Parties to an arbitration are usually required to pay a deposit, or an advance on costs, on account of the fees of the tribunal and the other costs of running the arbitration. The advance on costs is usually borne by the claimant and the respondent in equal shares. The advance can be quite substantial. The ICC, for example, links the advance to the amount in dispute so the higher the value of the claim, the greater the advance on costs the parties will have to pay.
It is not uncommon for a respondent in an arbitration to refuse to pay its share of the advance on costs. This is often a tactic employed in order to put financial pressure on the claimant (who will usually be asked to pay the respondent’s share), delay the arbitration and create difficulties for the claimant in bringing the claim. The remedies a non-defaulting claimant has against such a refusal are limited. Arbitration laws and rules do not usually provide for sanctions against the defaulting respondent and often the claimant will be obliged to pay the respondent’s share of the advance in order to continue the arbitration. If the claimant does not, there is a significant risk that the arbitration will be brought to a halt.
This very issue arose in BDMS Ltd (BDMS) v Rafael Advance Defence Systems (Rafael)  EWHC 451 (Comm). Rafael refused to pay its share of the advance on costs. BDMS also refused to pay them. As a result, the arbitration was withdrawn by the ICC. BDMS sought to bring its claim in the High Court, on the basis that this was now the correct forum as the failure by Rafael to pay its share of the advance amounted to a repudiatory breach of the arbitration agreement. Whilst Mr. Justice Hamblen had some sympathy for BDMS’ arguments, on the facts of the case, the arguments were rejected and a stay of the court proceedings was ordered. Arbitration remained the correct forum for pursuing the claim.
BDMS referred a dispute arising out of a consultancy agreement with Rafael to a London seated ICC arbitration pursuant to the terms of the contract. The ICC requested that the parties pay an advance on costs for the arbitration in equal shares further to Article 30 of the ICC Rules. BDMS paid its share of the advance. However, Rafael refused to pay its share unless BDMS put adequate security in place for Rafael’s costs in the arbitration.
On numerous occasions the ICC invited BDMS (as well as Rafael) to pay Rafael’s share of the advance. BDMS however chose not to do so and instead referred the dispute to the High Court. BDMS claimed that the failure by Rafael to pay its share of the advance amounted to a repudiatory breach of the arbitration agreement, therefore entitling BDMS to pursue the claim in court. This position was rejected by Rafael, who maintained it would pay the advance if BDMS put up security for Rafael’s costs, and stated it would continue to engage in the arbitration and follow the timetable.
As a result of neither party paying Rafael’s share of the advance, the ICC eventually wrote to the parties stating that the claims were considered withdrawn under Article 30(4) of the ICC Rules. At this point BDMS’ court proceedings were on foot. However, Rafael applied for those proceedings to be stayed pursuant to section 9 of the Arbitration Act. This, among other things, provides for a mandatory stay of court proceedings where there is an arbitration agreement, unless the arbitration agreement is null and void, inoperative or incapable of being performed.
Mr. Justice Hamblen did agree that Rafael had breached the arbitration agreement as the requirement to pay an advance on costs is mandatory under the ICC Rules and gives rise to contractual obligations between the parties (it is not merely a procedural matter). In his judgment, the breach was not however repudiatory, nor did it render the arbitration agreement inoperative, for a number of reasons including:
- The refusal to pay the advance did not deprive BDMS of its right to arbitrate. BDMS could have proceeded with the arbitration by providing the requested security or paying Rafael’s share (as the ICC Rules specifically provide for). BDMS could have then sought recompense through an interim or final award.
- Rafael was not otherwise refusing to participate in the arbitration and was actually actively engaging.
- Even though the claim was deemed to be withdrawn, there was no restriction on the claim being brought by arbitration again at a future time under Article 30(4).
- Given the above, the breach could not be said to go to the root of the contract, depriving BDMS of substantially whole benefit of the arbitration agreement.
Mr. Justice Hamblen therefore ordered a stay of the court proceedings and held that the dispute should be determined in accordance with the arbitration agreement.
Key points to note
From the judgment, it seems that non-payment by a party of its share of the advance on costs alone would not amount to a repudiatory breach of the arbitration agreement, enabling the non-defaulting party to bring the claim in court. However the position is not clear cut.
Mr. Justice Hamblen’s decision was perhaps unsurprising given that Rafael was otherwise participating in the arbitration and was willing to pay the advance in the event security for its costs was put up by BDMS. However, if a party is being less cooperative, the position may be different. Mr. Justice Hamblen referred to two foreign cases (Resin Systems Inc. v Industrial Service & Machine Inc  ABCA 104 and TRH Graphic v Offset Aubin (Cour de Cassation, 19 November 1991, 1992 REV.ARB 462) where the arbitration agreement was considered to be inoperative as a result of a party’s failure to pay its share of the advance.
Ultimately, whether there has been a repudiatory breach and/or the arbitration agreement is inoperative will be decided on a case-by-case basis.
It therefore remains important to be aware that the refusal to pay an advance on costs without legitimate grounds may have consequences. At the very least, the tribunal may look less favourably on the defaulting party during the conduct of the arbitration.