3PLR -EVERGLADE MARITIME INC V. SCHIFFAHRTSGESELLSCHAFT DETLEF VON APPEN MBH

POLICY, PRACTICE AND PUBLISHING, LAW REPORTS  3PLR

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EVERGLADE MARITIME INC

V.

SCHIFFAHRTSGESELLSCHAFT DETLEF VON APPEN MBH

COURT OF APPEAL, CIVIL DIVISION

4, 25 MARCH 1993

3PLR/1993/44  (SC-E)

 

BEFORE THEIR LORDSHIPS

SIR THOMAS BINGHAM MR,

KENNEDY AND EVANS LJJ

 

MAIN ISSUES

ADMINISTRATION OF JUSTICE; Arbitration

 

Arbitration – Costs – Discretion of arbitrator – Sealed offer – Successful party ordered to pay costs of reference – Respondent making sealed offer of settlement – Claimant rejecting sealed offer and continuing with arbitration – Arbitration award exceeding amount of sealed offer by small sum – Arbitrators directing claimant to pay both parties’ costs from date sealed offer considered – Arbitrators taking into account order for costs they would have made apart from sealed offer – Whether arbitrators entitled to take into account impact of costs in exercise of discretion – Whether arbitrators limited to comparing amount of award with amount of offer – Whether costs awarded to respondent can be taken into account in determining effect of sealed offer on costs.

 

The owners chartered a vessel for a time charter voyage from Europe to the Far East. When the vessel reached Taiwan the master refused for seven days to enter the port of discharge ordered by the charterers as he was concerned about the safety of the berth and as a consequence the charterers deducted $US73,828.93 from the hire claimed by the owners. The dispute was referred to arbitration. On 22 June 1990, about a month before the hearing, the charterers made a sealed offer of settlement of $US15,000 plus interest and costs up to the date of the offer. The owners refused the offer and the arbitration hearing proceeded following which the owners were awarded $US23,211·17 (later altered by agreement to $US16,215·99). In a second award the arbitrators held that they would have ordered the parties to bear their own costs even if there had been no settlement offer as the owners’ unfounded allegations that the vessel had grounded in her berth and that the charterers had exerted improper pressure on the master had increased the length and cost of the hearing and decreased the chances of settlement and that since the owners had not achieved more by going on with the arbitration than by accepting the offer because they had thereby lost their costs in the reference, the arbitrators directed the parties to pay their own costs to 29 June 1990, ie a week after the charterers’ offer, and the owners to pay the costs of both parties after that date. The owners appealed against the order that they pay the charterers’ costs. The appeal was was allowed and each party was ordered to pay its own costs on the ground that under s 18(1)^a of the Arbitration Act 1950 an arbitrator was not permitted to take into account the award of costs he would have made if there had been no offer when considering whether a claimant had 748 achieved more by rejecting a sealed offer than by going on with an arbitration. The charterers appealed to the Court of Appeal.

 

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^a    Section 18(1) provides:‘Unless a contrary intention is expressed therein, every arbitration agreement shall be deemed to include a provision that the costs of the reference and award shall be in the discretion of the arbitrator or umpire, who may direct to and by whom and in what manner those costs or any part thereof shall be paid, and may tax or settle the amount of costs to be so paid or any part thereof, and may award costs to be paid as between solicitor and client.’

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Held (Sir Thomas Bingham MR dissenting)– An arbitrator was required to act judicially in exercising his discretion as to costs, that is he had apply the same principles as applied in the High Court, in particular the principle that costs normally followed the event. If a sealed offer was made in an arbitration, being the arbitral equivalent of a payment into court, a respondent was normally entitled to payment of costs from the date of the offer if the award in respect of the claim and interest was less than the offer. The arbitrator was not entitled to take into account whether an award of costs would be made in favour of the claimant as that would require the claimant to assess not only the likelihood of achieving an award on his claim and interest exceeding the offer, but also, if there was a risk of an order that the claimant pay the respondent’s costs, the chance of obtaining an award greater than the offer and the respondent’s costs. Such a result would hinder settlement and introduce complications inconsistent with the principle that costs should follow the event. The appeal would therefore be dismissed (see p 759 c to h, p 762 g to 763 c, p 766 d to p 767 a, 767 f and p 768 b to c, post).

 

Dictum of Donaldson J in Tramountana Armadora SA v Atlantic Shipping Co SA [1978] 2 All ER 870 at 877 applied.

Gray v Lord Ashburton [1916–17] All ER Rep 380 distinguished.

Decision of Judge Diamond QC [1992] 3 All ER 851 affirmed.

NotesFor an arbitrator’s power to award costs on an arbitration, see 2 Halsbury’s Laws (4th edn reissue) para 689, and for cases on the subject, see 3 Digest (Reissue) 324–335, 2219–2306.

Cases referred to in judgmentsAntaios Cia Naviera SA v Salen Rederierna AB [1984] 3 All ER 229,[1985] AC 191,[1984] 3 WLR 592, HL.

Bankamerica Finance Ltd v Nock [1988] 1 All ER 81,[1988] AC 1002,[1987] 3 WLR 1191, HL.

Baylis Baxter Ltd v Sabath [1958] 2 All ER 209,[1958] 1 WLR 529, CA.

Calderbank v Calderbank [1975] 3 All ER 333,[1976] Fam 93,[1975] 3 WLR 586, CA.

Campbell (Donald) & Co Ltd v Pollak [1927] AC 732,[1927] All ER Rep 1, HL.

Chrulew v Borm-Reid & Co (a firm)[1992] 1 All ER 953,[1992] 1 WLR 176.

Computer Machinery Co Ltd v Drescher [1983] 3 All ER 153,[1983] 1 WLR 1379.

Cutts v Head [1984] 1 All ER 597,[1984] Ch 290,[1984] 2 WLR 349, CA.

Dineen v Walpole [1969] 1 Lloyd’s Rep 261, CA.

Findlay v Railway Executive [1950] 2 All ER 969, CA.

Gray v Lord Ashburton [1917] AC 26,[1916–17] All ER Rep 380, HL; rvsg [1916] 2 KB 353, CA.

Heaven & Kesterton Ltd v Sven Widaeus A/B [1958] 1 All ER 420,[1958] 1 WLR 248.

Lewis v Haverfordwest RDC [1953] 2 All ER 1599,[1953] 1 WLR 1486.

Lloyd Del Pacifico v Board of Trade (1930) 46 TLR 476, 35 Com Cas 325.

McDonnell v McDonnell [1977] 1 All ER 766,[1977] 1 WLR 34, CA.

Margaronis Navigation Agency Ltd v Henry W Peabody & Co of London Ltd [1964] 3 All ER 333,[1965] 2 QB 430,[1964] 3 WLR 873, CA.

Perry v Stopher [1959] 1 All ER 713,[1959] 1 WLR 415, CA.

Pioneer Shipping Ltd v BTP Tioxide Ltd, The Nema [1981] 2 All ER 1030,[1982] AC 724,[1981] 3 WLR 292, HL.

Portland Steamship Co Ltd v Charlton Steam Shipping Co (1925) 23 Ll L Rep 268, CA.

Scherer v Counting Instruments Ltd (1977)[1986] 2 All ER 529,[1986] 1 WLR 615, CA.

Tramountana Armadora SA v Atlantic Shipping Co SA [1978] 2 All ER 870.

Ward v James [1965] 1 All ER 563,[1966] 1 QB 273,[1965] 2 WLR 455, CA.

Cases also cited or referred to in skeleton arguments

Archital Luxfer Ltd v Henry Boot Construction Ltd [1981] 1 Lloyd’s Rep 642.

Bradshaw v Air Council [1926] Ch 329.

Hultquist v Universal Pattern and Precision Engineering Co Ltd [1960] 2 All ER 266,[1960] 2 QB 467, CA.

King v Thomas McKenna Ltd [1991] 1 All ER 653,[1991] 2 QB 480, CA.

Roache v News Group Newspapers Ltd [1992] CA Transcript 1120.

Rosen (P) & Co Ltd v Dowley and Selby [1943] 2 All ER 172.

Appeal Schiffahrtsgesellschaft Detlef von Appen GmbH, the charterers of the vessel Maria, appealed with the leave of Neill LJ given on 8 June 1992 against the order of Judge Diamond QC sitting as a judge of the High Court in the Queen’s Bench Division on 12 February 1992 ([1992] 3 All ER 851,[1993] 1 WLR 33) whereby he varied the second final award given on 28 March 1991 under s 1 of the Arbitration Act 1979 by three arbitrators, Alexander John Kazantzis, Michael Mabbs and Michael Baskerville, in respect of certain disputes between the charterers and Everglade Maritime Inc, the owners of the vessel, to provide that the parties should each pay their own costs of the reference. The facts are set out in the judgment of Sir Thomas Bingham MR.

Nicholas Hamblen (instructed by Middleton Potts) for the charterers.

Alistair Schaff (instructed by Richards Butler) for the owners.

Cur adv vult

25 March 1993. The following judgments were delivered.

SIR THOMAS BINGHAM MR. This appeal raises an important question on the exercise by arbitrators of their discretion in awarding costs.

The arbitration concerned the vessel Maria. The owners chartered her to the charterers under a time charterparty dated 26 April 1988 on the New York Produce Exchange (NYPE) form for a time charter trip from Europe to the Far East. The charterers deducted $US73,828·93 from the hire claimed by the owners on the ground that the master had wrongly refused to enter the port of discharge (which was Kaoshiung in Taiwan) over a period of seven days from 6 to 13 July 1988. The owners initiated a reference to arbitration to recover the sum deducted.

On 22 June 1990 the charterers made a sealed offer to the owners by which they offered to settle the owners’ claim on payment of $US15,000 plus interest and costs to date. The offer was rejected and the arbitration went ahead. An oral hearing took place between 16 and 20 July 1990 before three arbitrators, all of them very well known and respected maritime arbitrators and members of the Baltic: Messrs Alexander Kazantzis, Michael Mabbs and Michael Baskerville.

By their award dated 7 November 1990 the arbitrators unanimously held that the master had been justified in refusing to obey the charterers’ orders for approximately two days but no longer. They found that the berth to which the vessel had been ordered was safe but that the master had been entitled to a period for consideration. On this basis they awarded the owners a sum which (after consensual adjustment) amounted to $US16,215·99 plus interest plus $US336·61 in respect of sums paid late. In their reasons they found that in certain respects the owners’ case had been advanced on the basis of false documents and evidence, including false accusations that the charterers had tried to bribe and intimidate the master. They also concluded that an alleged grounding, relied on by the owners as showing the unsafety of the berth, had never in fact occurred. The arbitrators reserved the question of costs for later decision, explaining in the reasons–

‘Costs In the light of our findings we have reserved costs so as to give the parties opportunity to make fuller submissions to us on this aspect of the case. In the interim we have directed that each party shall bear half the cost of the award.

Sealed envelope At the end of the hearing we were handed a sealed envelope which we have preserved intact until such time we were fully agreed as to this our award. On opening the envelope we found the offer contained therein to be less than the sum awarded by us, and hence the offer has no effect as to costs.’

There was no oral hearing on the costs issue. Instead, both parties made written submissions. Following these, the arbitrators on 28 March 1991 made a second award, this time on costs alone. The effect of this award was as follows:(1) the owners and charterers were to bear their own costs of the reference up to and including 29 June 1990;(2) after that date the owners were to bear their own and pay the charterers’ costs; and (3) the owners were to pay the costs of both awards. The award was again unanimous.

The arbitrators were asked to give reasons as part of their award and duly did so. Since the legal soundness of these reasons is the major issue in this appeal, it is right that they should be quoted in full:

‘1.      In the substantive proceedings the Owners [the claimants] sought to recover a deduction from hire made by the Charterers [the respondents] in respect of the period [10.00 hours] 6th July 1988 to [05.52 hours] on 13th July. The Owners were in part successful in the proceedings as they recovered hire up to [14.20 hours] on 8th July, a fairly modest proportion of their claim amounting to $15,215·99 plus interest on that sum from 1st October 1988 and a further item of $336·61 in respect of interest on sums paid late.

2. The Respondents had, on 22nd June 19[90] prior to the hearing made a sealed offer of $15,000 plus interest plus costs up to the date of the offer, which the Claimants rejected. If the offer made had been in excess of the amount awarded we would, as part of Award, have awarded costs in favour of the Respondents from the date of the sealed offer. Since it was less, and there were matters as to the exercise of our discretion which required further consideration, we reserved our decision on all matters of costs and invited the parties to make further submissions on this issue.
3. The Owners’ case as presented at the arbitration was that whether the vessel in fact grounded or not the Master acted reasonably in delaying going into berth for the period up until 17th July (when he berthed) and would have been acting reasonably had he refused to berth at all at the place nominated by the Charterers. We accept that two views could have reasonably been held as to this matter and indeed expert witnesses who appeared at the hearing disagreed. In the event we accepted the Charterers’ claim that the berth was safe but we reduced the period of off-hire as we took the view that the Master was entitled to a period for consideration. The Owners’ claim could not be regarded as exaggerated. However the Owners chose to bolster their case by an allegation that the vessel actually grounded in her berth and allegations that the Charterers had exerted improper pressure on the Master. These allegations were vigorously pursued on the basis of evidence which we were obliged to reject. In our view the length and cost of the hearing were much increased, and the chances of a settlement decreased, by these factors.
4. The Respondents contended that under these circumstances we should exercise our discretion to order that the Claimants should pay the Respondents’ costs. In the alternative they contended that each side should bear their own costs up to the date of the Respondents’ offer, or that the Claimants should at best recover only a small proportion of their costs up to that date but that in any event the Claimants should be responsible for the Respondents’ costs following the date of the offer.
5. The Claimants contended that our rejection of part of the evidence they had put forward could not properly be regarded as grounds for penalising them in costs. It was not uncommon, they said, for certain parts of the evidence put forward in support of a reasonable and justifiable claim to be rejected; this is not treated in arbitration or in the Courts as a reason for depriving a successful party of its costs.
6. We are satisfied that in exercising our discretion as to costs it is proper to take into account not only the result of the case but also aspects of the way it has been fought and the effect that this may have had on the costs incurred and the prospects of settlement. We are satisfied that this view is consistent with the case law reviewed in Baylis Baxter Ltd v Sabath [1958] 2 All ER 209,[1958] 1 WLR 529.
7. Taking these factors into account we would, had there been no settlement agreement, have considered it proper to deprive the Claimants of their costs; we would have ordered that each party should pay its own costs despite the fact that the Claimants had made a recovery of part of the sum claimed. We had to consider what account, if any, should be taken of that view in assessing the effect on the allocation of costs of the Charterers’ offer of 22nd June.
8. The Claimants contended that the only proper consideration to take into account was whether they had recovered a larger sum in the arbitration by way of principal and interest than was offered. It was inappropriate that a party, when considering a settlement offer that included costs, should have to speculate whether, if it decided to continue with the case, the eventual award of costs would be more or less favourable than any offer as to costs included in the settlement offer.
9. It seems to us that the test to be applied is that laid down by Donaldson J in Tramountana Armadora SA v Atlantic Shipping Co SA ([1978] 2 All ER 870 at 877) namely “has the claimant achieved more by rejecting the offer and going on with the arbitration than he could [sic] have achieved if he had accepted the offer?” In this case the answer to that question is that he has not. By rejecting the offer and continuing with the arbitration the Claimants will receive an additional $1,215·99 (a small sum but not de minimis) but have, in effect, lost a much larger sum, viz, costs in the reference. Taking this into account, we are satisfied that in the light of the sealed offer the Respondents are entitled to recover their costs from an appropriate date. Allowing a reasonable period for the Claimants to consider the Respondents’ offer we have decided that the Respondents should be entitled to recover their costs from 30th June 1990 inclusive. We have already indicated that had there been no settlement offer we would have ordered that each party should pay its own costs. For the same reasons we considered it appropriate to make a similar order in respect of the costs up to and including 29th June.’

Leave to appeal against the arbitrators’ decision on costs was given to the owners by Hirst J on 20 May 1991. They did not complain of the order that they should bear their own costs up to 29 June 1990, nor did they challenge the arbitrators’ prima facie view that they should bear their own costs thereafter, but they challenged the arbitrators’ decision that they should pay the charterers’ costs incurred after 29 June. The appeal was heard by Judge Diamond QC sitting as a judge of the Queen’s Bench Division in the Commercial Court. He gave judgment on 20 December 1991 (see [1992] 3 All ER 851,[1993] 1 WLR 33). He reformulated the question of law which it was necessary for him to answer in a manner which, if not agreed at the time, is not now criticised (see [1992] 3 All ER 851 at 858,[1993] 1 WLR 33 at 39–40):

‘Whether on the facts set out in the award there were any grounds upon which the arbitrators could properly in law have exercised their discretion as to costs in the way they did.’

That question he answered in the negative, to that extent allowing the owners’ appeal. He varied the award so as to provide that the owners and the charterers should each bear their own costs of the whole reference. This was the result for which the owners contended. The judge remitted to the arbitrators for further consideration their order that the owners bear the costs of both awards.

The learned judge gave his reasons in a lengthy, careful and lucid judgment which deserves to be read in full. His train of reasoning may, I hope not unfairly, be summarised as follows. (1) The award of costs is in the discretion of arbitrators as it is of judges. (2) But in neither case is the discretion absolute or unfettered: it should be exercised judicially and according to settled principles. (3) The dominant principle is that, in the absence of circumstances justifying some other order, costs should follow the event so that the winner recovers his taxed or agreed costs and the loser pays them. (4) It is necessary to consider the outcome of the proceedings to decide what the event is which costs should follow. (5) In court proceedings the court will take account of a payment into court in exercising its discretion on costs: if a plaintiff does not recover more than was paid in he will ordinarily be ordered to pay the defendant’s costs after the date of payment in. (6) A sealed offer is the arbitral equivalent of making a payment into court: Tramountana Armadora SA v Atlantic Shipping Co SA [1978] 2 All ER 870 at 876 per Donaldson J. The question for an arbitrator was whether the claimant had achieved more by rejecting the offer and going on with the arbitration than he would have achieved if he had accepted the offer ([1978] 2 All ER 870 at 877). (7) There is no warrant in authority or practice for taking account of anything other than principal and interest in considering whether a plaintiff or claimant has achieved more by rejecting a payment in or a sealed offer. (8) The arbitrators accordingly erred in law in taking account of costs and the court is entitled to interfere.

There is of course much in this reasoning with which one may unreservedly agree. But I would make two points. First, the court’s power to review an order of costs is extraordinarily circumscribed. Section 18(1)(f) of the Supreme Court Act 1981, re-enacting earlier provisions, stipulates that no appeal shall lie to the Court of Appeal without leave of the court or tribunal in question from any order of the High Court or any other court or tribunal relating only to costs which are by law left to the discretion of the court or tribunal. The apparently exclusive effect of this subsection has been qualified by Donald Campbell & Co Ltd v Pollak [1927] AC 732,[1927] All ER Rep 1, Scherer v Counting Instruments Ltd (1977)[1986] 2 All ER 529,[1986] 1 WLR 615 and Bankamerica Finance Ltd v Nock [1988] 1 All ER 81,[1988] AC 1002. But an appeal will only lie where the court below has not exercised the discretion at all or has exercised it unjudicially, and where there has been a purported exercise of discretion the appellant ordinarily has to show that there was no ground on which the judge could rely in acting as he did or that he relied on extraneous grounds, that is grounds not connected with the case.

Secondly, the effect of the Arbitration Act 1979 has been (in the absence of misconduct and procedural irregularity) to limit challenges to arbitral decisions to cases of more or less clearly demonstrable legal error. Whether those who framed the legislation fully intended that effect is not now a practical issue: the House of Lords decisions in Pioneer Shipping Ltd v BTP Tioxide Ltd, The Nema [1981] 2 All ER 1030,[1982] AC 724 and Antaios Cia Naviera SA v Salen Rederierna AB [1984] 3 All ER 229,[1985] AC 191 laid down rules which have been followed for over a decade and appear to have been well received. It is generally accepted that those who entrust decisions to arbitrators do so because they wish to rely on the judgment, skill and fairness of those arbitrators. If a decision of the courts was what the parties had wanted they would not have chosen to arbitrate. While, therefore, a power in the courts to review arbitral awards on grounds of legal error is preserved, it is, as the authorities show, a power to be exercised with the utmost caution.

These points lead me to conclude that while the court can review an arbitrator’s exercise of discretion on costs it cannot do so unless the appellant can, at the least, show grounds which would suffice to disturb the order of a judge who had not given leave. It is not enough to show that the arbitrator’s order is one which a judge would not have made or would not be likely to have made. The parties chose an arbitrator, not a judge. It must be shown that the arbitrator’s order was one which was not lawfully made.

It has not been suggested that in the present case these very experienced arbitrators failed to exercise their discretion at all. Plainly they did, as their detailed reasons show.

The arbitrators posed to themselves what is accepted as being the right question: ‘Has the claimant achieved more by rejecting the offer and going on with the arbitration than he would have achieved if he had accepted the offer?’ (Although the arbitrators misquoted Donaldson J as saying ‘could’ rather than ‘would’, this was probably a clerical error and counsel took no point on this discrepancy.) There was no misdirection there. The complaint is that in taking account of costs the arbitrators took account of an extraneous matter and so acted unjudicially.

When the court or an arbitrator has to exercise a discretion on costs where there has been a payment in or a sealed offer, a comparison has to be made between what was paid in or offered and what was recovered. This is, I think, an objective, hindsighted exercise: the plaintiff or claimant has either recovered more or he has recovered less, and that (in the absence of special circumstances) 754is usually determinative. The question is not, at any rate in the ordinary way, whether it was reasonable to refuse the offer. The claimant’s case may, for instance, depend on the evidence of a witness whom he has every reason to believe honest and reliable, and he may for that reason reject the offer; but if the claim substantially collapses because the witness proves to be neither honest nor reliable, the reasonableness of the claimant’s belief will not save him from the usual consequences in costs. It appears that in relation to Calderbank offers (see Calderbank v Calderbank [1975] 3 All ER 333,[1976] Fam 93) and offers of an analogous kind, the approach may be different and may take account of the reasonableness of the offeree’s refusal (see McDonnell v McDonnell [1977] 1 All ER 766 at 770,[1977] 1 WLR 34 at 38, Cutts v Head [1984] 1 All ER 597 at 602,[1984] Ch 290 at 302 and Chrulew v Borm-Reid & Co (a firm) [1992] 1 All ER 953,[1992] 1 WLR 176). No reliance has, however, been placed on this difference of approach in the present case.

In the present case the arbitrators concluded that they would, in the absence of any offer, have ordered each side to pay its own costs. The propriety of that order is not challenged, and is indeed the order for which the owners successfully contended before the judge. It does, however, make this a very unusual case, because it is very rare for a successful plaintiff or claimant not to recover all, or at least part, of his costs.

Posing the correct test, the arbitrators concluded that the owners had not achieved more by rejecting the offer and going on with the arbitration than by accepting the offer. The offer had been $US15,000 and costs up to that date and interest. The owners had rejected that offer. By going on they had recovered more than the sum offered, by an amount which was not de minimis, and interest. But they had caused the arbitrators to conclude that they should receive no costs for any part of the reference. The comparison was between $US15,000 and costs up to 22 June 1990 and $US16,215 (or perhaps about $US16,550) and no costs. Plainly the owners were on that basis substantially worse off as a result of going on, and for that reason the arbitrators ordered them to pay the costs after the lapse of an appropriate time for them to assess the offer. I do not find the arbitrators’ decision in any way a surprising one for commercial men to reach. I would have difficulty in ruling that it was a decision which the law forbade them to reach.

The owners point out that at the date of the offer the future, including their conduct of the reference and the arbitrators’ prima facie conclusion on costs, was unknown. This is true. But when a libel defendant makes a payment into court the plaintiff similarly cannot know how the trial will go or what the jury will award. He nonetheless has to make his choice whether to accept or not and live with the consequences.

The owners point to the impossibility of conducting an unofficial taxation to assess the costs incurred, and the complications which would arise if calculations of irrecoverable costs and (for instance) the cost of in-house lawyers had to be assessed. I agree that inquiries of this kind would be quite inappropriate. But in the present case they are quite unnecessary, since the comparison yields a clear and simple answer.

It is suggested that Donaldson J did not allude to a comparison of this kind in Tramountana. Again, I agree. But the present point was not before him and he did not address it.

In the experience of counsel for the parties and of the court itself, the arbitrators’ approach is novel. No authority has been cited which sanctions it (or, for that matter, disapproves it). But the question must be resolved according to 755 principle, not previous practice. In Scherer v Counting Instruments Ltd (1977)[1986] 2 All ER 529 at 536,[1986] 1 WLR 615 at 621 Buckley LJ (in a passage expressly approved by the House of Lords in Bankamerica Finance Ltd v Nock [1988] 1 All ER 81 at 86,[1988] AC 1002 at 1009) required the judge’s discretion on costs to be exercised on relevant grounds and added:

‘The grounds must be connected with the case. This may extend to any matter relating to the litigation and the parties’ conduct in it, and also to the circumstances leading to the litigation, but no further.’

By this test, the grounds upon which the arbitrators relied were connected with the case and were not extraneous. It follows that, in my opinion, the parties should be bound by the unanimous decision of the commercial men to whose judgment they have entrusted resolution of their dispute. It is of course true that in the ordinary case the award of costs simply follows the event and does not form part of the event itself. But in this case the arbitrators made the unusual, but unchallenged, finding that but for the sealed offer they would have awarded the owners none of their costs of the reference. That provided relevant grounds on which they could properly conclude that the owners had fared worse, and not better, as a result of pressing on with their claim.

In reaching this conclusion I have not placed reliance on Gray v Lord Ashburton [1917] AC 26,[1916–17] All ER Rep 380. This was, as I read it, a decision based on special statutory rules governing the exercise of arbitrators’ discretion under the Agricultural Holdings Act 1908 and has not, at least since Lloyd Del Pacifico v Board of Trade (1930) 46 TLR 476 been treated as authority for the more ambitious propositions which some of the language used might be said to support. Nor was I persuaded by the charterers’ alternative argument that the arbitrators’ order was justified because, although the principal sum recovered by the owners exceeded the sum offered by an amount which was not de minimis, the excess was not very great.

I would allow the appeal and reinstate the award of the arbitrators.

KENNEDY LJ.

1. The arbitration

The facts which gave rise to the arbitration are set out in the judgment of Evans LJ, and I need not repeat them. Having considered the sealed offer the arbitrators concluded that each side should bear its own costs up to 29 June 1990, but that the charterers should be entitled to recover their costs from that date. In giving their reasons for that award the arbitrators began by criticising the owners’ claim, saying:

‘The Owners’ claim could not be regarded as exaggerated. However the Owners chose to bolster their case by an allegation that the vessel actually grounded in her berth and allegations that the Charterers had exerted improper pressure on the Master. These allegations were vigorously pursued on the basis of evidence which we were obliged to reject. In our view the length and cost of the hearing were much increased, and the chances of a settlement decreased, by these factors.’

In para 6 of their reasons the arbitrators recognised their discretion ‘to take into account not only the result of the case but also aspects of the way it has been fought and the effect that this may have had on the costs incurred and the prospects of settlement’. They then said in para 7 that, taking those factors into  account, had there been no sealed offer they would have considered it proper to deprive the owners of their costs, and continued:

‘We had to consider what account, if any, should be taken of that view in assessing the effect on the allocation of costs of the Charterers’ offer of 22nd June.’

In para 9 of their reasons the arbitrators expressly set out their conclusion:

‘It seems to us that the test to be applied is that laid down by Donaldson J in Tramountana Armadora SA v Atlantic Shipping Co SA ([1978] 2 All ER 870 at 877) namely “has the claimant achieved more by rejecting the offer and going on with the arbitration than he could [sic] have achieved if he had accepted the offer?” In this case the answer to that question is that he has not. By rejecting the offer and continuing with the arbitration the Claimants will receive an additional $1,215·99 (a small sum but not de minimis) but have, in effect, lost a much larger sum, viz, costs in the reference. Taking this into account, we are satisfied that in the light of the sealed offer the Respondents are entitled to recover their costs from an appropriate date. Allowing a reasonable period for the Claimants to consider the Respondents’ offer we have decided that the Respondents should be entitled to recover their costs from 30th June 1990 inclusive.’

2. In the High Court

That order was considered on appeal by Judge Diamond QC sitting as a judge of the High Court (see [1992] 3 All ER 851,[1993] 1 WLR 33). He recognised, as I do, that when considering costs arbitrators have a discretion which is theirs, and with which a court cannot interfere simply because it would have arrived at a different conclusion. To highlight that inhibition Judge Diamond formulated the question of law which we have to consider in a way which has now been accepted on all sides. His formulation was ([1992] 3 All ER 851 at 858,[1993] 1 WLR 33 at 39–40):

‘Whether on the facts set out in the award there were any grounds upon which the arbitrators could properly in law have exercised their discretion as to costs in the way they did.’

The judge also suggested ([1992] 3 All ER 851 at 857,[1993] 1 WLR 33 at 39) that–

‘an arbitrator in exercising his discretion must act judicially or, what amounts to the same thing, must apply the same principles when deciding upon his award as to costs as are applied in the High Court …’

The judge put forward two reasons why the discretion of an arbitrator should be so constrained. First, because the parties have, at least by implication, chosen English procedural law, and secondly, because the parties, in deciding whether to make or to accept a sealed offer, need to know what principles will be applied to it.

Having alluded to the principle that costs follow the event, and considered the decision of Donaldson J in Tramountana, Judge Diamond said ([1992] 3 All ER 851 at 860–861,[1993] 1 WLR 33 at 42):

‘The main question which arises in the present case is whether in considering the test propounded by Donaldson J, namely “Has the claimant achieved more by rejecting the offer and going on with the arbitration than he would have achieved if he had accepted the offer?” arbitrators are in principle limited to a comparison of what the claimant has achieved in respect of the principal sum claimed and interest, as contended by the owners; or whether, as the charterers contend, arbitrators may also take into account what order for costs they would have made apart from the offer, with the result that although the claimant has achieved more in respect of principal and interest than if he had accepted the offer, he can be regarded overall as having achieved less.’

That does seem to me to be the main question. Judge Diamond decided that question in favour of the owners because:(1) he regarded the sealed offer procedure as the arbitral equivalent of making a payment into court, to which established principles apply. Those principles he found to be consistent with the general principle that costs follow the event. (2) The application of those principles makes it possible for arbitrators to deal easily, fairly and in a predictable way with the effect of the sealed offer. (3) When parties know how arbitrators will react to a sealed offer they can more easily decide what offer should be made or accepted. In order to make their assessment they should not have to speculate as to the extent to which, in the absence of a sealed offer, the arbitrators might be disposed to make an unusual order as to costs. That could be very difficult because, if a claimant although successful overall were to fail in relation to a substantial issue, an arbitrator when considering costs could deal with that situation in a number of ways. He might make no order as to costs in relation to that issue, or an adverse order in relation to that issue. He might order that the claimant only recover a percentage of his costs of the claim, or that he recover no costs. (4) If in order to decide whether a claimant has ‘achieved more’ by rejecting a sealed offer than by going on with the arbitration it is permissible in some cases to have regard to the claimant’s expenditure on costs, why should that not be permitted in every case? Why should the costs to be considered be limited to those recoverable on taxation? How can the arbitrator avoid investigating the claimant’s costs up to and subsequent to the making of the sealed offer if either side wishes to make that investigation?

At the end of his judgment Judge Diamond reformulated the Tramountana test in these words ([1992] 3 All ER 851 at 864,[1993] 1 WLR 33 at 46):

‘Has the claimant achieved more in respect of his claim for principal and interest by rejecting the offer and going on with the arbitration than he would have achieved if he had accepted the offer?’ (Judge Diamond’s emphasis.)

If that is the test which the arbitrators in the present case should have applied then this appeal fails. At the end of the determination an arbitrator who opens a sealed offer and finds it to be for less than he has awarded in respect of principal and interest can, Judge Diamond suggests, simply set it aside and then go on to consider whether the conduct of the arbitration should lead him to make anything other than the usual order in respect of costs.

3. In the Court of Appeal

Before us Mr Hamblen for the appellant charterers emphasised first the limited jurisdiction of the High Court to interfere with an award made by arbitrators in relation to costs. He placed considerable reliance upon the decision of the House of Lords in Gray v Lord Ashburton [1917] AC 26,[1916–17] All ER Rep 380 but, as Evans LJ points out, that was decided under different legislation and the extent to which the High Court can review the discretion exercised by arbitrators is now clearly set out in later cases, including cases decided under the Arbitration Act 1950. In any event Mr Hamblen accepts that the discretion of arbitrators in 758 relation to costs has to be exercised judicially, but he contends that here the arbitrators met that requirement. They clearly gave the matter careful consideration, and he submitted that in principle there is no reason why in an exceptional case arbitrators should not be entitled when considering a sealed offer to have regard to claimants’ costs. This was, Mr Hamblen submitted, an exceptional case, because the claim was found to be exaggerated, the award in respect of principal and interest was only greater than the sealed offer by a small margin and, if there was taken into account the contingent view of the arbitrators as to the appropriate award in respect of costs if no sealed offer had been made, the disadvantage suffered by the claimants in terms of costs as a result of their rejection of the sealed offer was manifest. In short, Mr Hamblen submitted, the arbitrators were entitled to apply the Tramountana test as they did, but Mr Hamblen concedes that that case is not direct authority for the arbitrators’ approach.

That concession seems to me to be the weakness of his approach, and the reason why in this case the judge was right to decide as he did. Here the arbitrators purported to apply a test which at face value did enable them to answer the question as they did, but that test, although very valuable, cannot be used without qualification in every case. It was never intended to open the door to the approach which was adopted by the arbitrators in this case, and the real weakness of the present decision seems to me to be that the arbitrators, who did not have the benefit of oral argument in relation to the question of costs, do not seem to have recognised that they were breaking new ground. Had they done so I am sure that they would have realised that the value of keeping the principles to be applied to a sealed offer so far as possible in line with those applied to a payment into court. As Judge Diamond made clear, that assists the offeror and the party who receives the offer because, with one large uncertainty removed (forecasting the probable award in relation to costs) both parties are better able to judge what offer should be made and accepted, and thus settlements should be easier to achieve. Similarly, the task of arbitrators in deciding how to react to a sealed offer is kept relatively simple. And it should never be forgotten that it is always open to a respondent to secure the advantage which the arbitrators gave to the respondent in the present case by making a sealed offer which ‘beats’ the ultimate award in respect of principal and interest. One of the odd features of the present case is that if the arbitrators are right the respondents would have been no better off if they had offered a sum equivalent to or in excess of that actually awarded.

Furthermore, as Mr Schaff for the respondent owners pointed out to us, it would be odd if the way in which a party conducted the reference after receiving a sealed offer could improve the value of that offer to the other side. What, he asked rhetorically, would have been the position in the present case if those allegations which the arbitrators found to be unjustified had not been pursued? That, in my view, helps to illustrate that Judge Diamond was right for the reasons which he gave. The proper approach for these arbitrators would have been for them to ask themselves the Tramountana question in Judge Diamond’s amended form. That is why I agree with the order proposed by Evans LJ and would dismiss this appeal.

EVANS LJ. This appeal is concerned with the validity of the order for costs made by three experienced arbitrators at the conclusion of a maritime arbitration. The claimant shipowners were awarded $US23,211·17 plus interest after claiming in excess of $US73,000 as the balance of hire due under a time charterparty. The  amount of the award dated 7 November 1990 was later reduced by agreement to $US16,215·99 excluding interest. The arbitrators then considered the question of costs in the light of a sealed offer which the respondents (the charterers) had made by letter dated 22 June 1990, about a month before the hearing. The offer was to pay $US15,000 plus interest and costs. The parties made further written submissions. By their second final award dated 28 March 1991, the arbitrators directed that the claimants and the respondents should each bear their own costs of the reference up to and including 29 June 1990, thus allowing seven days for consideration and acceptance of the 22 June offer, and that the claimants should bear their own and the respondents’ costs of the reference and should pay the whole of the costs of the interim award on liability and the final award on costs.

The claimants appealed by leave of Hirst J dated 20 May 1991. Their appeal was allowed by Judge Diamond QC sitting as a judge of the Commercial Court on 20 December 1991. His order was that each party should pay its own costs of the reference and that the costs of the two awards should be remitted to the arbitrators for their further consideration.

The charterers now appeal from his judgment, contending that the arbitrators’ award on costs should be restored.

The issue of law which arises was reformulated by the judge in these terms, and neither party dissents from his wording ([1992] 3 All ER 851 at 858,[1993] 1 WLR 33 at 39–40):

‘Whether on the facts set out in the award there were any grounds upon which the arbitrators could properly in law have exercised their discretion as to costs in the way they did.’

This has the advantage of emphasising (a) that arbitrators have a statutory discretion in the matter of costs, and (b) that the court is only entitled to interfere in their exercise of that discretion if they are shown to have acted improperly in law.

The costs order has two unusual features, only one of which gives rise to any issue for the court. First, the successful claimants recovered none of their costs, even those incurred before the sealed offer was made. This was for special reasons which were identified in the award and will be quoted below. There is no complaint in respect of this part of the order. Secondly, and importantly for present purposes, the claimants were ordered to pay the respondents’ costs incurred after the sealed offer, allowing seven days for consideration of it as is stated above, and the whole of the arbitrators’ costs of the two awards.

The essential issue, therefore, is the impact of the sealed offer on the order for costs which the arbitrators would otherwise have made. They make it clear that in any event they would not have ordered the respondents to pay the costs of the claimants, who succeeded in recovering $US16,215. Their decision, apart from the sealed offer, was that each party should bear its own costs throughout the reference, and the claimants do not challenge this as a proper exercise of the arbitrators’ discretion in the circumstances of this case. Their reasons in part were as follows:

‘3 …   The Owners’ claim could not be regarded as exaggerated. However the Owners chose to bolster their case by an allegation that the vessel actually grounded in her berth and allegations that the Charterers had exerted improper pressure on the Master. These allegations were vigorously pursued on the basis of evidence which we were obliged to reject. In our view the length and cost of the hearing were much increased, and the chances of a settlement decreased, by these factors …

7. Taking these factors into account we would, had there been no settlement agreement, have considered it proper to deprive the Claimants of their costs; we would have ordered that each party should pay its own costs despite the fact that the Claimants had made a recovery of part of the sum claimed.’

Proceeding to consider the effect of the sealed offer, they concluded as follows:

‘9.      It seems to us that the test to be applied is that laid down by Donaldson J in Tramountana Armadora SA v Atlantic Shipping Co SA ([1978] 2 All ER 870 at 877) namely “has the claimant achieved more by rejecting the offer and going on with the arbitration than he could [sic] have achieved if he had accepted the offer?” In this case the answer to that question is that he has not. By rejecting the offer and continuing with the arbitration the Claimants will receive an additional $1,215·99 (a small sum but not de minimis) but have, in effect, lost a much larger sum, viz, costs in the reference. Taking this into account, we are satisfied that in the light of the sealed offer the Respondents are entitled to recover their costs from an appropriate date. Allowing a reasonable period for the Claimants to consider the Respondents’ offer we have decided that the Respondents should be entitled to recover their costs from 30th June 1990 inclusive.’

In Tramountana Armadora SA v Atlantic Shipping Co SA [1978] 2 All ER 870 at 876 Donaldson J described the practice of making a sealed offer so as to safeguard the position of respondents as regards the costs of an arbitration as ‘analogous to a payment into court’. The analogy cannot be exact, if only because there is no requirement that the respondent should produce the amount of his offer, nor any machinery, apart from special agreement, which would permit him to do so. But the practice which had developed by 1978 and which, so far as I am aware, has continued since then in commercial arbitrations is that a sealed offer is regarded as similar in its effect to a payment into court.

The position under the Rules of the Supreme Court is briefly as follows. If the money paid into court is accepted by the plaintiff, all further proceedings are stayed (RSC Ord 22, r 3(4)) and the case becomes one where an order for costs in his favour is deemed to have been made. He is entitled to recover his costs of the action incurred up to the time of giving notice of acceptance (Ord 62, r 5(4)). If the payment is not accepted and the action proceeds to judgment, then the court exercising its discretion as to costs is required to take into account ‘any payment of money into court and the amount of such payment’(Ord 62, r 9(1)(b)) and ‘any written offer made under Order 22, rule 14’ with the proviso that no such offer shall be taken into account if the party making the offer could have protected his position as to costs by making a payment into court (Ord 62, r 9(1)(d)).

Jurisdiction

The first question arising on this appeal was not raised, or if raised was not developed, before Judge Diamond. The law and practice of arbitration with regard to the award of costs is stated by Mustill and Boyd Law of Arbitration (2nd edn, 1989) p 395 as follows:

‘Although the Act gives the arbitrator a full discretion as to costs, his exercise of the discretion is limited to this extent, that he must apply the same principles when deciding upon his award of costs as are applied in the High Court. This means that the discretion must be exercised judicially …’

What follows can be summarised by saying that the arbitrator must not be influenced by unverified or extraneous facts. The passage continues:

‘The practice of the High Court is that “costs follow the event”: i.e. that in the ordinary way, the successful party should receive his costs. The arbitrator must apply the same principle.’

The earliest of the authorities referred to, apart from Donald Campbell & Co Ltd v Pollak [1927] AC 732,[1927] All ER Rep 1, which requires that costs shall follow the event is Lloyd Del Pacifico v Board of Trade (1930) 35 Com Cas 325 at 335 where Wright J quoted from the judgment of Scrutton LJ in Portland Steamship Co Ltd v Charlton Steam Shipping Co (1925) 23 Ll L Rep 268 at 271, which included the following:

‘… I should like to warn [the arbitrator] that it is wrong to make a successful defendant pay the costs of an unsuccessful plaintiff. Judges are not allowed to do it, and arbitrators cannot have a wider use of discretion in these matters than a Judge.’

Mr Hamblen for the charterers submits that this line of authority should be reconsidered in the light of the even earlier judgment of the House of Lords in Gray v Lord Ashburton [1917] AC 26,[1916–17] All ER Rep 380. That was a case where statutory arbitrators were given a discretion as to the award of costs, under r 14 of Sch 2 of the Agricultural Holdings Act 1908, which was followed by r 15 in these terms:

‘The arbitrator shall, in awarding costs, take into consideration the reasonableness or unreasonableness of the claim of either party, either in respect of amount or otherwise … and generally all the circumstances of the case …’

The arbitrator deposed by affidavit that he had done precisely this and had concluded that the landlord who claimed £744 and recovered £71 should pay the costs of the arbitration and of the award (see [1917] AC 26 at 27–28,[1916–17] All ER Rep 380 at 382). The House of Lords held that the Court of Appeal had been wrong to interfere with the arbitrator’s exercise of discretion. Their judgments therefore were concerned with the extent of the court’s powers to interfere with an award of costs made under and in accordance with that statute.

The issue which arises is whether the discretion given to arbitrators by s 18(1) of the Arbitration Act 1950, which I need not quote, is similarly unrestricted. There is no equivalent in the 1950 Act to r 15 of Sch 2 of the 1908 Act which appears to have influenced all the members of the House of Lords in Gray v Lord Ashburton (see [1917] AC 26 at 31, 35, 36,[1916–17] All ER Rep 380 at 382, 384, and including, in my judgment, Viscount Haldane also,[1917] AC 26 at 32,[1916–17] All ER Rep 380 at 382). But, whether or not the judgments were so limited, it cannot now be argued, in my judgment, that commercial arbitrators have any wider discretion as regards costs than is stated in the authorities referred to in Mustill and Boyd Law of Arbitration (2nd edn, 1989) and summarised by the learned authors in the passages quoted above. This is for two reasons. First, these authorities are themselves sufficient to establish the law, and they are unlikely to have been decided per incuriam or in ignorance of the earlier decision of the House of Lords (which was referred to by Diplock J in one of the cases, Heaven & Kesterton Ltd v Sven Widaeus A/B [1958] 1 All ER 420 at 423,[1958] 1 WLR 248 at 253–254). The then current edition of Russell on the Law of Arbitration (16th edn, 1957) p 252 was quoted with approval by Hodson LJ in Perry v Stopher [1959] 1 All ER 713 at 715,[1959] 1 WLR 415 at 419 as follows:

‘… the discretion must be exercised judicially, and it will be reviewed by the court to the same extent as a judge’s order as to costs will be reviewed upon an appeal.’

Secondly, in a later judgment of the Court of Appeal, which varied an arbitrator’s costs order on this ground, Edmund Davies LJ referred to a ‘settled practice’ to this effect which Lord Goddard CJ had so described in Lewis v Haverfordwest RDC [1953] 2 All ER 1599 at 1599,[1953] 1 WLR 1486 at 1487 (see Dineen v Walpole [1969] 1 Lloyd’s Rep 261 at 266). It follows that arbitration agreements have been made on this basis since at least 1930, the year of Wright J’s judgment in Lloyd del Pacifico, and this should not be changed retrospectively, in my judgment, even if some earlier authority was not properly understood.

In the result, however, it may not be important for present purposes whether an arbitrator is required to exercise his statutory discretion as to costs in the same way and subject to the same constraints as a judge; more strictly, whether the court’s power to interfere with the arbitrator’s award is limited to the same extent as an appellate court’s powers in relation to a costs order made by a judge. Mr Hamblen accepts and asserts that the arbitrator is bound to act judicially. The essential dispute is whether this means, in relation to a sealed offer, that it must be treated in precisely the same way as a payment into court, so that in the event of non-acceptance the respondent is only protected as regards his costs after the date of the offer if the offer is at least as great as the sum finally awarded in respect of the claim, or whether an arbitrator has power to exercise a wider discretion so as to take account of, in particular, the incurring of costs and the fact, if it be such, that the award only exceeds the offer by a relatively small amount.

Before leaving the question of jurisdiction, I venture to doubt whether there is any difference between the ‘absolute’ discretion for which Mr Hamblen contends and a duty to act judicially, which requires an arbitrator to exercise the discretion within the same limits as a judge, as described in Mustill and Boyd Law of Arbitration (2nd edn, 1989). The judge’s discretion is also ‘absolute’ but nevertheless it must be exercised ‘judicially’, as appears from the speech of Viscount Cave LC in Donald Campbell & Co Ltd v Pollak [1927] AC 732 at 811–812,[1927] All ER Rep 1 at 41:

‘A successful defendant … has no right to costs unless and until the Court awards them to him, and the Court has an absolute and unfettered discretion to award or not to award them. This discretion, like any other discretion, must of course be exercised judicially, and the judge ought not to exercise it against the successful party except for some reason connected with the case.’

In addition, there is room for argument as to whether ‘absolute’ adds anything to ‘discretion’ in this context: see per Lord Denning MR in Ward v James [1965] 1 All ER 563 at 569,[1966] 1 QB 273 at 292.

For my part, I would accept that the discretion is ‘absolute’, but in my judgment an arbitrator errs in law if he exercises the discretion otherwise than in accordance with the restraints imposed by law upon a judge.

Sealed offers

The next question, therefore, is whether the arbitrator is required to treat a sealed offer in exactly the same way as the law requires a judge to treat a payment in, ie the respondent recovers his costs after the date of the offer if it was at least as great as the amount of the award. Conversely, the offer has no effect on the order for costs if it was for less than the amount awarded in respect of the claim. This question, so put, can be answered shortly. Payment in is regulated by rules of court which do not apply either to arbitrations generally or to sealed offers in particular. But the question to be posed, in my judgment, is whether the arbitrator is required by law to make equivalent orders in the case of a sealed offer to pay a stated amount in respect of the claim. This situation cannot arise in court proceedings, because of the proviso to RSC Ord 62, r 9(1)(d) which I have quoted above.

This makes it necessary to consider the question as one of principle, and the arbitrators were correct, in my judgment, and certainly entitled as a matter of law to ask themselves the question posed by Donaldson J in Tramountana Armadora SA v Atlantic Shipping Co SA [1978] 2 All ER 870 at 877. The arbitrator ‘should ask himself the question: “Has the claimant achieved more by rejecting the offer and going on with the arbitration than he would have achieved if he had accepted the offer?”’

The answer to this question is clear in the present case, but it depends upon whether costs are taken into account, or not. Disregarding costs, the answer is ‘Yes:$16,215 as against $15,000, ie $1,215, which the arbitrators expressly find is not a de minimis amount’. If costs are included, then the answer equally clearly, is ‘No’, because the claimant’s costs both before and after 29 June must greatly have exceeded that amount. So the present case raises directly, in my judgment, the issue whether as a matter of law the arbitrators were permitted to take the claimants’ costs into account. Moreover, the arbitrators gave as their only reason for ordering the claimants to pay the costs of continuing the arbitration after their rejection of the respondents’ offer the fact that they ‘have, in effect, lost a much larger sum [than $1,215·99], viz, costs in the reference’(para 9).

Small excess

I should refer first to Mr Hamblen’s alternative submission, which is that the amount by which the offer was exceeded was so small, notwithstanding that it was greater than de minimis, that on this ground alone the arbitrators were entitled to treat the offer as practically equivalent to the amount of the award. In my judgment, the arbitrators’ finding is fatal to this submission. The concept of de minimis means that the court will disregard ‘trivialities, matters of little moment, of a trifling and negligible nature’(per Sellers LJ in Margaronis Navigation Agency Ltd v Henry W Peabody & Co of London Ltd [1964] 3 All ER 333 at 334,[1965] 2 QB 430 at 444). The finding implies, therefore, that the excess recovery cannot be disregarded. The offer was exceeded by a non-negligible amount.

Costs

I return therefore to the question whether the arbitrators were entitled as a matter of law to take into account the burden of costs. There are many practical reasons why it is desirable that the sealed offer procedure should raise for the arbitrator ‘a simple question to answer’(Tramountana [1978] 2 All ER 870 at 877) and why the parties should not face, at the stage when they are deciding whether or not to accept the offer, the difficulties referred to by Judge Diamond [1992] 3 All ER 851 at 863ff,[1993] 1 WLR 33 at 45ff. But these practical considerations might have to bow to the greater desirability of allowing arbitrators, as the parties’ chosen tribunal, to take into account all such matters, including costs, as they may consider appropriate, when asking themselves the general question posed by Donaldson J in Tramountana. It is necessary, therefore, to consider whether there is a sound reason why as a matter of law costs should not be taken into account.

Tramountana itself is authority for the proposition that they should not. The offer there was to pay $US6,000 inclusive of interest and costs. Donaldson J pointed out ([1978] 2 All ER 870 at 878) that ‘costs calculated to a date in the middle of the arbitration are a completely unknown factor which the arbitrator is not in a position to assess …’ He is ‘unable to make the vital comparison’ and a sealed offer must (or should) be ‘to settle the action for £X plus costs’. But this passage also demonstrates that Donaldson J was not invited to consider or decide the question raised by the present appeal.

There have been, moreover, two significant developments in the law since 1978, when Tramountana was decided. First, the Arbitration Act 1979 as applied in Pioneer Shipping Ltd v BTP Tioxide Ltd, The Nema [1981] 2 All ER 1030,[1982] AC 724 has reduced considerably and as a matter of legislative and judicial policy the scope for interference by the courts in arbitrators’ awards, not least where experienced and specialist tribunals are concerned. Secondly, the courts have developed the concept of Calderbank offers which is now referred to in RSC Ord 22, r 14 where they are described as written offers ‘without prejudice save as to costs’. These began with Calderbank v Calderbank [1975] 3 All ER 333,[1976] Fam 93 but their use was extended to other kinds of cases by Computer Machinery Co Ltd v Drescher [1983] 3 All ER 153,[1983] 1 WLR 1379 though subject to the requirement, now reflected in the proviso to Ord 62, r 9(1)(d), that they are inappropriate in cases where the payment in procedure under Ord 22 might be used: Cutts v Head [1984] 1 All ER 597,[1984] Ch 290.

This new procedure has enabled the courts to consider the more general question whether it was reasonable to refuse the offer and to take into account the size of the difference between the amount of the offer and the amount of the adjudication: Chrulew v Borm-Reid & Co (a firm) [1992] 1 All ER 953,[1992] 1 WLR 176 (taxation of costs, where the offer exceeded the taxed amount by a small amount, but the plaintiffs were not required to pay the defendants their post-offer costs).

In my judgment, a parallel may be drawn between the arbitrator’s exercise of discretion in regard to the effect of a sealed offer on costs and a judge’s exercise of discretion following a Calderbank offer. In both cases, the discretion is ‘absolute’ in the sense referred to above, but it must be exercised ‘judicially’. If the Calderbank procedure was permitted in cases of a money claim where the defendant could make a payment into court, then the correspondence might be exact. But the question remains: is the arbitrator, if not the judge, entitled to take costs into account when answering the question whether the plaintiff is better off for having refused the offer and proceeded to a hearing and award?

This is the question which the tribunal asks itself at the conclusion of the proceedings, in the light of the substantive award which it has made. If it is concerned only with the size of the award in relation to the amount of the offer, then the answer, subject only to the de minimis rule, is clear. But if it is permitted to take costs into account, it becomes necessary to consider a much wider range of factors, from the point of view of the party who had to decide, when the offer was received, whether to accept it or not. This must involve assessing whether the rejection was reasonable, for it would be onerous to order that party to pay the costs of the reference if the decision not to accept the offer was reasonable when it was made.

What factors should that party, notionally and with hindsight, have been required to take into account? This makes it necessary to consider what precisely is meant by the costs of the reference. Is this limited to the claimant’s own costs incurred up to the date when the offer is received? Should these be the actual costs for which he is liable to his solicitor, or are they limited to the amount which he may expect to recover on taxation, if the claim succeeds and the respondent is ordered to pay the claimant his costs? Should the claimant estimate his chances of obtaining an order for his costs, if there are or may be grounds on which the arbitrators might make some other and more limited order in the circumstances of the case? The wider the arbitrators’ powers in the exercise of their discretion are, the more difficult it becomes for the party to know in advance what order they are likely to make.

Mr Hamblen for the respondents does not contend for a rule which would require the arbitrators to take actual, as opposed to taxed costs into account. But this means straightaway that they are not concerned with the actual financial consequences of refusing the offer for the claimants, but with the eventual state of accounts between them and the respondents. The equation should also include, presumably, the costs of the award, which are paid to the arbitrators direct.

If the inquiry is limited in this way, and the arbitrators are required to consider only whether the claimants are better or worse off for rejecting the offer, then it leads in my view to the single issue, whether the claimants could reasonably expect to obtain a costs order in their favour if they were to obtain an award greater, subject always to de minimis, than the amount of the offer. The corollary of this question is whether the claimants were aware of any reason why costs should not follow the event when in due course the claim succeeds for an amount greater than the respondents have offered. It would also be subject to the qualification that if the claimants were deprived of all or part of their taxed costs, then it would be necessary to estimate, from the point of view of the claimant at the time when the offer was made, whether the amount of that shortfall was greater or less than the amount by which the award exceeds the sum which was offered. If $US15,000 is offered and $US16,000 awarded, but without costs, then it may safely be assumed that the claimants’ pre-offer taxed costs were greater than the $US1,000 excess; but the comparison becomes more difficult, though none the less valid, as the amount of the excess increases.

If the arbitrators are entitled to have regard, not merely to the claimant’s pre-offer taxed costs but to some estimate of the costs which he will incur and not recover from the respondents if the arbitration proceeds, then the question which a claimant, to whom a sealed offer is made, and his advisers must ask themselves becomes practically impossible to answer. Indeed, it may even lead to estimating the likely amount of the respondents’ taxed costs. He and they must assess the chances of recovering, not merely a greater award but also an order that the respondents shall pay the whole of his costs and of the award. If there is any risk of some other order for costs, then he must assess the chances of obtaining a sufficiently greater award to take account of the difference; and, if he does not, of being ordered to pay the respondent’s costs of the reference after the date of the offer, which would be a foreseeable outcome if the respondent’s submission in the present case is correct.

These are awesome complications in what Donaldson J saw in 1978 in Tramountana as a simple exercise and which is still regarded as such, so far as I am aware, in commercial arbitrations generally. I cannot accept that the law requires or permits arbitrators, or judges, to have regard to the likely incidence of post-offer costs, whatever the position may be with regard to the claimant’s own pre-offer taxed costs. The present case is a straightforward example of that situation. The offer was $US15,000 plus costs. The award was $US16,215 without costs. The claimants’ pre-offer costs likely to be recovered on taxation clearly were more than $US1,215. So the claimants are worse off for going on, because the additional hire which was awarded to them was less than the costs which they did not recover but which had been offered to them.

Conclusion

It is this distinction between the claim for hire, to which the claimants are entitled as of right, and the ancillary claim for costs, in relation to which there is no prior right (per Viscount Cave LC in Donald Campbell & Co Ltd v Pollak [1927] AC 732,[1927] All ER Rep 1), which points to the correct solution as a matter of law. Treated as a matter of contract, the offer was to pay $US15,000 in respect of the claim, and costs in an indeterminate amount which could be taxed, if not agreed. $US15,000 was the respondents’ valuation of the claim for hire. That has proved to be an undervaluation, and the claimants’ decision to regard it as such has been vindicated by the award.

What the respondents now say is that the offer should be regarded as equivalent to $US15,000 plus $X, where X is the amount of the claimants’ pre-offer taxed costs. No such taxation has taken place, nor will it as a result of the arbitrators’ decision to deprive the claimants of all their costs, in any event. Therefore,$X can only be regarded as an estimate of the amount which the claimants would have recovered if their costs had been taxed or agreed. But, having made the estimate, that figure should be added to the $US15,000 offered in respect of the claim so as to produce a total figure for the purposes of comparison with the recovery of $US16,215 in respect of hire, but without costs, in fact made. This is perilously close to offering a global sum, inclusive of costs, which Donaldson J held in Tramountana should not be done.

In my judgment, the respondents should not be permitted to say that the offer of $US15,000 in respect of hire should now be treated as if it was an offer of $US16,215 or more, merely because their further offer of costs was proved by subsequent events to have been unnecessary. Costs were offered because they were regarded as ancillary to the claim. In the result, the respondents successfully objected to that ancillary order being made. They cannot now say, in my judgment, that the offer to pay costs should be treated as if it was a supplementary offer to pay more than $US15,000 in respect of the claim.

This conclusion is consistent with the judicial basis on which the rule that ‘costs follow the event’ has been reconciled with the rule, or practice, that a plaintiff who obtains judgment for less than the amount of the payment in loses his right to recover costs after the date of the payment in and becomes liable, although successful in obtaining judgment, for the defendant’s costs after that date. This was explained by Somervell LJ in Findlay v Railway Executive [1950] 2 All ER 969 at 971 as follows:

‘The first point to be decided here is whether a defendant who has paid money into court which has not been taken out and exceeds the sum awarded to the plaintiff is a successful litigant or a successful party within those two statements of the law. I hold that he is, and that the principles there laid down apply. The main purpose of the rules for payment into court is the hope that further litigation will be avoided, the plaintiff being encouraged to take out the sum paid in, if it be a reasonable sum, whereas, if he goes on and gets a smaller sum, he will be penalised wholly or to some extent in costs. Once, therefore, the money has been paid in, the lis between the parties simply is: Is that sum sufficient to cover the damage which has been suffered. Prima facie, therefore, the defendants in the present case are entitled to be paid their costs as from the date of payment in, but, of course, as in other cases, there may be circumstances connected with the case which entitled the judge to make some order other than that of giving the successful litigant his costs, and counsel for the plaintiff submitted that there were such circumstances in this case.’

This in my opinion is equivalent to saying, in contractual terms as I have sought to do in this arbitration context, that the offer represents the respondents’ valuation of the claimants’ cause of action. The claimant takes issue with that valuation by rejecting the offer, and success or failure on that issue determines, subject to special considerations, if any, the proper order as to costs. Here, the offer was an undervaluation and the claimants were justified in treating it as such. The result for which the respondents contend is, on analysis, in my judgment, inconsistent with the basic principle that costs follow the event. It is clearly established that that principle governs an arbitrator’s exercise of his discretion as to costs. There is no other situation, so far as I am aware, where the order for costs, which should follow the event, itself determines the event. For these reasons I would dismiss this appeal.

I should add that there is an additional reason why I would be reluctant to introduce, even in commercial arbitrations, any qualification of the requirement that arbitrators should exercise their discretion as to costs, in an arbitration governed by English law, in accordance with the principles applied in the courts. The English rules regarding costs, whilst not unique, are certainly a distinctive feature of English arbitration proceedings. An agreement to arbitrate in England or subject to English laws of procedure is made on the basis that these principles will be applied. It is always possible for the parties or for standard arbitration rules to exclude these principles, and this is sometimes done. When it is not, the parties’ expectations will tend to be defeated if some other or wider discretion is given to arbitrators than the established rules permit. This is not to say that the rules cannot be changed and are established for all time; but it does mean, in my judgment, that the arbitrator’s discretion in such circumstances is subject to recognised rules of law.

Appeal dismissed. Leave to appeal to the House of Lords refused.

L I Zysman Esq Barrister.