REUTERS | Christian Charisius

I’ve started, so I’ll finish: discontinuing arbitration claims

Enforcing an international arbitration award is a matter of utilising the New York Convention in the domestic courts. Discontinuing arbitration claims, however, is getting complicated.

The United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards celebrated its 60th birthday in June 2018. Through the Convention, signed on 10 June 1958, 159 state parties agree to the principle that foreign arbitration awards can be both recognised and enforced in their own courts.

Discontinuing arbitration claims once launched is not a topic that has received much attention. The topic has come under the spotlight in the last six months after two cases involving arbitration claims came before the English courts (and were withdrawn), only to find themselves subject to legal complications about whether they should have done so, and the costs consequences of doing so.

When can an arbitration claim be discontinued?

One question recently addressed by the courts is whether a New York Convention award creditor can abandon their attempt to enforce in circumstances where that enforcement has been challenged by the award debtor? The answer, according to a decision in August by the English Court of Appeal, will almost always be “yes”.

This important question has received surprisingly little attention from courts in New York Convention jurisdictions.

Stati v Kazakhstan makes the English law position clear, in a decision that both draws from, and is likely to influence, international jurisprudence on the enforcement of New York Convention awards. The decision relates to attempts to enforce a US $500 million arbitral award obtained by a Moldovan businessman against the Republic of Kazakhstan dated 19 December 2013. During proceedings in the English Commercial Court, the court found that there were sufficient grounds to permit Kazakhstan to argue that the award was obtained by fraud. In February 2018, prior to the commencement of the English fraud trial, the Stati parties exercised their right to discontinue their subsisting enforcement claim and offered undertakings not to further seek to enforce the award in England.

Kazakhstan successfully applied to set aside the notice of discontinuance on the basis that it had a “legitimate interest” in proceeding to a fraud trial and seeking a declaration that the award had been obtained by fraud, notwithstanding that the Stati parties had abandoned their attempt to enforce it in England.

However, the Court of Appeal, in August 2018, reversed the Commercial Court’s decision. It held that there was no “legitimate interest” in Kazakhstan proceeding to a fraud trial in circumstances where the underlying enforcement attempt was no longer pursued, relying on the ratio of a case on similar facts from Alberta, Canada: Karaha Bodas Company LLC v Perushaan Pertambangan Minyark Dan Gas Bumi Negara. There would only be such a “legitimate interest” in exceptional circumstances, which did not exist in that case.

Discontinuance costs

The consequences of a successful discontinuance of an arbitration claim were then addressed by the English Commercial Court in January 2019 in Koshigi Limited & Svoboda Corporation v Donna Union Foundation & Ulmart Holdings Limited. After the London Court of International Arbitration (LCIA) ruled that the claimants were bound to purchase shares in Ulmart held by Dona Union and for a price of more than US $67 million, they appealed the awards under section 68 of the English Arbitration Act 1996, claiming serious irregularity and bias on the part of the tribunal. They subsequently discontinued the claim.

The usual rule is that the discontinuing party pays the costs of the discontinued case. The section 68 applicants contended that despite losing the arbitration, the award was likely to have been unenforceable in any event since the successful party had not complied with certain aspects of the tribunal’s award. For that reason, the court should not follow the usual rule, and allow discontinuance without any costs consequences. The court declined to do so, on the footing that it was impossible to determine this factual question when assessing an application for discontinuance costs. Moreover, the court held that costs would be ordered against the discontinuing applicant on an indemnity basis, since the section 68 challenge had been “very weak”.

Lessons learned

These decisions are a cautionary tale for parties contemplating arbitration claims in England and Wales in respect either of enforcing or appealing arbitration awards. An award creditor can now commence enforcement proceedings in the knowledge that it will not be forced to fight another lengthy legal battle based solely on the award debtor’s alleged “legitimate interest” in having its allegations that the award was obtained by fraud heard at trial (even if an exceptional risk of being held to a trial on the issue remains). But Koshigi has also sharpened the focus on the costs burden for discontinuing arbitration claims and the court’s reluctance to depart from the usual costs consequences. A party can discontinue an arbitration claim, but they may pay the price for doing so.

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