Factual and Procedural Background
Company A is the assignee of a New York Convention arbitration award and seeks to enforce it in England against the award debtor, Company B. Company B resists enforcement primarily on the basis that the award was procured by fraud, a recognized ground under the Convention allowing refusal of enforcement on public policy grounds. Company B applied for security for costs against Company A, arguing it was just that security be provided given Company A's status as claimant seeking enforcement. The trial judge granted security for costs against Company A, who appealed. Permission to appeal was granted on the basis that important arguable questions were raised.
The arbitration award was made by an international court in Moscow pursuant to a contract concerning the use of a gas pipeline between a Russian gas company and the legal predecessor of Company B. The award creditor was originally the reinsurer of an insurer of the Russian gas company, which obtained the award and later assigned it to Company A. Company B challenged the award unsuccessfully in Russian courts and unsuccessfully sought enforcement in New York on jurisdictional grounds without contesting fraud or public policy.
Company A commenced enforcement proceedings in England, obtaining an ex parte order permitting enforcement and judgment, along with a freezing order against Company B. Company B responded by seeking to set aside the enforcement order and requested security for costs, alleging among other grounds that the award was obtained by fraud based on documents not before the arbitral tribunal but later exhibited in English proceedings.
The application for security for costs was granted by the trial judge under the Civil Procedure Rules ("CPR") and Company A appealed that order.
Legal Issues Presented
- Whether the court has jurisdiction under the CPR to order security for costs against an award creditor seeking enforcement of a New York Convention award under section 101 of the Arbitration Act 1996.
- Whether the security for costs regime applicable to domestic claims applies equally to enforcement proceedings of foreign arbitration awards.
- Whether, as a matter of discretion and principle, security for costs should be ordered against an award creditor in enforcement proceedings, particularly where the award debtor alleges fraud in procuring the award.
- Whether ordering security for costs against the award creditor in enforcement proceedings breaches Article III of the New York Convention by imposing more onerous conditions than those on enforcement of domestic awards.
Arguments of the Parties
Appellant's Arguments
- There is no jurisdiction to order security for costs against an award creditor enforcing a Convention award under section 101 of the Arbitration Act 1996.
- Even if jurisdiction exists, it is counter-intuitive and contrary to the Convention's principle of speedy enforcement to require security for costs from the award creditor.
- The award debtor, who challenges enforcement, is effectively the claimant and liable to provide security for costs of such challenges under sections 67-70 of the Arbitration Act 1996; thus it is inconsistent to require security from the award creditor.
- Ordering security for costs against the award creditor breaches Article III of the Convention by imposing more onerous conditions on foreign award enforcement than domestic awards.
- The enforcement proceedings are summary and quasi-administrative, intended to be efficient, and security for costs should not impede this.
- The alleged fraud is a serious matter but is contested and has been previously rejected by Russian courts.
Respondent's Arguments
- The CPR treats enforcement applications as claims to which the award debtor is defendant, thereby permitting security for costs under CPR 25.12.
- Security for costs is available in enforcement proceedings, including for foreign awards, consistent with the CPR and the Arbitration Act 1996.
- The award debtor incurs substantial costs in resisting enforcement and it is just to require security given Company A's lack of assets beyond the award.
- There is an essential distinction between challenging an award by application or appeal under sections 67/69 and defending enforcement under section 66 or 101; the latter is defensive and security for costs is appropriate.
- CPR 74.5, dealing with security for costs in enforcement of foreign judgments, supports the availability of security for costs in analogous enforcement proceedings.
- The prima facie case of fraud and the large sum involved justify the exercise of discretion to order security for costs.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Neck v. Taylor [1893] 1 QB 560 (CA) |
Discretion to award security for costs in counterclaims; counterclaims as defence do not usually warrant security. |
Referenced to illustrate discretion in security for costs and the treatment of counterclaims as defences. |
| The Silver Fir [1980] 1 Lloyd's Rep 371 |
Security for costs may be awarded on both claim and counterclaim where both parties claim damages. |
Used to show pragmatic approach to security for costs in related claims. |
| Hitachi Shipbuilding & Engineering Co Ltd v. Viafiel Compania Naviera SA [1981] 2 Lloyd's Rep 498 |
Security for costs jurisdiction exists for counterclaims but discretion limits ordering security to additional costs. |
Supports the principle that security for costs depends on substantive claims and discretion. |
| BJ Crabtree (Insulation) v. GPT Communications Systems (1990) 59 BLR 43 |
Where claim and counterclaim are linked, generally neither party should get security for costs. |
Supports the limitation of security for costs in linked claims. |
| Copp e-Lavalin SA/NV v. Ken-Ron Chemicals and Fertilizers Ltd [1995] 1 AC 38 |
Jurisdiction to order security for costs in international arbitration but courts should be circumspect. |
Discussed as background on the controversy of security for costs in arbitration; statutory changes reversed this jurisdiction. |
| Dardana Ltd v. Yukos Oil Co [2002] 2 Lloyd's Rep 261 |
Whether security for costs is available in enforcement proceedings of Convention awards; award debtor as defendant. |
Considered the issue of security for costs in enforcement; jurisdiction accepted but security refused as discretion. |
| Jaffray v The Society of Lloyds [2007] EWCA 586 |
Allegation of fraud in enforcement of judgments requires new action; security for costs considerations. |
Analogized to enforcement of awards; supports proposition that fraud challenges require active claimant role. |
Court's Reasoning and Analysis
The court examined the procedural framework under the Civil Procedure Rules (CPR), the Arbitration Act 1996, and the New York Convention to determine whether security for costs could be ordered against an award creditor enforcing a foreign arbitral award.
The CPR defines a "claim" broadly and provides that a defendant to any claim may apply for security for costs. The enforcement of an arbitration award under section 101 of the Arbitration Act 1996 is initiated by an arbitration claim form, and the award debtor is identified as defendant. This prima facie supports jurisdiction to order security for costs.
However, the court recognized that enforcement proceedings, particularly those under the Convention, are intended to be summary and quasi-administrative, facilitating prompt enforcement subject to limited exceptions. The New York Convention and the Arbitration Act impose narrow grounds for refusal of enforcement and specifically regulate security for the award itself, but not security for costs of enforcement challenges.
The court analyzed prior authority, notably Dardana Ltd v. Yukos Oil Co, which accepted jurisdiction but refused security for costs as a matter of discretion. It also considered the statutory scheme for domestic awards, where an award debtor challenging an award may be required to provide security for costs, but an award creditor enforcing the award would not typically be subject to such a requirement.
The majority reasoned that it would be inconsistent and contrary to the Convention's principle of equal treatment to impose a security for costs regime on an award creditor enforcing a Convention award if no such regime applies to the award debtor in domestic enforcement proceedings. The court emphasized that the burden of proof for fraud or other public policy exceptions rests on the award debtor, and enforcement should not be made conditional on security for costs absent exceptional circumstances.
The judge below had found a prima facie case of fraud and the large amount involved justified security for costs. The appellate majority found these reasons insufficient to overcome the principle that security for costs should not generally be ordered against an award creditor in enforcement proceedings under the Convention.
One dissenting judge took the view that jurisdiction existed and that the judge's discretion to order security for costs was properly exercised given the circumstances, including the prima facie fraud allegation and the size of the claim.
Holding and Implications
ALLOWING THE APPEAL
The court held that, assuming jurisdiction exists, it was wrong in principle to order security for costs against the award creditor enforcing a New York Convention award in the circumstances of this case. The order for security for costs was set aside.
The decision underscores the principle that enforcement of Convention awards should be efficient and not unduly burdened by security for costs requirements, reflecting the limited grounds for refusal of enforcement under the Convention. The ruling affirms that the burden to challenge enforcement lies primarily with the award debtor and that imposing security for costs on the award creditor risks imposing more onerous conditions than those applicable to domestic awards, contrary to Article III of the Convention.
No new precedent was established altering the existing framework; rather, the judgment clarified the application of security for costs in enforcement proceedings and emphasized judicial reluctance to impose such orders against award creditors enforcing Convention awards except in wholly exceptional cases.