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Security for costs and enforcement of New York Convention arbitration awards

15 January 2014

In the case of Diag Human SE v Czech Republic [2013] EWHC 3190 (Comm), 25 October 2013, the Commercial Court has confirmed that it has jurisdiction to grant security for costs against claimants seeking to enforce arbitration awards in the English court under the New York Convention. Despite the Commercial Court refusing to exercise its discretion based on the facts of the instant case, it nonetheless confirmed the existence that the court has such a power.

Background
 

Diag Human SE (Diag), the applicant, a company incorporated in Lichtenstein, had brought arbitral proceedings in the Czech Republic against the Czech government in 1996 seeking damages arising out of the termination of a commercial contract between Diag and its major supplier which occurred as a result of the Czech government’s actions.

A number of awards were rendered by the tribunal including a partial award granting interim damages to Diag for approximately GBP 10 million, without interest, which the Czech Republic paid in January 2003. The final award was issued in August 2008 in Diag’s favour for further damages and interest, not included in the partial award, for about GBP 275 million. Diag tried to enforce the final award in the U.S., Austria, France, Luxembourg, Switzerland and the UK. In July 2011, Diag successfully made an ex parte application for enforcement before the English court. The Czech Republic sought to resist enforcement on the basis that the final award was not yet binding because, pursuant to the parties’ arbitration agreement, there was an outstanding application for the final award to be reviewed by a review tribunal in the Czech Republic. The Czech Government’s application to resist enforcement of the final award is due to be heard in May 2014. In support of its set aside application, the Czech Republic made an application for security for costs which is the focus of this article.

Burton J was faced with two key issues regarding the Czech Republic’s application for security of costs:

(a) whether the English court had jurisdiction to grant security for costs in favour of the Czech Republic, who was resisting the enforcement of a New York Convention award, and

(b) if the English court had jurisdiction to grant such an order, should the court, as a matter of discretion, exercise its power to grant security for costs in the instant case.

Jurisdiction

Burton J, considering the first issue, identified three matters for debate:

1. Does the New York Convention allow an order for security for costs to be awarded against a party seeking to enforce a Convention award?

The court found that the Convention did not explicitly provide for a party resisting enforcement of a Convention award to be granted security for costs. Instead, Article VI of the Convention only permitted security for costs to be awarded in favour of a party seeking to enforce a Convention award in the event that its enforcement application is resisted on the basis that the award is not yet binding pursuant to Article V(1)(e) of the Convention. However, Burton J stressed that the language in Article III of the Convention suggested that local courts were free to impose their own procedural conditions, including an order for security for costs so long as the conditions did not discriminate between domestic and Convention awards.

2. Can security for costs be awarded against a party seeking to enforce an English arbitration (ie domestic) award? If not, then there can be no such order in relation to a Convention award.

Turning to the second sub-matter, Burton J noted that pursuant to CPR 74.5, an applicant enforcing a foreign judgment could be subject to an order for security for costs but no similar provision existed in relation to arbitral awards. However, ss 67, 68, 69 and 70(6) of the Arbitration Act 1996 allow security for costs to be made against a defendant challenging an arbitral award. Importantly, Burton J went on to rely on the Court of Appeal’s decision in Gater Assets Ltd v Nak Naftogaz Ukrainiy [2007] 2 Lloyd’s Law Rep 588, to find that security for costs was available to a defendant opposing the enforcement of an English award therefore the same relief should be available to a defendant resisting the enforcement of a Convention award pursuant to Article III of the Convention.

Burton J also rejected Diag’s argument that the Czech Republic’s application to set aside the final award was out of time based on ss67, 68 or 69 of the Arbitration Act. Instead, he found that the sole basis for the set aside application was that the final award was not yet binding and therefore, there was no question about whether the Czech Republic’s set aside application was out of time or materially delayed.

3. Is a defendant resisting the enforcement of a Convention award, not in fact in the position of a defendant but in the position of a claimant?

The final sub-matter Burton J considered was whether the Czech Republic could be considered a “defendant” under CPR 25.12 for the purposes of security for costs given that it borne the onus of proof in its application to set aside the enforcement order. In deciding this issue, Burton J relied on previous decisions to conclude that “who a defendant is does not depend upon who brings an interlocutory application, but rather who is the defendant in the overall claim."1 Burton J also noted that the Court of Appeal in Gater confirmed that the English court “had jurisdiction to order security for costs in favour of an award debtor resisting an award, whether that award was a domestic or Convention award.”2 He went on to stress that this power extended to ordering security for costs in favour of the Czech Republic, despite it being an passive defendant (with the burden of proof in relation to the set aside application) under CPR 25.12.

Discretion
 

Having confirmed that the English court had jurisdiction to order security for costs in favour of the Czech Republic, Burton J then went on to consider the second key issue. Should the court exercise its discretion to make an order for security for costs in the instant case?

Diag relied on Gater to argue that the court should only exercise its discretion to make an order for security for costs in favour of a defendant in exceptional circumstances. Burton J considered Diag’s “higher order of discretion” argument in light of four sub-issues. First, whether there was a need for security given that Diag had a third-party financing the substantial costs associated with its worldwide enforcement of the final award. Second, whether Diag’s impecuniosity had been brought about by the Czech Republic’s conduct. Third, had the Czech Republic delayed its application for security for costs and finally, if the final award was deemed to be valid following the review, would it render an order for costs inappropriate given that the final award would be for considerably more than the GBP 258,405 sought as security by the Czech Republic.

Burton J rejected Diag’s argument that the court should only exercise its power to order security for costs in exceptional circumstances. However, he did note that he would adopt a cautious approach when considering whether to exercise his power to order security for costs in the instant case. He stressed that it was unclear that Diag’s impecuniosity was caused solely by the Czech Republic’s actions and although Diag had a third-party funding its enforcement proceedings, based on the evidence before him, Burton J could not conclude that the third-party funder would be able to pay the Czech Republic’s costs. Accordingly, Burton J was not satisfied that Diag would be able to pay the Czech Republic’s costs in the event that Diag’s enforcement order is set aside. This meant that the Czech Republic would be eligible for security for costs pursuant to CPR 25.13.

However, Burton J ultimately decided against awarding the Czech Republic security for costs on the basis that the Czech Republic already held security by virtue of the unsatisfied final award against it and even if the final award was reduced following the review, he doubted that it would be reduced to nothing. Moreover, at a minimum, Burton J believed that the interest due on the partial award issued in 2003, which had not been awarded at the time, would have to be paid by the Czech Republic and it far exceeded the costs sought by the Czech Republic. Finally, Burton J also noted that there had been no previous cases in which security for costs had been granted in favour of a defendant in enforcement proceedings of a New York Convention award.

Comment

This judgment, despite the fact that the court declined to exercise its discretion, provides helpful confirmation that the English court has the jurisdiction to order security for costs in favour of “passive” defendants resisting the enforcement of New York Convention awards. This is useful given that the New York Convention does not expressly confer such a power. The decision confirmed that under the New York Convention, local courts are free to impose their own procedural conditions, as long as the measures do not discriminate between the enforcement of Convention and domestic awards. It also highlighted the English court would consider the entire circumstances of a case, without necessarily assessing the merits of any pending set aside applications, when deciding whether the court should exercise its discretion. Indeed, this judgment leaves open the opportunity that the English court would order security of costs in favour of a “passive” defendant in different circumstances.

Further information

This case summary is part of the Allen & Overy Litigation Review, a monthly update on interesting new cases and legislation in commercial dispute resolution. For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 20 3088 3710.


Footnotes:
1.Burton J at paragraph 32.
2.Burton J at paragraph 33.