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Arbitrator’s liability for costs: C Ltd v (1) D (2) X

A while ago, I wrote a summary of the decision in Cofely Limited v Bingham and another. That decision concerned the costs position following the removal of an arbitrator under section 24 of the Arbitration Act 1996 (AA 1996) and, in particular, the following question: is the arbitrator potentially liable for the costs of the application to remove him or her?

The potential tension lies between the provisions of the Civil Procedure Rules (CPR) and those of the AA 1996. Under CPR 62.6(1), an arbitrator is, as a matter of procedure, a defendant to an application for removal. On that basis, one might expect the arbitrator to be liable for costs, should the application succeed. On the other hand, section 29 of the AA 1996 provides that:

“An arbitrator is not liable for anything done or omitted in the discharge or purported discharge of his functions as arbitrator unless the act or omission is shown to have been in bad faith”.

In Cofely v Bingham, Hamblen J (as he then was) took the view that, once the claimant’s application notice made clear the grounds relied upon for seeking removal, the other parties could and should have acceded to the application and, in not doing so, both defendants had not been “neutral” but had acted unreasonably. He considered that section 29 had no application to court proceedings involving an arbitrator, at least where the arbitrator had been found to have acted unreasonably in relation to the proceedings.

Some caution has been expressed in subsequent case law about how far to extend the decision in that case. In PAO Tatneft v Ukraine, Cockerill J commented (in relation to removal, but not costs) that, “Cofely was a very particular case… Cofely is therefore no safe guide in the present case”.

The issue of an arbitrator’s liability for costs arose again recently in C LTD v (1) D (2) X . The claimant had initiated arbitration proceedings in the London Court of International Arbitration (LCIA). On the claimant’s request, the LCIA had appointed X as arbitrator on an expedited basis for the urgent resolution of an intellectual property ownership dispute, which was decided against the claimant by X. X’s CV had been provided to the parties with the notice of appointment. The claimant brought a challenge to the LCIA, alleging that X had failed to treat the parties fairly and impartially in the interim measures decision and the procedure leading up to it. That challenge was rejected.

The claimant also filed a second challenge to the LCIA, alleging that X had misrepresented their experience as an arbitrator in the CV. That challenge too was rejected by the LCIA and the claimant issued the application seeking X’s removal under section 24 of the AA 1996. X’s case was that the LCIA appointed X based on their arbitration experience, which had been deliberately misrepresented in the CV. The defendant denied the merits of the application but offered to agree to X’s removal provided there was no costs order. This was refused and the claimant went on to make a complaint concerning X to the Solicitors Regulation Authority (SRA). X rejected the challenges but offered to resign on the basis that they retained their fees and the other parties reached agreement as to costs. The claimant continued the proceedings, seeking an order for costs of the proceedings against X and X resigned.

Given that X had resigned, the only issue before the court concerned costs.

The first issue was whether the claimant could be considered to be the successful party for costs purposes. The claimant’s case was simple: the application sought removal and X had resigned; thus, the claimant’s application had been successful.

However, Henshaw J rejected that view, essentially for three reasons.

First, as a matter of principle, costs awards against arbitrators are “extremely rare”. Cofely itself was an exceptional case, in which, in Henshaw J’s words:

“… 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 were aggressive and hostile”.

Henshaw J drew attention to Cockerill J’s comments in PAO Tatneft cited above.

Second, the evidence indicated that X retired because of the SRA referral, not the section 24 application. It was irrelevant that the SRA report was based on the same matters as that application. There were cogent reasons for X retiring following the SRA referral: an SRA investigation could reasonably be expected to take a year or more to resolve, and to be demanding and stressful in the meantime. There could be no assurance that this court’s decision on the section 24 application would resolve that matter: the court might for example conclude that the claimant’s allegations did not trigger section 24 because they did not go either to X’s impartiality or their conduct of the arbitration proceedings. Thus, the SRA investigation might continue after the section 24 application was concluded: sitting as arbitrator during an ongoing SRA investigation could also have created a reasonable perception of bias.

Third, Henshaw J also went on to ask what would have been the likely outcome had the application for removal continued to judgment, applying the test for apparent bias applicable to an application for removal (Porter v Magill), whether a fair-minded and informed observer, having considered the facts, would conclude that there was a real possibility that the tribunal was biased. On that basis, the application would have been likely to fail. As far the LCIA was concerned, X’s evidence as to what X told the LCIA concerning X’s previous arbitration experience had not been shown to be incorrect and the court was likely to have accepted it, with the result that it would have held that the LCIA could not have been misled in that respect. The claimant likewise could not have been misled by the CV because, following the expedited appointment of a tribunal, lack of experience as an arbitrator would not have provided any ground for challenging the appointment. Finally, even if the contents of X’s CV had given rise to cause for complaint, that would not have provided any justifiable doubts about X’s impartiality within section 24(1)(a) and would not have amounted to a failure by X “properly to conduct the proceedings” since the production of an arbitrator’s CV did not form part of such conduct and, in any event, it would not have caused substantial injustice to C within section 24(1)(d).

The second issue concerned whether, in any case, the claimant could have recovered costs of the challenges to the LCIA court itself. Henshaw J held (albeit obiter) that such costs are arguably irrecoverable where the challenge to which they relate was rejected, for article 29 of the LCIA Rules provides:

“The determinations of the LCIA Court with respect to all matters relating to the arbitration shall be conclusive and binding upon the parties and the Arbitral Tribunal, unless otherwise directed by the LCIA Court.”

The third issue the court had to determine was the recoverability of costs by the defendants, given its findings. Both defendants were represented on a pro bono basis, apart from junior counsel for X. The defendants sought a pro bono costs order (PBCO) in respect of the pro bono representation, pursuant to section 194 of the Legal Services Act 2007. However, as the claimant operated in the philanthropic sector, the court considered that a substantial costs award requiring payment from one philanthropic enterprise to another was not attractive. The outcome was no order as to costs, save that C should pay the costs of junior counsel’s fees in respect of the section 24 application.

So, what are the key points which arise for the future? A few stand out:

  • It is now well established that section 29 of the AA 1996 does not prevent a costs order being made against an arbitrator following a section 24 application. Although Henshaw J held that such awards may be “extremely rare”, he also pointed out that so are successful section 24 applications: “the removal of an arbitrator is an “extreme step” that is only likely to occur in “the rarest of cases”: Brake v Patley Wood Farm LLP [2014] EWHC 1439 (Ch) § 166.” (emphasis added). As removal (by court or by retirement) is a precondition to a successful costs application, there may be more scope for obtaining costs from an arbitrator following removal than one might at first expect.
  • On the other hand, the court held that the mere fact that X resigned as arbitrator “clearly cannot of itself mean that C should be treated as the successful party”. Thus, the fact of resignation does not itself stack matters in favour of a costs order against the arbitrator. This will be welcome to an arbitrator placed in what is felt to be an impossible position.
  • The fact of an investigation brought by a professional body may be a cogent reason for retirement but, of course, that can be taken too far. If the mere fact of a complaint to such a body or an investigation by it means that the arbitrator should not continue to act, a disappointed party in continuing proceedings would simply have to make a complaint to achieve the removal of the arbitrator. One hopes that professional bodies are aware of the possibility that such complaints might be made as a tactical step. It may be better in such circumstances to wait to see the outcome of any court challenge (or expiry of the period for such a challenge) before proceeding with consideration of such complaints.
  • The court’s comment that any (allegedly) misleading statements in the arbitrator’s CV could not have given rise to doubts concerning impartiality does not mean that a misleading CV could never do so. A misleading statement concerning experience generally does not itself indicate bias, but a misleading statement concerning previous representation or experience as an arbitrator in relation to one of the parties or associated company could well lead to a different conclusion.
  • There remains, if costs are recoverable in principle, the question of the costs of applications to the relevant arbitral body. Section 24(2) of the AA 1996 requires such an application to be made prior to a section 24 application. While the rules of the arbitral body may provide that the decision is final, it does not preclude such an application as such and, if costs have to be incurred in an application to the body, the applicant understandably will consider that such costs should be recoverable subsequently. The argument may be that they are pre-action costs which are not to be treated as costs of the court proceedings, but this remains to be decided.
  • The costs involved in the exercise were striking: the parties’ costs schedules claimed in aggregate approximately £256,000, in relation to arbitration proceedings in which the sum claimed was approximately EUR 166,000. The case is a reminder of how expensive arguing about arbitration proceedings can be, by comparison to the costs claimed in the proceedings themselves.

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