ICC - Partial Award on Costs Where a Party Defaults in Paying its Share of the Advance Payment

In an economically strained climate, be it with the aftermath of the Covid-19 Pandemic or the rising inflation rates causing price increases and economic hardship, the cost of arbitration is a factor that has become ever more prevalent.

Having decided to take a dispute to arbitration the parties must consider the costs of the same. In ICC arbitrations the rules on costs can be found at Article 37 (Advance to Cover the Cost of the Arbitration) and Article 38 (Decision as to the Costs of the Arbitration).

Article 37(2) provides that the advance on costs shall be “payable in equal shares by the claimant and the respondent”. (1) Therefore, the rule set out that the parties should pay the advance on costs on a 50-50 basis. Unless the advance on costs is paid the arbitration procedure will not continue.

Thus, the question that is posed is: what happens in the event that one party fails to pay its share of the advance on costs? More specifically, what recourse does a party have where the other party fails to pay its share?

In some cases, a party (usually the respondent) – for whatever reason – will refuse to pay its share of the advance on costs. The most common reason for a respondent to fail to pay is to delay the process and thus stall the proceedings.

Article 37(5) provides, inter alia, that any party may be free to pay the other party’s share of advance on costs in case of a failure. This allows for the advance to be paid in full and the case to proceed. However, in practice, this means that the cost of the defaulting party (usually the respondent) is passed on to the party who has already paid its share (usually the claimant), who will have to bear 100% of the advance on costs, notwithstanding that the rule is that it should be paid on a 50-50 basis.

Pursuant to Article 38(3) the arbitral tribunal have the power to make decisions on costs “at any time during the arbitral proceedings” other than those fixed by the court and “order payment”. (2) As such, in theory, a claimant, who has had to pay a respondent’s share of the advance on costs for its failure to do so may invoke Article 38(3) by seeking an order from the arbitral tribunal for the Respondent to pay.

There has been a debate regarding whether the provision that parties should pay the costs equally constitutes a contractual obligation or whether the provisions under the ICC rules constitute a provisional measure. (3) It has also been debated as to whether the non-payment amounts to a breach of the parties ‘agreement’ to act in good faith, having accepted arbitration and being governed by the ICC Rules as part of their arbitration agreement. (4) Whereas the contractual approach considers the obligations as a substantive one, the provisional/interim measures approach considers it as a procedural obligation. (5) The different approaches will be explored in turn:

1. The Contractual Approach

The proponents of this approach opine that Article 38(3) creates a substantive legal obligation between parties. As such, firstly, Article 38(3) creates a contractual obligation between the parties and secondly, the contractual terms of a contract falling into the scope of the arbitration clause. (6)

1.1. Two Elements of the Contractual Approach

The contractual obligation approach is based on the principle that once the parties agree on ICC rules, they are also incorporating the ICC rules to their arbitration agreement by reference. (7) Indeed, some arbitration agreements will make express reference to the ICC Rules and the parties being bound by the same:

“All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.” (8)

Moreover, those supporting this approach argue that apart from being a contractual obligation, the arbitral tribunal has the competence to decide on all issues within the scope of the agreement. (9) Therefore, the payment of the advance on costs becomes a contractual obligation over which the tribunal has competence.

Scholars with a civil law background assert that the non-payment of the advance on costs constitutes a breach of the principle of good faith. The underlying idea behind this approach is that where parties have agreed to arbitration, they must not act in a manner to make the arbitration “impossible”. (10) The act of non-payment of the advance on costs would constitute an act to make the arbitration impossible, hence a breach. Nevertheless, this good faith view remains a minority view among the scholars and tribunals. It would also not be sufficient to convince those of a common law background – where the concept of good faith is generally not accepted in commercial contracts.

1.2. The Nature of the Decision: Partial Award

Under the contractual obligation approach, it is considered that the arbitral tribunal is entitled to render a partial award rather than an interim measure, as the request of a party for imminent reimbursement of the payment (upon enforcement) is a matter of substance requiring a final and binding decision. (11) Further to this, some authors advocate that there are reasons to link the contractual characterisation for issuing an award. Therefore, the applicant has a legitimate interest to obtain an award. (12)

1.3. Special Circumstances to not Pay the Advance on Costs

Scholars accepting the contractual obligation view are also asserting that there could be legitimate reasons for the failing party in not paying the advance on costs. (13)

These circumstances remain non exhaustive, and the tribunal should examine them on a case-bycase basis. However, there are circumstances approved by scholars and the tribunals, such as the cases where the claimant intentionally deteriorates its financial situation or when the jurisdiction of the tribunal is challenged by the defaulting party. (14) Yet, even in these examples, it appears to defy the purpose of the parties having agreed to be bound by the rules, one of which is to split the advance on costs. That being said, a particularly strong jurisdictional challenge by a defaulting party may tip the scale in their favour by showing that the case has been filed against them wrongly in the first place. In these situations, refusing to pay its share may therefore be considered a “legitimate reason”. Needless to say, each case should be considered on its own merits and thus, not all jurisdictional objections will have the same effect.

Indeed, where a defaulting party is defending its position by advancing that it has a “legitimate reason”, the burden of proof is upon the defaulting party to establish the same. The defaulting party must prove and satisfy the tribunal that a special circumstance exists. Whereas, in advocating the procedural approach it is asserted that the burden of proof should be upon the party requesting the reimbursement. (15)

2. The Interim Measure Approach

2.1. Elements of the Interim Measure Approach

Moving on to the procedural approach – those of this view assert that the question of payment of the advance on costs does not create a contractual obligation between the parties, instead, it is a matter of procedure, and not a substantive one.

On the one hand, the interim measure approach endorses are of the view that the default of payment is provisional and preliminary. The obligation to pay the advance on costs is strictly an obligation of the parties towards the ICC. Therefore, the payment of the advance on costs is not a contractual obligation between the parties, but an obligation of the parties towards the ICC Court. (16) In other words, each party has its own relationship with the court. (17)

Furthermore, it is also asserted by some scholars that the arbitral tribunal does not have authority to rule on a question of an administrative nature. However, the ICC court has exclusive competence regarding the payment of the advance on costs. (18)

2.2. The Nature of the Decision: Interim Measure

For the proponents of this view, the arbitral tribunal can order an interim measure rather than a partial award pursuant to Article 28(1) of the rules. (19) The key element is the nature of the failure of the defaulting party to pay its share of the costs. If it is considered a substantive obligation pertaining to the contract then, under that view as expressed above, the paying party may seek a partial award. However, if the nature of the default is considered as a procedural failure, then the result of that would be that the tribunal would have the power to grant an interim measure. (20)

Furthermore, the arbitral tribunals which ruled on that matter considered that the conditions of particular urgency or irreparable prejudice should not be required. (21) However, in an ICC partial award, the tribunal asserted that a tribunal should “do what it can to prevent said injustice”.(22)

2.3. The Burden of Proof is Upon the Requesting Party

Contrary to the endorsers of the contractual obligation doctrine, since the decision is an interim measure, the proponents of the interim measure doctrine advocate that the burden of proof is upon the requesting party. (23)

To grant an interim award, the tribunal should be satisfied that the requesting party may satisfy the stringent conditions to obtain an interim measure. (24) In other words, it is the duty of the requesting party to prove that there is an injustice.

3. Conclusion

As such, whether it is to be considered a contractual obligation deriving from the agreement between the parties or a procedural/interim measure, the fact is that the ICC Rules has foreseen a situation where a party may default in the payment of the advance on costs. As such, the ICC Rules sets the premise that the starting point is that the parties pay the costs “equally”. However, in practice, this may not be the case and one party may have to end up bearing the entire costs of the advance, notwithstanding their agreement. As a recourse, the ICC have built in a mechanism into the Rules to give the arbitral tribunal powers to make decisions on costs “at any time in the proceedings” and to “order payment”. This then allows the arbitral tribunal to make a partial award against a defaulting party to pay, especially where it had no legitimate reason for failing to do so.

The notion of balance of justice between the parties is an important one. In circumstances where a party is deliberately not paying their share of the costs of the arbitration it is vital for arbitral institutions to have to necessary mechanisms in place to safeguard against injustice. Essentially, depending on the financial means of the parties involved, a non-payment by a defaulting party could have far reaching consequences – as far as depriving a party the right to bring its claims to arbitration. Thus, the mechanisms in place could potentially act as a deterrent to parties whose intention is to stall the arbitration process or put excessive financial pressure on the other party by refusing to pay its share.

In conclusion, whether you support the contractual approach or the interim measure approach, the fact is that the arbitration cannot proceed unless the whole of the advance is paid in full. With that in mind, and considering the intensions of the defaulter, it should be possible to recover that unpaid amount, merely for the sake of striking the correct balance of justice between the parties.

References

(1) Article 37(2) of ICC Arbitration Rules

(2) Article 38 (3) of ICC Arbitration Rules

(3) Webster T.H/Bühler M., Handbook of ICC Arbitration, 5th Edition, pp 639-641, ¶¶37-27,37-28.

(4) Fadallah I., Payment of the Advance to Cover Costs in ICC Arbitration: The Parties’ Reciprocal Obligations, ICC Bulletins, Vol. 14, No. 1, p.56, ¶ 7.

(5) Darwazeh N./Greenberg S., ‘No one’s credit is as good as cash: Awards and Orders for the Payment of the ICC advance on costs’ journal of International Arbitration, Vol. 31, Issue 5, p. 560

(6) Secomb, Awards and Orders Dealing with the Advance on Costs in ICC Arbitration: Theoretical Questions and Practical Problems, ICC Buletins, Vol. 14 No. 1, p. 63

(7) Darwazeh N./ Greenberg S., No one’s credit is as good as cash: Awards and Orders for the Payment of the ICC advance on costs’ journal of International Arbitration, Vol. 31, Issue 5, p. 560

(8) Standard ICC Arbitration Clause

(9) Rohner T./Lazopoulos M., Respondent’s Refusal to Pay its Share of the Advance on Costs, ASA Bulletin, Vol 29, No. 3, p. 556

(10) Fadallah I., Payment of the Advance to Cover Costs in ICC Arbitration: The Parties’ Reciprocal Obligations, ICC Bulletins, Vol. 14, No. 1, p. 56, ¶ 7

(11) Rohner T./Lazopoulos M., Respondent’s Refusal to Pay its Share of the Advance on Costs, ASA Bulletin, Vol 29, No. 3, p. 556

(12) Darwazeh N./ Greenberg S., No one’s credit is as good as cash: Awards and Orders for the Payment of the ICC advance on costs’ journal of International Arbitration, Vol. 31, Issue 5, p. 566.

(13) Schwartz E./Derains Y., Guide to the ICC Rules of Arbitration (Second Edition), p. 347

(14) Rohner T./Lazopoulos M., Respondent’s Refusal to Pay its Share of the Advance on Costs, ASA Bulletin, Vol 29, No. 3, p. 561; see also Secomb M. , Awards and Orders Dealing with the Advance on Costs in ICC Arbitration: Theoretical Questions and Practical Problems, ICC Buletins, Vol. 14 No. 1, p. 64, ¶ 20.

(15) Secomb M., Awards and Orders Dealing with the Advance on Costs in ICC Arbitration: Theoretical Questions and Practical Problems, ICC Buletins, Vol. 14 No. 1, p. 66, ¶ 31.

(16) Favre-Bulle X., “Les conséquences du non-paiement de la provision pour frais de l’arbitrage par une partie. Un tribunal arbitral peut-il condamner un défendeur au paiement de sa part de l’avance de frais” in Darwazeh N./ Greenberg S., No one’s credit is as good as cash: Awards and Orders for the Payment of the ICC advance on costs’ journal of International Arbitration, Vol. 31, Issue 5, p. 562

(17) Mitrovic D. Advance to Cover Costs of Arbitration, ICC Arbitration Bulletin, Vol.7 No.2, p. 90

(18) Darwazeh N./ Greenberg S., No one’s credit is as good as cash: Awards and Orders for the Payment of the ICC advance on costs’ journal of International Arbitration, Vol. 31, Issue 5, p. 562

(19) Secomb M., Awards and Orders Dealing with the Advance on Costs in ICC Arbitration: Theoretical Questions and Practical Problems, ICC Buletins, Vol. 14 No. 1, p. 65, ¶ 25

(20) Darwazeh N./ Greenberg S., No one’s credit is as good as cash: Awards and Orders for the Payment of the ICC advance on costs’ journal of International Arbitration, Vol. 31, Issue 5, p. 560

(21) ICC case 11405, Partial award dated 26 March 2002, reproduced in Secomb M., Awards and Orders Dealing with the Advance on Costs in ICC Arbitration: Theoretical Questions and Practical Problems, ICC Buletins, Vol. 14 No. 1, p. 66, ¶28

(22) Secomb M., Awards and Orders Dealing with the Advance on Costs in ICC Arbitration: Theoretical Questions and Practical Problems, ICC Buletins, Vol. 14 No. 1, p. 66, ¶ 29.

(23) Secomb M., Awards and Orders Dealing with the Advance on Costs in ICC Arbitration: Theoretical Questions and Practical Problems, ICC Buletins, Vol. 14 No. 1, p. 66, ¶ 31

(24) Secomb M., Awards and Orders Dealing with the Advance on Costs in ICC Arbitration: Theoretical Questions and Practical Problems, ICC Buletins, Vol. 14 No. 1, p. 71, ¶ 59

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