Arbitration and Conciliation Act
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This article is written by Snehil Balani, pursuing Certificate Course in International Commercial Arbitration and Mediation from LawSikho. The article has been edited by Prashant Baviskar (Associate, LawSikho) and Smriti Katiyar (Associate, LawSikho).

Introduction

Before discussing in detail the branches (Advances on Costs), let us have a glimpse of the whole tree of ‘Costs’ in international arbitration. The 2015 Queen Mary University of London International Arbitration Survey mentioned “Cost as the worst characteristic of international arbitration”. Cost continued to be the worst feature in international arbitration as mentioned in the 2018 Survey. The high costs incurred by parties for resolving their disputes under the mechanism of international arbitration has led to this perspective of costs.

This article intends to discuss in detail the whole idea of advances on costs in international arbitration, starting from the reason on why advances are paid in the first place, rules under different arbitral institutions, and by the end discussing the repercussions, course of action in case of default by the party(s) in non-payment of advances. 

Why are advances on costs paid?

First, a provisional advance on costs is supposed to be paid by the parties to cover the likely administrative costs of the institutions and the tribunal’s fees until the terms of reference are drawn up.

Article 24.1 of the LCIA Rules specify that advance payment for costs is made in order to secure payment of the Arbitration costs under Article 28.1 (Arbitration Costs and Legal Costs). The Schedule of LCIA Arbitration Costs provides for costs that can be directed by the LCIA court to be paid under Article 24.1 of the rules. These include administrative charges such as charges of the registrar/deputy registrar, counsel, case administrators, casework accounting functions. Also, a sum equivalent to 5% of the fee of the tribunal (excluding expenses) can be sought by the LCIA court under advances on costs.

Ideally, these advances on costs are to be borne by the parties equally, unless they agree otherwise or unless the arbitrator in the award assesses such expenses or any part thereof against any specified party or parties.

Why does a party default on the payment of advances on costs?

In the majority of the cases for non-payment of advances on costs, it is the defendant who does not fulfil its duty to pay advances. In very few cases the reason for non-payment is a financial burden. The majority of the time, non-payment of advances on costs is used as a tactic by the defendant to delay the process of arbitration as the arbitration cannot proceed without the advances which are used for the appointment of arbitrators and covering administrative costs.

This is very often used by the defendants to delay the process of arbitration because there are no penalties for non-payment of advances on costs as a party cannot be precluded from defending a claim or counterclaim. The general rule is that the arbitral tribunal does not care which party pays the advance as long as it is paid, and the non-defaulting party may pay the whole of the advance if it wants the proceedings to continue.

Provisions under different institutional rules

International Chamber of Commerce (ICC)

Provision: Article 37 of the ICC Arbitration Rules provide for “Advance to Cover the Costs of the Arbitration”.

Time: There is no specific time limit mentioned by the ICC Arbitration Rules under which the payment of advances of costs is to be made. Article 37(2) states that “As soon as practicable, the court shall fix the advance on costs”. 

Chronological Procedure: After the payment of the filing fee by the Claimant, the ICC Secretary-General will request the claimant to make a payment called “provisional advance on costs”. The claimant is generally asked to pay the provisional advance within a 30-day period.

Consequently, the court will fix the full advances on costs. Article 16 of the rules provide that “The Secretariat shall transmit the file to the arbitral tribunal as soon as it has been constituted, provided the advance on costs requested by the Secretariat at this stage has been paid.”

Non-Payment of Advances on costs: Article 37(5) of the ICC rules provide that “In all cases, any party shall be free to pay any other party’s share of any advance on costs should such other party fail to pay its share”.

Singapore International Arbitration Centre (SIAC)

Provisions: The 2016 SIAC Rules expressly mention the advances on costs only under Schedule 1, under the sub-head SIAC-SIMC Arb-Med-Arb Protocol. Under para 12, it mentions that “Parties shall also pay to SIAC, upon request, an advance on the estimated costs of the arbitration (“Arbitration Advance”) as well as administrative fees and expenses for the mediation (“Mediation Advance”) in accordance with SIAC and SIMC’s respective Schedule of Fees (collectively “the Deposits”).”

The advance on costs for arbitration under SIAC is mentioned in detail under the “Practice Note 3 of SIAC on Case Administration, Appointment of Arbitrators & Financial Management for Cases under the UNCITRAL Rules 2010.” Points 20-26 provide for ‘Advances and Deposits’.

Point 20 reads “The SIAC shall collect advances and deposits from the parties towards the costs of the arbitration.”

Time: Points 22 and 23 provide that “The first tranche of advances and deposits shall normally be required from the parties shortly after the Registrar receives the request for administration. The Registrar may from time to time request further advances and deposits from the parties.” Thus, there is no specific number of instalments or time. It just mentions being paid ‘shortly after the request’.

Non-Payment of Advances on Costs: The Practice Note implicitly mentions that the non-payment by one party can be covered by the other party as it mentions under point 32 that “The parties are jointly and severally liable for the costs of the arbitration.” As the parties are jointly liable for the advances, they can be paid by one party on behalf of the other. 

The London Court of International Arbitration (LCIA)

Provision: Article 24 of the LCIA Arbitration Rules provides for “Advance Payment for Costs”.

Time: Article 24.1 of the rules state that “The LCIA Court may direct the parties, in such proportions and at such times as it thinks appropriate, to make one or more payments to the LCIA (the “Advance Payment for Costs”) in order to secure payment of the Arbitration Costs under Article 28.1”. So, there is no specific time or instalments for payment of advances on costs. The tribunal can call upon the payment at such times as it deems fit. 

Non-Payment of Advances on Costs: Article 24.6 of the rules provide that “In the event that a party fails or refuses to make any payment on account of the Arbitration Costs as directed by the LCIA Court, the LCIA Court may direct the other party or parties to effect a further Advance Payment for Costs in an equivalent amount to allow the arbitration to proceed (subject to any order or award on Arbitration Costs).”

Hong Kong International Arbitration Centre (HKIAC)

Provision: Article 40 of the HKIAC Administered Arbitration Rules provides for “Deposits for Costs”. Article 40.1 states that “As soon as practicable after receipt of the Notice of Arbitration by the Respondent, HKIAC shall, in principle, request the Claimant and the Respondent each to deposit with HKIAC an equal amount as an advance for the costs”.

Time: Article 40.4 of the rules set the time limit for payment of advances on costs to be 30 days.

Non-Payment of Advances on Costs: Article 40.4 states that “If the required deposits are not paid in full to HKIAC within 30 days after receipt of the request, HKIAC shall inform the parties in order that one or another of them may make the required payment.”

American Arbitration Association (AAA)

Provision: Rule 56 of the AAA Commercial Arbitration Rules and Mediation Procedures provide for “Deposits” and states that “The AAA may require the parties to deposit in advance of any hearings such sums of money as it deems necessary to cover the expense of the arbitration, including the arbitrator’s fee”.

Non-Payment of Advances on Costs: Rule 57 of the AAA rules mention the “Remedies for Non-Payment” and states that “If arbitrator compensation or administrative charges have not been paid in full, the AAA may so inform the parties in order that one of them may advance the required payment”.

Nature of payment of advances on costs

There has been a difference of opinion among various judgments as to the nature of the payment of advances on costs. Majorly the conflict is between two approaches i.e., (i) The Contractual Approach, (ii) The Procedural Approach. But, a third approach can also be seen in some cases which are known as (iii) The Good Faith Approach.

The Contractual Approach

Supporters of this approach opine that the obligation to pay advances on costs is a contractual obligation that arises from the parties’ agreement to arbitrate. As it is further to the arbitration agreement, the parties contractually agree to comply with the applicable arbitral rules, including the obligation to pay their respective shares of the arbitral institution’s advance on costs. Therefore, a respondent’s failure to pay its share of those costs is a breach of the arbitration agreement.

Under the contractual approach, the obligation to pay advances on costs is owed by the parties towards each other as it arises from the parties’ agreement itself.

ICC Case No. 15506 (2009) supported the contractual approach and stated “the arbitral tribunal considers that the Claimant rightly points out that since the Rules were adopted by reference in the Contract through the adoption of the arbitration clause, they have contractual value and bind the parties. Thus, [the parties] undertook to comply with them, including the obligation imposed on them by Article [36(2)] to each pay half of the advance on costs.”

The Procedural Approach

Proponents of the procedural approach believe that the obligation to pay advances on costs does not arise from the parties’ agreement, rather it arises from the provisions of the institutional rules to which parties have subjected themselves to be governed. It is considered to be an obligation towards the arbitral institution which is owned by each party. 

Under this approach, no-obligation flows (for the payment of advances on costs) from one party to the other party.

In ICC Case No.12491 (2004), the tribunal decided that the consequences for non-payment of the advances on costs were strictly procedural. 

The major issue with the procedural approach: The procedural approach provides that the obligation for payment of advances on costs is owed by the parties towards the arbitral institution. So, in a case where a party defaults the payment of advances on costs, almost all the major institutional rules provide for the payment to be made by the non-defaulting party on part of the defaulting party in order to proceed with the arbitration. The non-defaulting party makes the payment on the part of the defaulting party and the arbitration continues. 

The issue arises when the non-defaulting party seeks reimbursement for the advances on costs it made on behalf of the defaulting party. Now, if the procedural approach is adhered to, the obligation was towards the institution, and the same has been complied with as the institution has received its whole share of the advances on costs. And as there was no contractual obligation between both parties, the tribunal cannot direct the non-defaulting party to pay back to the non-defaulting party. 

The same was seen in ICC Case No. 12948 (2004). The arbitral tribunal held that it did not have the power to order the respondent (defaulting party) to make payment to the ICC as the latter had already received the advance on costs in its entirety. 

Thus, the obligation towards the ICC was fulfilled and no further action could be taken by the arbitral tribunal as it adhered to the procedural approach.

The Good Faith Approach

The duty to pay the advances on costs is considered to be a good faith obligation by a few arbitral tribunals. Parties have a devotion to further the proceedings in good faith. 

This view was noticed in the ICC Case No. 16812 (2011), where the arbitral tribunal held that “the reciprocal obligation of the parties to pay half of the advance on costs each does not only result from the application of the Rules, to which the parties are contractually bound. It also results from the parties’ obligation to execute their agreements in good faith”.

Possible scenarios in case a party defaults payment of advances on costs

1) The first option available to the non-defaulting party is to pay the defaulting parties to share and to seek reimbursement at the end of the proceedings in the final award. 

2) The second option available to the non-defaulting party is to pay the defaulting parties to share and to seek an interim measure that directs the defaulting party to reimburse its share immediately.

3) The third option available to the non-defaulting party is to not pay the defaulting party’s share, but to seek, instead, a partial award or procedural order requiring the defaulting party to pay its share to the institution.

4) The fourth option available to the non-defaulting party is to not pay the defaulting party’s share, which will eventually result in suspension or termination of the arbitration, or the claims will be considered withdrawn from the arbitral institution. The same is incorporated under Article 37.6 of the ICC rules, Rule 34.6 of the SIAC Rules, Article 24.8 of the LCIA Rules, Article 40.4 of the HKIAC rules and Rule 57(e) of the AAA rules.

In circumstances where a case is considered withdrawn (as mentioned above), a party usually goes to the state courts to get the dispute resolved. When a non-defaulting party approaches the state courts, the defaulting party raises an issue of jurisdiction as the parties’ agreement proved for resolving the dispute through arbitration. The result is then that the claimant has no other choice than to further pursue the arbitration or relaunch it by paying the advance on costs in full.

A similar situation was seen in the case of BDMS Limited vs. Rafael Advanced Defence Systems [2014] EWHC 451 (Comm.).

In this case, BDMS paid its part of the advance, but RAFAEL was only willing to pay its part of the advance if BDMS would provide adequate security for costs. BDMS was not willing to fulfil the condition put forth by RAFAEL and also was unwilling to pay the other half in order to continue the arbitral proceedings. Further, the claim was withdrawn and brought before the high court. RAFAEL raised the issue of jurisdiction. BDMS raised the issue that non-payment on part of RAFAEL was a repudiatory breach arising out of the parties’ agreement. 

The court took the contractual approach and determined that the obligation to pay advances on costs is a contractual obligation arising out of the parties’ agreement. But, the breach in the present case is not a repudiatory one because non-payment on part of RAFAEL was conditional as it was willing to pay if adequate security of costs were provided. 

And the court determined that non-payment of advances on costs do not make the arbitration agreement inoperative and BDMS could bring the same claim to arbitration again.

Reimbursement of substituted payment

In cases where the non-defaulting party pays the other half of the advances on costs on behalf of the defaulting party, it can either be recovered as an award or as an interim measure (procedural order).

The primary advantage of an award over a procedural order is that an award can generally be enforced more easily in domestic courts than in a procedural order.

The advantage of an interim measure over an award is that it can be issued more quickly. In cases where the non-defaulting party is under some financial burden and needs immediate reimbursement, an interim measure can be sought to reimburse the payment made by it on behalf of the non-defaulting party.

Another analogy is made for determining whether to pass an award or an interim measure for reimbursement of advances on costs. This analogy is in relation to the contractual or procedural approaches discussed above.

The authors believe that a tribunal’s decision to order reimbursement should take the form of a partial award, rather than a procedural order if it decides that the obligation to pay the advance on costs is contractual. This is because the tribunal would be ruling on the substantive rights and liabilities of the parties, and such a decision requires a detailed level of reasoning.

On the other hand, if a tribunal considers the matter to be procedural, it would be more appropriate for it to direct reimbursement by way of a procedural order. The issues in point would not be substantive, and whilst the tribunal would need to explain how it reached its decision, it would not have to provide the detailed reasoning expected in an award.

Nature of reimbursement

The nature of reimbursement also depends upon whether the breach is considered to be a contractual breach or a procedural breach. 

If it is considered to be a contractual breach then damages for breach of contract are awarded. For instance, in ICC Case No. 13290 (2008), the tribunal noted that “the claimant was effectively forced to pay the respondent’s share of the advance on costs so that the arbitration would proceed’, and found that the amount paid by the claimant equated to the damage that it suffered as a result of the respondent’s breach of contract.”

If it is considered to be a procedural breach, then it is hard to claim damages on the basis of breach of contract because, under the procedural approach, there is no obligation towards the other party of payment of advances on costs. For instance, Partial Award No. 2 of June 1, 2004 in ICC Case No. 12491 held that the claimant did not suffer any damage as a result of its payment of the entire advance; that the allocation of costs would only be known upon the arbitral tribunal’s costs award; and that the payment of a deposit could not result in damages claim.

Reimbursement of substituted payments is more straightforward in arbitrations governed by arbitral rules which explicitly permit the tribunal to grant such relief. For this reason, LCIA tribunals are likely to render partial awards in this regard at the request of the non-defaulting party.

Conclusion

In case of default by a party for non-payment of advances, the best possible way is to get going and pay on behalf of the defaulting party. This does not further delay the process of arbitration and the amount paid can be recovered by way of an award or an interim measure, depending upon the scenario of the case. If the non-defaulting party is not in a hurry to get the reimbursement due to financial constraints it is suggested the reimbursement is sought by an award as it is easily enforceable.

A bird’s eye view of non-payment of advances on costs shows that ‘it is all about perspective’. If the nature of reimbursement is considered to be a contractual one, then it determines what kind of order needs to be passed in order to get the reimbursement (award) and what kind of remedy will be provided under the order (damages for breach of contract). The same changes if it is perceived that nature is procedural.

References

  1. www.arbitration.qmul.ac.uk/media/arbitration/docs/2015_International_Arbitration_Survey.pdf
  2. 2018 International Arbitration Survey: The Evolution of International Arbitration – School of International Arbitration (qmul.ac.uk)
  3. LCIA Arbitration Rules
  4. Schedule of LCIA Arbitration Costs (2014)
  5. Kluwer Law Online
  6. https://iccwbo.org/dispute-resolution-services/arbitration/rules-of-arbitration/#article_37
  7. The Timing of Payment of Arbitration Advances on Costs • Aceris Law LLC

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