atlantis Contract. Apart from the fact that John Holland was partially successful, this submission overlooks the significant consideration that, as appears from the principal judgment, John Holland had some difficulty in extracting from Atlantis what its position was with respect to relying on the alternative dispute resolution provision. Also, I do not consider that John Holland's opposition was unreasonable.
John Holland was not guilty of conduct which deserves to be marked by an order for indemnity costs. Both KBR and Atlantis succeeded in their motions. Costs should follow the event, and they should be on the ordinary basis.

At a glance

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Judgment (6 paragraphs)

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