COSTS CONSEQUENCES OF BREACHING ARBITRATION CLAUSES By John Kelly, William KQ Ho and Jonathan Chan (Melbourne) What happens when a party breaches an arbitration clause and decides, instead, to commence a court proceeding? In Australia, the courts will almost certainly refer the parties’ dispute to arbitration and stay the court proceedings. That is consistent with the “pro-arbitration” approach that has been adopted by the Australian courts. However, in recent times, there has been a debate as to the costs consequences of any such stay application. Generally speaking, a successful party to an interlocutory application (such as a stay application) will only be awarded costs on a standard basis (also known as “costs on an ordinary basis” or “party and party costs”). It represents a partial indemnity for those costs reasonably incurred for the attainment of justice. In other words, the successful party will generally only be indemnified to the extent of 50 to 70 per cent of its actual legal costs incurred in connection with the application. However, the courts have discretion to order costs on an indemnity basis in special circumstances (i.e., the successful party is able to recover between 85 to 100 per cent of its legal costs). In that context, it has been debated whether a costs order in respect of a stay application in relation to an arbitration clause should be made on an indemnity basis, and whether that should be a general rule. We now consider the competing approaches. 54 | K&L Gates: ARBITRATION WORLD INDEMNITY COSTS SHOULD BE THE GENERAL APPROACH In the English court decision of A v B [2007] 2 CLC 203, Colman J held that if a party is successful in its application for a stay or anti-suit injunction as a remedy for a breach of an arbitration clause that has caused the innocent party reasonably to incur legal costs, those costs should be recovered on an indemnity basis. Colman J compared the legal costs incurred in the stay application to damages and held (at 208 [10]) that: “…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”.