All of the major arbitral institutions require payment of an advance on costs (to cover arbitrators' fees and the institution's administrative expenses) before an arbitration can proceed. The advance fee can be substantial, especially in high-value claims. For example, the ICC estimates the advance on costs for a USD $5 million claim with a sole arbitrator to be roughly USD $132,000.
These are generally shared between the parties equally, with the arbitral institution issuing a payment request to both the Claimant and the Respondent. For the Claimant, payment of its share is a prerequisite to the arbitration proceeding. But what if the Respondent refuses to pay its share?
This type of "bad" behaviour – the English High Court (in BDMS Limited v Rafael Advanced Defence Systems (2014) EWHC 451 (Comm)) has found that a party's refusal to pay its share amounts to a breach of the arbitration agreement – is becoming increasingly common. There are various reasons why a Respondent might refuse to pay its share. Tactically, it may wish to draw out the processor make life difficult for the Claimant. As a matter of principle, it may consider the proceedings vexatious and intended simply to put it to cost and inconvenience. Or as a practical matter, it may simply be unable to pay.
In most such cases, it will be necessary for the Claimant to pay the non-paying Respondent’s share in order to avoid the proceedings being dismissed/withdrawn. Therefore it is vital that claimants embarking on arbitration appreciate the risk that the respondent may fail to make payment of its share of the advance fee, and that they budget accordingly.
If a Respondent refuses to pay its share of the advance on costs, institutional arbitration rules provide little by way of penalties. On the contrary, they provide the basis for asking the other party (usually the claimant) to pay the Respondent's share. The reasoning behind this is that the arbitral institution's primary aim is to facilitate the progress of the arbitration. By making the Claimant liable for the Respondent's share, the institution thereby gives the Claimant a means of ensuring that the arbitration can proceed. However, an alternate view is that this solution – and the lack of any obvious consequence for the Respondent – legitimises the Respondent's non-payment of its share.
So, what can a Claimant do to recover any sum paid in lieu of his recalcitrant opponent's share? And what are the potential pitfalls for a Respondent considering refusing to pay its share?
The London Court of International Arbitration ("LCIA") rules are the most helpful to a Claimant. They provide a clear mechanism for recovery:
“In [the event of non-payment], the party effecting the further Advance Payment for Costs may request the Arbitral Tribunal to make an order or award in order to recover that amount as a debt immediately due and payable to that party by the defaulting party, together with any interest.”
Therefore once the Claimant has paid the Respondent's share, it can immediately seek an award from the Tribunal in respect of that sum, which can be enforced in the same way as any other arbitral award.
The ICC rules contain no equivalent provision. Nonetheless, the appropriate course is to apply to the Tribunal for an interim award. The court in BDMS Limited approved this approach in respect of ICC arbitration:
"it appears to be well recognized that the arbitral tribunal can order the defaulting party to pay the advance, either by means of an interim award or 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."
This is in line with the approach taken by the LCIA as outlined above. However, in BDMS the Court also made clear that in certain cases, a refusal to pay an advance on costs may also amount to a repudiatory breach of the arbitration agreement (i.e. a breach which entitles the other party to withdraw from the agreement to arbitrate). Therefore as well as the risk of an arbitral award against them in respect of their unpaid share, non-paying Respondents run the risk of the Claimant being free to bring court proceedings against them.
So, aggrieved Claimants can be reassured that there are options available when faced with a non-paying Respondent. And Respondents should fully consider the potential consequences before deciding to withhold their share of the advance on costs.