On 19 September 2023, I made orders pursuant to s 7(2) of the International Arbitration Act 1974 (Cth) staying a cross-claim brought by the defendant, Australian International Aviation College Pty Ltd (AIAC), against Hainan Airlines Co Ltd (Hainan). The only remaining question is the costs of the notice of motion by which the application for the stay was sought. AIAC accepts that it must pay the costs of the motion. Hainan claims those costs on an indemnity basis and seeks a gross sum costs order. AIAC resists a costs order in those terms.
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Background
AIAC runs a training school for pilots. By an agreement dated 20 December 2016 between it and Hainan (the Training Agreement), AIAC agreed to conduct training for Hainan's cadet pilots. One of those trainees claims to have suffered personal injuries as a result of a night training flight. He has sued AIAC in the District Court claiming damages in negligence in respect of those injuries.
AIAC claims that it is entitled to be indemnified by Hainan under Art 10.1 of the Training Agreement which provides (in an English version):
HAINAN AIRLINES agrees to release, defend, indemnify and hold harmless AIAC and their respective officers, directors, employees, instructors, service representatives and agents, from and against any and all claims, demands, suits, judgments, damages, liabilities, losses (including costs), and expenses in connection therewith or incidental thereto, for the death or bodily injury to any persons including any HAINAN AIRLINES employees, designees or HAINAN AIRLINES cadets (collectively, "HAINAN AIRLINES Parties") or property damage, arising out or in connection with any action taken, or omitted to be taken, by HAINAN AIRLINES Parties, AIAC employees or designees as a result of or in connection with this Contract and the Training Services provided hereunder, except to the extent caused by AIAC's gross negligence or willful [sic] misconduct.
Zheng v Australian International Aviation College Pty Ltd [2023] NSWSC 1165 | Case summary | Zoe
Article 14 of the Training Agreement provides:
Resolution of Disputes
14.1 Any dispute, controversy or claim arising out of or relating to this Contract, including the validity, invalidity, breach or termination thereof, shall be settled by arbitration in Hong Kong under the Hong Kong International Arbitration Centre Administered Arbitration Rules in force when the Notice of Arbitration is submitted in accordance with these Rules. The arbitration proceedings shall be conducted in English.
14.2 The arbitration award shall be binding on all Parties.
Article 15.2 of the Training Agreement provides:
The text of this Contract herein written in the Chinese Language is the authentic text and any difficulties and uncertainties in interpretation arising shall be solved by reference to this text and it shall prevail over any translation made hereof.
Notwithstanding Art 14.1, by a letter dated 14 July 2021, AIAC proposed that in view of the indemnity, Hainan be joined with its consent as a cross‑defendant in the District Court proceedings. AIAC proposed that "Hainan could then accept the application of the indemnity but otherwise leave AIAC to conduct the defence of the case and/or participate in the defence to the extent it chooses to do so".
That and a number of follow‑up letters were not sent to the address for service provided for in the Training Agreement.
Eventually, having received no response, AIAC filed a cross‑claim and sought to serve it by email dated 16 August 2022. Hainan objected to service in that form and insisted that the cross‑claim be served in accordance with the provisions of the Hague Service Convention, which is what happened. Following service, on 1 May 2023, Corrs Chambers Westgarth, who acted for Hainan, wrote to GSG Legal, who acted for AIAC, asking whether AIAC would consent to the matter being referred to arbitration under s 8(1) of the
"Commercial Arbitration Act 2012 [sic: 2010] (NSW)".
GSG replied to that letter on 10 May 2023. They asserted that the New South Wales legislation was not applicable. They asked Hainan to identify "the matter" to be referred to arbitration given that there appeared to be no dispute that Hainan was liable to indemnify AIAC. Lastly, they asked what the commercial sense of referring the matter to arbitration was, particularly in light of the course suggested by AIAC in its earlier letter.
There was further correspondence between the parties on those issues. Corrs identified that the stay was sought under s 7(2) of the International Arbitration Act 1974 (Cth), not the New South Wales Act. The debate between the parties was complicated by the fact that there was both a Chinese and English version of the contract and the terms of the indemnity in each appeared to be different. However, both versions plainly provided that disputes arising out of or relating to the contract be referred to arbitration. It was also plain that Hainan disputed liability under the indemnity. It set out its reasons for doing so in a letter dated 13 June 2023 from its solicitors. Its view is that, even if the English version applied, the indemnity was not available because:
a. the particulars of negligence alleged in the Second Further Amended Statement of Claim dated 14 March 2023, which if made out are sufficient to amount to gross negligence such that clause 10 of the Agreement would not apply;
b. there is a question as to whether at least some of the loss claimed does not fall to be indemnified, for example, mental harm does not constitute "bodily injury", and future care and future economic loss go beyond the loss covered by the indemnity; and
c. there is a question as to whether the loss was caused "in connection with" the training services under the Agreement.
In light of that, Hainan claimed that a stay was mandatory under s 7(2) of the International Arbitration Act 1974 (Cth), which provides:
Subject to this Part, where:
(a) proceedings instituted by a party to an arbitration agreement to which this section applies against another party to the agreement are pending in a court; and
(b) the proceedings involve the determination of a matter that, in pursuance of the agreement, is capable of settlement by arbitration;
on the application of a party to the agreement, the court shall, by order, upon such conditions (if any) as it thinks fit, stay the proceedings or so much of the proceedings as involves the determination of that matter, as the case may be, and refer the parties to arbitration in respect of that matter.
Despite that, AIAC continued to resist an application for a stay, largely because of the continuing dispute on the correct meaning of Art 10.1 of the Training Agreement arising from the fact that there was both an English and Chinese version of the contract. It was not until 15 September 2023, five days before the motion was due to be heard, that AIAC agreed to consent to an order for a stay.
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Relevant principles
It is appropriate to make an order for indemnity costs against a party who has acted unreasonably in persisting with a claim or defence that it should have known had no real prospects of success: Rosniak v Government Insurance Office (NSW) (1997) 41 NSWLR 608; Baillieu Knight Frank (NSW) Pty Ltd v Ted Manny Real Estate Pty Ltd (1992) 30 NSWLR 359; Chaina v Alvaro Homes Pty Ltd [2008] NSWCA 353 at [111]‑[113] per Basten JA; Sewell v Zelden (No 2) [2010] NSWSC 1181 at [48]ff per Rein J.
The same circumstances may also justify a gross sum costs order provided the Court considers it can do so fairly between the parties and where an appropriate sum can be determined from the available materials: see Ahern v Aon Risk Services Australia Ltd (No 2) [2022] NSWCA 39 at [14]ff per Meagher, White and Brereton JJA.
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Consideration
I am satisfied that it is appropriate to make a gross sum costs order and that the amount of the order should be determined on an indemnity basis.
AIAC was aware that the contract contained an arbitration clause which was in broad terms. At least by 13 June 2023, it was aware of the general nature of the dispute in relation to the indemnity clause and that Hainan wished to exercise its contractual right to have that dispute referred to arbitration in accordance with the Training Agreement. It is plain that the Court was required to refer the matter to arbitration in those circumstances. Most of the costs claimed by Hainan were incurred after that date. AIAC maintains that it was entitled to "get to the bottom of" the indemnity before agreeing to a stay. But why that is so is unclear. The meaning and effect of the indemnity clause is a matter for the arbitration.
The total costs incurred by Hainan in relation to the motion (apart from the costs associated with the hearing on costs) are $38,978, which is not a large amount. In support of its claim for a gross sum costs order, Hainan has tendered its solicitors' invoices, which provide a description of each item of work, who did the work, the time taken and the amount charged. The bills also show the charge‑out rates of each person who worked on the matter. In addition, Hainan's solicitor estimates that the costs of preparing for and appearing on the costs hearing to be $1,200 for Counsel and $1,520 in solicitor's fees. Accordingly, the total cost of the motion are said to be $41,698, of which $9,520 represents Counsel fees. Apart from Counsel fees, the only disbursement included in those costs is a filing fee. Hainan has proposed that if costs are awarded on an indemnity basis, solicitor's fees should be discounted by no more than 10 percent to $28,960, leading to a gross sum of $38,480.
Hainan's costs appear to be reasonable given the work that was done. AIAC did not suggest otherwise. The application of a ten percent discount to solicitor costs also appears to be reasonable, given that Hainan is entitled to recover its costs on an indemnity basis. Given that discount and the small amount of costs incurred prior to 13 June 2023, it is not appropriate to make a separate order in relation to costs incurred before that date.
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Orders
Accordingly, the order of the Court is that the cross-claimant pay the cross-defendant's costs of the amended notice of motion filed on 14 July 2023 fixed in a gross sum of $38,480.
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Decision last updated: 28 September 2023