When Is A Counterclaim Not A Counterclaim?

Peter Horne LLB(Hons) FRICS FCIArb MAE

The reason for posing this question is purely a matter of allocation in an award of costs.

I recall, in my 'induction' to CIArb that we were taught simply that a counterclaim could stand as a claim in its own right and that costs should be apportioned between claim and counterclaim 'following the event'.

The draft Construction Industry Model Arbitration Rules (13.3) carries the same direction but extended by 'unless he considers them to be so interconnected that they should be dealt with together.

I believe that this principle has been copied from the courts (RSC o.62 and see also o.15 r.2 and o.18 r.17 and 18) on the assumption that arbitration is carried out on a similar basis and that answers to most procedural problems can be found by reference to the 'white book'. I suggest that there are sufficient differences in arbitration that High Court principles should not be copied slavishly. The courts have a jurisdiction which has very different origins from the initiating contract and Act which govern arbitration and are more likely to include resolution of other matters between the parties and the inclusion of third (and more) parties.

However, I believe this principle to be fundamentally flawed and over simplified, particularly when applied to arbitration. (I would favour a change in approach in litigation also but that is another matter). Over the years, I have had many discussions with other consultants, solicitors and counsel, particularly when considering settlement, and am continually horrified by the divergence of views. It seems to me that settlements are achieved more by luck than judgment, reliant on guesswork as to how an arbitrator or court would award costs when there is success in both claim and "counterclaim". The best we ever seem to achieve is an acknowledgement that there is doubt as to the award of costs which, usually, neither party wants to risk and therefore settlement is encouraged

I believe that a counterclaim must be given far more than a cursory glance and I also believe that many (if not most) counterclaims may better be described as a defence (set-off) which, following RSC o.15 procedure appears as a counterclaim. It is not my current intention to query why RSC o.15 should be appropriate to arbitration, I believe that most lawyers are intellectually capable of operating two parallel systems; others only have to operate one.

To take a simple example from the construction industry, a claim for extension of time with loss and/or expense flowing from the same facts will often result in a defence that no such extension is applicable and a counterclaim for liquidated damages. I cannot imagine more incestuous matters. Nor can I believe that an arbitrator, on finding that the Contractor was entitled to one week out of the twelve claimed, with a loss/expense entitlement of £10,000 and 11 weeks liquidated damages at £5,000 per week payable to the Employer would then award the costs of the claim to the Contractor and the (minimal) costs of the counterclaim to the Employer. Can one really say that the Contractor has gained by continuing? I doubt if he would think that making a payment of £45,000 represented a 'win' even if he then received a large portion of his costs.

I suggest that the situation outlined by my simple example shows that the entire subject warrants far more attention than the CIArb appears to give.

When formulating or receiving an offer the parties want to know the bottom line figure, not a figure 'plus costs' and it is therefore essential for their representatives to be able to predict how the costs would be awarded. At present, we seem too frequently to be identifying considerable doubt as to whether costs would go to the overall winner or separately to the winners of the claim and counterclaim.

I believe that a step in the right direction could be to redesign the test and get away from the question of 'would the counterclaim stand on its own as a claim?' to 'are these two matters in fact a single issue?' While not perfect by any means, this appears to me to introduce a valid measure of intimacy which would justify the award of costs to the overall winner. I would even go further and suggest that the normal principle should be that the overall winner is awarded his entire costs but (notwithstanding the arbitrators inherent discretion) the parties should be at liberty to present argument as to why such an award would be inappropriate. I believe that my view is adequately supported by Hanak v Green 1BLR1, a 1958 Court of Appeal case where the claim and counterclaim were not intimately connected although arising out of the same contract. (The judgment by Morris LJ is well worth reading as a historical account of how counterclaims came to be pleaded in their current fashion). This principle would not interfere with existing 'subsidiary' awards arising out of the circumstances or conduct of the case. I also refer to the Court of Appeal case of Malcolm Charles Cathery (trading as King Cathery Partnership) v Lithodomos Ltd 41BLR76 where, in an application for security of costs, the court held that the counterclaim arose out of the same contract as the claim and was relied on by way of set-off so that the defendants were not taking the position of plaintiffs.

Another approach is to examine from a 'jurisdictional' point of view. If the Arbitrator's jurisdiction was limited to the 'claim' then would the 'counterclaim' be within or outside his jurisdiction? Only if 'outside jurisdiction' would the counterclaim become applicable to a separate award of costs. This may be a very appropriate method of determining the issue as arbitrators may well have an increased need, under the 1996 Act, to study jurisdictional matters. To extend this line of thought, in many instances the counterclaimant would never have initiated arbitration (the Respondent being content that its contra charges completely negated the claim but were not commercially worth commencing an action) and, if he is proved to be right, why should there be any award of costs against him. In this situation, assuming that the Claimant had been properly notified of the contra charges, it appears to me to be just that the "winner take all" scenario should apply. My general concept could then be re-stated so that "winner takes all" would apply unless the jurisdiction of the arbitrator had been extended to include matters which were not in dispute at the commencement of the reference. Of course, this opens up a whole new can of worms as arbitrators will discover when deciding on their award of costs that they did not even have jurisdiction to deal with the counterclaim!

Whilst my suggestions are based entirely on the views of a construction professional (for which I make no excuse), it is likely that they would also apply to other industries. It is also likely that they would be highly inappropriate to some industries or types of dispute.

The most important principle which must underlie any award of costs is whether or not the relevant party gained by commencing or (after offers) continuing with the reference and surely this principle supports the "winner takes all" approach.

The Editors would be pleased to hear from readers either supporting or countering the above views. It is hoped that future issues (subject to space being available) will deal with parameters for awarding costs on an 'indemnity' basis and for payment of costs following interim awards, also on suggestions for pleading cases with particular reference t the 1996 Act. Articles and correspondence will be gratefully received.