UK: What Can You Do If A Responding Party In An Arbitration Refuses To Pay Its Share Of The Advance On Costs?

Last Updated: 4 June 2014
Article by Jeremy Glover

A not uncommon problem in international arbitration is where a party declines to pay its share of the advance on costs. This can be particularly frustrating for a claiming party where the parties have agreed that arbitration is to be the default procedure for resolving disputes. This is what happened in the case of BDMS Ltd v Rafael Advanced Defence Systems [2014] EWHC 451 (Comm). The International Chamber of Commerce ("ICC") fixed an advance on costs, but Rafael refused to pay its share. It was given extra time to pay, but when it failed to do so the ICC deemed the claim withdrawn

The underlying contract was subject to English law. BDMS argued that the failure to pay the advance amounted to a repudiatory breach of the arbitration agreement. BDMS further argued that this repudiatory breach rendered the arbitration agreement "inoperative" which meant that it could bring a claim against Rafael through the courts. In response, Rafael argued that the court had no jurisdiction and sought an order that the claim be dismissed or stayed to arbitration.

The dispute related to a claim for "success fees" under a consultancy agreement. The agreement provided for arbitration under the ICC Rules. Article 30 provides that the ICC Court shall fix the advance on costs in an amount likely to cover the fees and expenses of the arbitrators and the ICC administrative expenses for the claims which have been referred to it by the parties. The Rules specifically provide that any party shall be free to pay the whole of the advance on costs in respect of the principal claim or the counterclaim should the other fail to pay its share. When a request for an advance on costs has not been complied with the ICC can direct the Arbitral Tribunal to suspend its work and set a time limit on the expiry of which the relevant claims, or counterclaims, shall be considered as withdrawn.

That is what happened here. Both parties took part in the arbitration, with Rafael filing an Answer to the initial Request for Arbitration. Rafael's solicitors expressed concerns about BDMS' ability to meet any adverse costs order and said that until adequate security had been put in place, Rafael did not propose to pay the advance on costs. Rafael also noted that if BDMS wanted to take the referral forward without securing its costs, it would have to meet whatever demands the ICC made as to payment of the balance of the advance on costs.

Rafael maintained its position and the ICC duly gave notice that the claim would be withdrawn if neither party paid Rafael's share of the advance. In the interim, BDMS had started proceedings in the Commercial Court in England. It then wrote to Rafael indicating that it was accepting Rafael's failure to pay its share of the advance on costs as a repudiatory breach of the Rules and clause 7 of the arbitration agreement and would now pursue its claim in the High Court.

The Referring Party's case

BDMS said that under Article 30 payment of the advance on costs was a condition precedent for the arbitration taking place. If payment was not received by the ICC, then pursuant to Article 30(4), the proceedings would be withdrawn unless a request to object was received. BDMS had paid its share of the advance on costs in full. The failure by Rafael to pay any part of its share led first to the possibility of, then to the actual, withdrawal of the arbitration proceedings.

This was a repudiatory breach of the arbitration agreement because the purpose of clause 7 of the arbitration agreement was to ensure that arbitration could resolve the dispute and Rafael's behaviour, in causing the withdrawal of the arbitral proceedings, prevented that purpose. Further, Rafael's refusal to comply with Article 30 of the ICC Rules "paralysed" the arbitration proceedings and brought about their withdrawal. This amounted to a fundamental breach of the arbitration agreement.

Further, BDMS said that this repudiatory breach rendered the arbitration agreement "inoperative", which meant that it was entitled to bring its claim in the court by virtue of section 9(4) of the 1996 Arbitration Act. Rafael said that there was no breach, still less any repudiatory breach of the arbitration agreement, and that accordingly a mandatory stay should therefore be granted under s.9 of the Arbitration Act 1996.

Was there a breach of the arbitration agreement?

First of all Hamblen J noted that there was a difference in view as to whether the requirement that an advance on costs be paid under Article 30(3) gave rise to a contractual obligation owed to the other party or merely to a procedural obligation owed to the ICC Court. On the latter view, the issue is one of procedure rather than substance and recourse is by way of interim measures. In other words, any decision by an arbitral tribunal ordering a party to pay an advance on costs is a procedural decision of an administrative nature and is therefore not subject to review by state courts. In the ICC system, the ICC Rules make the administration of all financial aspects, including in particular the advance on costs, the exclusive responsibility of the ICC Court of Arbitration. In contrast, the arbitral tribunal is only competent to decide which of the parties shall bear the costs of the arbitration (including the fees of the arbitrators as determined by the ICC Court) and in what proportion.

This contractual view was the one favoured by the Judge. Here, it was expressly agreed that the arbitration "shall take place under the rules of the International Chamber of Commerce" and that the parties would, as a matter of contract, comply with mandatory requirements imposed on the parties under the Rules. However, the Judge also noted that whichever approach is correct it appears to be well recognised that the arbitral tribunal can order the defaulting party to pay the advance, either by means of an interim award or by interim measure. Further, the unpaid portion of the advance owed by the defaulting party may be paid by posting a bank guarantee pursuant to Appendix III Article 1.6 of the Rules.

Under English law, for a breach to be repudiatory it must be shown that the party in breach has clearly and unequivocally evinced an intention not to perform its obligations under the arbitration agreement in some essential respect or has committed a breach of the arbitration agreement which went to the root of the contract.

The position in Canada

BDMS placed reliance upon a Canadian case of Resin Systems Inc v Industrial Service & Machine Inc where the ICC had required each party to make a payment of advance costs of $87,500. ISM refused to pay its share on various grounds. Resin was not prepared to pay ISM's share, the claim was deemed withdrawn and court proceedings were issued. A stay of proceedings was sought under the Canadian equivalent of s.9. The court refused the stay, finding that the refusal to pay rendered the arbitration unworkable and thereby inoperative. Here the Court of Alberta found that the refusal to pay the advance on costs made the arbitration unworkable, and thereby inoperative; there being no obligation on the other party to fund the defaulting party's share. The Court described ISM's request that Resin be denied access to the courts because it did not choose to pay ISM's share of arbitration costs, which ISM refused to pay in breach of the arbitration rules, as being "audacious".

Although the court in the Resin case did not consider the issue of repudiatory breach, the reasoning was relevant to that issue. However, Hamblen J noted that if, as the court found, ISM's refusal to pay made the arbitration unworkable, then if that refusal was a breach of contract it may well have been repudiatory. He further noted: "a breach of contract which renders a contract unworkable is a breach which may well go to the root of the contract and therefore be repudiatory".

The position in France

BDMS also referred to a French Cour de Cassation decision in Societé TRH Graphic v Offset Aubin (Cour de Cassation, 19 November 1991, 1992 REV.ARB 462) where the Cour de Cassation accepted jurisdiction where the claimant had declined to substitute payment for the defaulting respondent and instead sued on the merits. This was because the defaulting respondent had not, at any time, supplied any explanation of its default in payment and had no right to claim the exclusivity of arbitral jurisdiction as it had "paralysed the arbitration" by its own behaviour.

The Judge's Decision

Hamblen J accepted that here there was a clear and unequivocal refusal by Rafael to pay its share of costs. This was a continuing breach so that there is no question of affirmation. He accepted that a stage was reached where it was clear that the continued failure to pay the advance share of costs was going to lead to withdrawal of the arbitration claim. When Rafael initially failed and then refused to pay its share of advance costs there were a number of possibilities. One possibility was that its security for costs application would be heard before there was any possibility of withdrawal. If it had been so heard and the Tribunal had ruled in Rafael's favour and security had been provided, Rafael had made it clear that the advance would be paid. Alternatively, the issue of the advance on costs would be dealt with as part of the preliminary issue hearing, as the Tribunal had ordered. That might have had the consequence that there was to be no question of withdrawal until that had occurred. Another possibility was that BDMS would pay Rafael's share of the advance on costs. In practice this is what usually happens. However, it became clear that none of these possibilities were going to happen and that the consequence of continued non-payment was going to be withdrawal of the claim. In those circumstances, the Judge said, Rafael's breach was potentially repudiatory. However, ultimately the Judge held that the breach was not repudiatory. Rafael had not declined to participate in the arbitration. It was actively participating in the arbitration. It had taken part in settling the Terms of Reference in exchanges about the scope of the preliminary issue hearing. Rafael's refusal to "play by the rules" was limited to the issue of payment of its advance share on costs. This was a matter which was due to be addressed at the forthcoming preliminary issue hearing. Further, this refusal was not absolute, but was a refusal to pay unless security for costs was provided.

Importantly, the breach did not deprive BDMS of its right to arbitrate. It was at all times open to BDMS to proceed with the arbitration by posting a bank guarantee for Rafael's share of the advance on costs and then seek an interim award or interim measure order that the advance be paid by Rafael. BDMS could also have objected against withdrawal to the ICC Court pursuant to Rule 30(4). Whilst strictly it was correct that BDMS had no obligation either to pay Rafael's share of advance costs or to object to withdrawal, the Rules provide means whereby the arbitration could be proceeded with and the withdrawal of the claim avoided. For a breach to go to the root of the contract it is generally necessary to show that the innocent party has been deprived of substantially the whole benefit of the contract. In the view of the Judge it was difficult to see how BDMS was "deprived" here of that benefit when they had the means, expressly afforded to them by the Rules, to prevent that occurring and to seek recourse.

Further, whilst the arbitration reference had been withdrawn, there was no restriction on the same claim being brought to arbitration again. Therefore the arbitration agreement had not been repudiated. As the breach did not go to the root of the contract, it could not be said that the arbitration agreement was made unworkable and thereby inoperative.

Therefore whilst Rafael's failure to pay its share of an advance on costs was a breach of the arbitration agreement, it was not a repudiatory breach and BDMS' alternative approach failed. As the Judge said, there were a number of reasons why the breach by Rafael could not be characterised as repudiatory under English law; perhaps the most important was that the breach itself did not deprive BDMS of its right to arbitrate. The ICC Rules provided the means for the arbitration to continue despite the failure by Rafael to pay its share of the advance on costs.

International Quarterly is produced quartely by Fenwick Elliott LLP, the leading specialist construction law firm in the UK, working with clients in the building, engineering and energy sectors throughout the world.

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