Under the rules of many arbitral institutions, in order to bring a claim in arbitration it will be necessary for the parties to pay a certain amount at the outset of the matter. Typically this sum, often referred to as an “advance on costs”, will be paid by the parties in equal shares. In the recent case of BDMS v Rafael Advanced Defence Systems, the Commercial Court considered whether a party’s refusal to pay their share amounted to a repudiation of the agreement to arbitrate.

The case concerned a dispute over sums allegedly due under a consultancy agreement which specified arbitration under ICC rules as the agreed method of dispute resolution. Following the commencement of the arbitration, and in accordance with its rules, the ICC fixed an advance on costs at US$27,000 and sought half that sum from the defendant. However, the defendant, concerned at the claimant’s ability to meet any adverse costs order, refused to pay until adequate security for costs was provided by the claimant. The claimant contended that the payment of the advance was a condition precedent to the arbitration taking place and that the defendant’s failure to pay its share was a repudiatory breach of the arbitration agreement which rendered the agreement “inoperative”, with the result that it could bring its claim in the Commercial Court instead.

The Commercial Court accepted that the requirement that an advance on costs be paid gave rise to a contractual obligation owed to the other party, particularly given that the parties had expressly agreed that the arbitration would take place under the rules of the ICC, and that the parties would, as a matter of contract, comply with the requirements imposed on the parties by the rules. Thus the failure to pay the advance did involve a breach of the arbitration agreement. However, the Court did not consider that the breach was repudiatory in this case. The defendant was not refusing to participate in the arbitration, but was in fact actively participating. Its refusal to “play by the rules” was limited to the issue of payment of its advance share of costs, which was to be addressed at a preliminary issue hearing. Further the refusal was not absolute, but was a refusal to pay unless security for costs was provided. The breach did not deprive the claimant of its right to arbitrate, as it could have proceeded by posting a bank guarantee for the defendant’s share and then seeking an interim award or interim measure order that the advance be paid by the defendant, and while the claimant had no obligation to pay the defendant’s share of advance costs, the ICC rules provided a means whereby the arbitration could be proceeded with and withdrawal of the claim avoided. Noting that, for a breach to go to the root of the contract, it is generally necessary to show the innocent party has been deprived of substantially the whole benefit of the contract, the Court considered it was difficult to see how the claimant was deprived of that benefit when he had the means to prevent it occurring and seek recourse. Further, the arbitration agreement had to be repudiated, not merely the arbitration reference, and even if the claim was deemed withdrawn as a result of default in payment of the advance on costs, there was no restriction on the same claim being brought to arbitration again at a future time.

This decision is yet another reminder that in circumstances where the parties have agreed to settle their disputes in arbitration, the English courts will be wary before stepping in. However, although the defendant’s decision not to pay the advance on costs did not enable the claimant to bypass arbitration in this case, parties should be aware that a tribunal is unlikely to look kindly upon someone who refuses to pay their share and in circumstances where they refuse to participate in the arbitration as well, a court may be more willing to intervene.

BDMS Ltd v Rafael Advanced Defence Systems [2014] EWHC 451 (Comm)