FAI award addressing the recoverability of the costs of injunction proceedings in the subsequent FAI arbitration

Background

In the arbitration practice, a question sometimes arises whether a party may seek reimbursement of costs that are not directly related to the arbitration itself but to some ancillary proceedings. For example, a party may have resorted to a state court for conservatory or other interim measures of protection before initiating the arbitration proceedings. Are the costs of such interim measure proceedings recoverable in the following arbitration?

According to Bernard Hanotiau, “[i]t seems that the allowability of these costs as costs of the arbitration is generally not accepted. They should be claimed and allocated in the relevant procedures. Some of them might also be claimed as damages.” (See Hanotiau, The parties’ costs of arbitration, in Derains, Yves – Kreindler, Richard H. (ed.), Evaluation of Damages in International Arbitration, Dossiers of the ICC Institute of World Business Law, ICC Publication No. 668, Paris 2006, p. 215.) The answer may not be that straightforward, however, but will depend on the applicable cost regime. In some jurisdictions (including Finland) the law provides that the costs of interim measure proceedings shall be determined and allocated between the parties only in connection with the decision on the merits of the dispute, i.e., in a final award rendered by the arbitral tribunal (provided that there is a valid and binding arbitration agreement, and the party initiates an arbitration following the interim measure proceedings). In such cases, a party is allowed to request reimbursement of its costs of ancillary interim measure proceedings only in conjunction with the arbitration.

Case comment

The above-mentioned question was specifically addressed in a final award recently rendered in an FAI arbitration between two Finnish parties, A and B. The main issue in dispute concerned the allegedly unlawful termination of the parties’ co-operation agreement by B. Before the arbitration proceedings were launched, A sought an injunction from Finnish state courts prohibiting B from terminating the co-operation agreement. The application was dismissed in both the District Court and the Court of Appeal. In the meantime, A commenced FAI arbitration proceedings against B, requesting inter alia that the arbitral tribunal (i) declare that the termination had been unlawful and (ii) order B to pay to A the costs and expenses arising out of the injunction proceedings, together with default interest in accordance with the Finnish Interest Act.

The arbitral tribunal ultimately found that the termination of the co-operation agreement by B had been unlawful. As regards the compensation of A’s costs related to the injunction proceedings, the arbitral tribunal stated as follows (direct quotation from the award, with only the names of the parties anonymized):

“A has claimed that as B has not been entitled to terminate the Agreement, A has had the right to seek an injunction. According to A, the Arbitral Tribunal has the power to decide who will bear the costs and expenses arising out of or in connection with the injunction proceedings in accordance with Chapter 7, Section 10 of the Finnish Code of Judicial Procedure. This provision of law reflects the principle that the party who has lost the main proceedings shall also be ultimately liable for the costs and expenses arising out of or in relation to the injunction proceedings.

B has asserted that A should be liable to pay the costs as [it] has lost the injunction proceedings in both instances. The courts have found that no legal grounds for an injunction order have existed. A’s injunction application has therefore not been necessary. (…) B has further asserted that the Arbitral Tribunal is in fact bound by the findings of the Court of Appeal, according to which there have been no legal grounds for an injunction order (…)

The Arbitral Tribunal first notes that Chapter 7, Section 10 of the Finnish Procedural Code provides that the question as to which of the parties in the injunction proceedings shall finally bear the cost, shall be resolved when ruling on the main issue in the main proceedings and provided that a party has so requested. Furthermore, Section 11 of the same Chapter provides that an applicant who has unnecessarily resorted to injunction proceedings shall be liable to compensate the opposing party for the damage caused by the precautionary measures and their enforcement, and to cover the expenses incurred. In other words, the question as to who is liable to pay the cost arising from the injunction proceedings is to be decided based on who wins the main issue and whether the injunction proceeding in the light of the outcome of the main issue has been unnecessary. (…) The Arbitral Tribunal also notes that under Finnish law, as a main rule, the binding finality of court decisions is usually limited to the outcome of the decision, not to its reasoning. Furthermore the findings of a court in an injunction proceeding are not legally binding on the court or arbitral tribunal that is competent to decide on the main issue (…) Accordingly, the decisive matter here is whether the injunction proceeding initiated by A was unnecessary in light of the outcome of this arbitration. The answer is no – B has terminated the Agreement without grounds and therefore A’s attempt to obtain an injunction to try to prevent the unlawful termination was necessary. (…) For the reasons stated above, the Arbitral Tribunal finds A’s claims justified and accepts them and orders accordingly.”

Reported by Mika Savola
Chair, FAI Board

Posted in FAI cases |