Defendants in arbitration proceedings are often reluctant to pay their share of the advance on costs ordered by the arbitral institution.
The temptation not to pay and to force the claimant to choose between paying the defendant's share or letting the arbitration grind to a halt can be a strong one, especially if the health of the claimant's finances is in doubt. There can be risks in this course of action, but the case of BDMS Limited (BDMS) v Rafael Advanced Defence Systems (Rafael) (Feb 2014) has confirmed those risks are not as great as may have been feared.
In this case, the High Court decided that:
- the defendant's failure to pay the International Chamber of Commerce (ICC) advance on costs was not a repudiatory breach of its arbitration agreement with the claimant,
- the arbitration agreement was still operative, and
- the claimant could therefore not withdraw from the arbitration proceedings and bring a claim through the courts.
A dispute arose between BDMS and Rafael over sums which BDMS, as claimant, alleged were due to it from Rafael as defendant for "success fees" under a consultancy agreement. Pursuant to that consultancy agreement, all disputes arising out of the agreement were to be referred to the decision of a single arbitrator in accordance with ICC rules. The claimant started the arbitration process.
Due to its concern about the claimant's financial stability, the defendant refused to pay its share of the ICC advance on costs levied shortly after the start of the process. The claimant had paid its share of the advance on costs. The defendant served an application for security for costs on the claimant, which was to be heard at a preliminary hearing.
Pursuant to Article 30 of the ICC rules, the advance on costs, which needs to be paid in order for an arbitration to proceed, is payable in equal shares by the claimant and the defendant. However, the rules specify that if a party fails to pay its share, then the other party can pay the whole of the advance on costs. The issue of the payment of the defendant's share of the advance on costs was also due to be decided at the same preliminary hearing.
On several occasions the ICC invited the claimant (as well as the defendant) to make payment of the defendant's share of the advance on costs. When the claimant did not make that payment, the tribunal gave the parties notice that if it did not receive payment within a specified time, then the claim would be considered withdrawn.
Rather than make full payment of the advance on costs, the claimant said it was withdrawing its arbitration claim, and issued a fresh claim in the High Court; it then wrote to the defendant and alleged repudiatory breach. The tribunal formally withdrew the arbitration claim, as it had confirmed it would, before the date of the preliminary hearing.
On the defendant's application to stay the High Court claim, the claimant continued to argue that the defendant's failure to pay its share of the advance on costs was a repudiatory breach of the arbitration agreement. It argued that the arbitration agreement was rendered inoperative, and that the claimant should therefore be able to bring its claim against the defendant in the High Court. In support of this argument, it said that the defendant's conduct in failing to pay its share of the advance on costs had prevented the resolution of the dispute through arbitration, and had been causative of the withdrawal of the arbitration proceedings.
The High Court found that the obligation to pay the 50% share of the advance on costs was an obligation owed in contract between the parties (it was not solely a procedural matter), and so the defendant had breached the arbitration agreement by failing to pay its share of the advance. However, that breach was not repudiatory for a number of reasons:
- a 'mere' non-payment is generally not regarded as a breach of a repudiatory nature;
- the defendant had otherwise actively engaged with the arbitration;
- the defendant's failure to pay its share of the advance on costs did not automatically stop the arbitration, because the claimant could have paid that share (which the ICC rules specifically provided for);
- the arbitration agreement could be enforced simply by the claimant's payment of the outstanding amount of the advance on costs, and then seeking recompense through an award.
The defendant's breach had therefore not deprived the claimant of substantially the whole of the benefit of the contract, as was necessary for a breach to be classified as repudiatory.
As the contract had not been repudiated, the court granted a permanent stay of the High Court proceedings in accordance with Section 9 of the Arbitration Act 1996, and held that the dispute between the parties should properly be determined in accordance with their arbitration agreement.
The issue of non-payment of the defendant's share of an advance on costs is often a difficult one.
- It now appears unlikely that a party may be subject to a claim in the courts if it refuses to pay its share of an advance on costs. However, caution should be taken because in this instance the court placed reliance on the fact that the defendant had otherwise fully engaged with the arbitration procedure. The situation may therefore be different where a party sits back and chooses not to engage with the arbitration at all.
- Even though it may run a reduced risk of a claim in the courts, a party who refuses to pay its share of the advance on costs still risks being "on the wrong side" of the tribunal. Tribunals tend not to like parties who do not pay the advance on costs.
- The decision reached by the High Court is perhaps not surprising. Indeed, one would not expect non-payment of the advance on costs to amount to a repudiatory breach, especially when the ICC rules governing the arbitration specify that a party can choose to pay the other party's share of the costs. An arbitration agreement is no different to any other agreement, nor is the test for repudiatory breach any different.
- The decision is a welcome ruling preserving the exclusion of the courts when the parties have themselves specified for arbitration; it is also helpful to defendants facing what they may see as unmeritorious claims from impecunious claimants when considering whether to make payment of a sizeable advance on costs.