A recent arbitral award from the Danish Institute of Arbitration established that failure to pay the requested security for a counterclaim does not necessarily lead to termination of the arbitral proceedings as a whole.
The provision of security is governed by the Arbitration Act. However, most of the rules detailed in the act are non-mandatory - parties therefore have ample opportunity to design the arbitral proceedings as they wish. This can be done specifically or by referring the proceedings to institutional arbitration, where the rules of procedure of the chosen institution will apply.
Section 36 of the act governs the provision of security and is non-mandatory. Under Section 36 the arbitration tribunal may order the parties to provide security for the fees and expenses of the tribunal. If such security is not paid, the tribunal may terminate the arbitral proceedings.
Security provision is further governed by the Rules of Procedure of the Institute of Arbitration. Section 27(1) of the rules stipulates that the parties must pay a cash deposit as security for the estimated costs of the case. Section 27(2) specifies that the parties must pay identical amounts; however, if one party fails to pay the requested amount, the other party must pay the full amount in order for the case to be processed.
According to Section 27(5) of the rules, Section 27 also applies when a respondent asserts a counterclaim during the proceedings. Therefore, failure to pay security for the counterclaim will have the same consequences as failure to pay security for the original claim.
In a recent arbitration under Institute of Arbitration rules, the claimant refused to provide security in respect of a counterclaim asserted by the respondent. The respondent argued that according to Section 36 of the act, the arbitration tribunal should terminate the arbitration process. The respondent further argued that the dispute would be better served by a combined hearing before the Danish court, since all disputes between the parties derived from the same set of facts.
The claimant argued that Section 36 of the act was non-mandatory and that the situation was covered by Section 27(5) of the rules. Therefore, proceedings should be terminated only in respect of the counterclaim.
The arbitral tribunal concluded that the parties had already agreed on the question of security when they agreed to arbitration under the Institute of Arbitration's regime. Furthermore, the tribunal concluded that Section 27(5) of the rules governs the issue and limits the effects to dismissal of the counterclaim if neither the claimant nor the respondent pays the security requested. Section 36 of the act was not found to cover this issue and was nevertheless non-mandatory.
The tribunal finally stated that it would undermine the use of arbitration if a party could merely present a counterclaim and require that the other party contribute to the financing of such a counterclaim as a condition for the treatment of the other party's claim.
Accordingly, the respondent's request for termination of the arbitration was rejected and the original claim presented by the claimant was heard by the tribunal.
The award establishes the legal situation regarding the provision of security for counterclaims within the rules of the Institute of Arbitration. Arbitration proceedings cannot be terminated on account of a claimant's failure to pay a requested security relating to a counterclaim. If the respondent wishes the counterclaim to be tried during the arbitration proceedings and the claimant refuses to pay its part of the security, the respondent must pay the full amount of the security in order for the counterclaim to be tried by the arbitration tribunal.
For further information on this topic please contact Peter Schradieck at Plesner by telephone (+45 33 12 11 33), fax (+45 33 12 00 14) or email ([email protected]).