A FLY IN THE OINTMENT: INVESTIGATING THE NON-PAYMENT OF THE ADVANCE ON COST BY PARTIES IN ICC ARBITRATION PROCEEDINGS
Effective arbitration agreements are principally founded on, among a host of other attributes, party autonomy. Parties have the freedom to select, the Tribunal, the arbitration rules, governing law of the arbitration and the juridical seat of the arbitration, subject to mutually acceptable terms. In theory therefore, parties are also expected to bear the costs of the arbitration, in equal portion. In the context of International Chamber of Commerce (“ICC”) arbitrations, article 37 (2) of the ICC Rules (2017) provides that once parties enter into an arbitration agreement, the arbitral tribunal proceeds to set advance on costs to be borne equally by the disputing parties. These costs are meant to cover the likely ‘fees/expenses of the arbitrators and the ICC’s administrative expenses.1 However, in the recent past, there has been ‘a significant increase in the number of applications for ICC arbitral tribunals to intervene and order the defaulting party to pay its share2.This article explores what happens when parties fail to pay the advance on costs, and to what extent it is becoming a bottleneck to arbitration proceedings.
Reasons for Non-Payment of the Advance on Costs
The ICC Rules (2017) do not provide for sanctions against a defaulting party for non-payment of its share of the advance on costs. Rather, the ICC Secretariat offers a non-defaulting party a non-obligatory option under article 37(5), to pay the defaulting party’s share of advance on costs. If the non-defaulting party fails to pay the whole of the advance on costs, the ICC Secretariat can direct the tribunal to suspend the arbitration for a period not exceeding 15 days after which the claims in question will be ‘considered as withdrawn.3 Conversely, payment of the whole of the advance on costs by a non-defaulting party allows the arbitration proceedings to continue without prejudice to the non-defaulting party’s right to claim back costs paid.4
It is against the backdrop of such limited remedies that a party may feel compelled to default on payment of its share of the advance, effectively delaying or stopping the arbitration proceedings. Further, it could be successfully used as a tactic to exert financial pressure (usually where the non-defaulting party is in financial strain) on the non-defaulting party, to pay the whole of the advance so that the arbitration proceedings can continue.5 This particular tactic becomes even more challenging to a non-defaulting party where the value of the claim (under which the advance on costs is calculated) is significantly high. Non-payment of the advance on costs can also be instigated by the party’s objection to the arbitral tribunal’s jurisdiction. Possibly objectives for the defaulting party are:
(a) To halt the arbitration proceedings should the non-defaulting party fail to pay the total of the advance on costs, or;
(b) Where the non-defaulting party pays the advance on costs as per Article 36 (5), choose not to participate in the arbitration proceedings and later challenge the arbitral award on grounds of lack of due process.6
Nature of the obligation to pay advance on costs
Whilst the above causes for non-payment of advance on costs by parties are largely suggestive, past ICC arbitration proceedings have been instructive on the steps adopted by non-defaulting parties in response to non-payment of advance on costs by the other side. There are varying approaches by parties on the nature of the obligation to pay advance on costs. Arbitral tribunals are largely split on two approaches; contractual and procedural approach.
(i) Contractual approach
The contractual approach is premised on the understanding that non-payment by a party of its share of the advance on costs is a breach of the arbitration agreement that gives rise to a substantive claim. This is based on the binding nature of the arbitration agreement and by extension, the ICC Rules, which provide for payment of advance on costs. This was the finding by the arbitral tribunal in Wenko Wenselaar v. S.A GB Industries (1995) Rev Arb. 132.7
A non-defaulting party’s options are limited under the contractual approach. It would be required to pay the whole advance on costs for the arbitration proceedings to continue and subsequently introduce claims for breach of the arbitration agreement. The introduction of such claims may result in an increase in the amount of the advance on costs should the value of the claim increase.8 However, a non-defaulting party under the contractual approach can request specific performance of a contractual obligation from the tribunal in form of a partial award.9 In ICC Case No. 18445/CYK, the arbitral tribunal granted a partial final award to the non-defaulting party. Whilst some arbitral tribunals have held that ‘such contractual obligations never arise’, the decision of the tribunal in the CYK case points to a likely avenue for relief available to a non-defaulting party.
(ii) Procedural approach
Under this approach, the argument is that there exists ‘a distinction in the ICC rules between those financial aspects of arbitration for which the arbitral tribunal is competent and responsible and those for which the ICC Court has exclusive competence.10 Proponents of this approach contend that the requirement to pay the advance on costs under Article 36 (2) ‘only aims to define the relationships between the parties and the ICC Court, not the reciprocal relationship between the parties.11
As such, the obligation of a party to pay the advance on costs under the procedural approach is taken as an obligation to the ICC rather than to the other party. It follows then that the relief to be accorded to a non-defaulting party due to non-payment of the advance on costs is restricted to the procedural remedies provided under the ICC Rules (2012), i.e. that a party either pays the whole amount of the advance on costs or where it elects not to pay these costs, the tribunal may withdraw the claim.12
Dr. Favre-Bulle, in emphasising the procedural approach, stated that,
‘In ICC arbitration, it appears (to us) that parties’ agreement seeks to distribute the powers relating to arbitration costs: while the arbitral tribunal is empowered to decide which party must ultimately bear what proportion of the costs, the question of the advance is dealt with solely by the ICC. If this question is raised with the arbitrators they cannot, (in our opinion) render a decision in substantive law, by way of a partial award on the merits, ordering the respondent to make a contractual payment, since they have no authority to rule in the ICC’s stead on a question of administrative nature.13
Remedies available to non-defaulting parties
Leaving aside Dr. Favre-Bulle’s position, parties have obtained other remedies quite apart from the contractual and procedural approaches mentioned above. These remedies fall under the interim measure approaches and provisional measure approaches.
(i) Interim measure approach
Under this approach, a non-defaulting party requests the arbitral tribunal ‘to issue a provisional measure requesting the non-paying party to pay its portion of the advance on costs’ or in the alternative, refund the advance on costs paid on the defaulting party’s behalf.14 An obvious challenge here is that, to bring a claim for such provisional relief, the non-defaulting party would have to pay the total of the advance on costs before the arbitral tribunal exercises its discretion to dismiss the claim under Article 37 (6) for non-payment.15
The applicability of the interim measure approach depends on the ‘applicable institutional rules and the domestic arbitration laws in the jurisdiction16. For instance, in the ICC arbitration Fertalage Industries (Algeria) v. Societe Kaltenbach Thurin S.A. (France), Tribunal de grande instance de Beauvais, 9 April 199817, after the ICC had dismissed claims against the Respondent for non-payment, the claimant (non-defaulting party) obtained cost orders from the Respondent’s domestic courts ordering the Respondent to pay the advance on costs. Whilst such relief would vary from jurisdiction to jurisdiction, it is highly likely that it would result in more time and costs expended, if available.18
(ii) Provisional measure approach
A non-defaulting party can petition the ICC Secretary General to determine a provisional amount, less than that of the total of the advance on costs which would enable the arbitration to proceed. The non-defaulting party can then seek provisional measures from the tribunal to have advance on costs paid. This approach enables the non-defaulting party to pay less fees than the total advance on costs, circumvent any procedural issues, get the merits before the tribunal and reserve the argument for the final award.19However, arbitral tribunals are yet to accept this approach and as such, it is doubtful (in practice) that a non-defaulting party will successfully benefit from the provisional measure approach.20
Non-defaulting parties have in past ICC cases, adopted distinctive approaches in dealing with the non-payment by the defaulting party. Key among these cases is BDMS Ltd.v Rafael Advance Defence Systems (Rafael)  EWHC 451, where the claimant sought to: (i) treat non-payment of the advance on costs by the respondent as a repudiatory breach, (ii) accept the repudiatory breach; (iii) terminate the arbitration agreement; and (iii) sue in court.21
BDMS Ltd. argued before the English High Court that the non-payment rendered the arbitration agreement inoperative and as such, that it was entitled to raise its claims against the defendant at the High Court after it had opted not to pay the full advance on costs which resulted in the tribunal withdrawing the claims. Whereas the understanding of the nature for payment of the advance on costs under the contractual approach is that the non-payment is a breach of the arbitration agreement, the approach by BDMS Ltd. took the position that such a breach is of a fundamental nature that entitles it to terminate the arbitration agreement.
A critical question considered by the High Court in this particular case is whether the non-payment by a defaulting party is fatal to the arbitration agreement. J. Hamblen whilst agreeing with the claimant that the respondent’s non-payment was a breach that gave rise to contractual obligations, held that the breach was not repudiatory on the following grounds:
i. The non-payment of the advance on costs by the respondent did not deprive the claimant of its right to arbitrate. The claimant had the option to settle the full amount of the advance on costs for the arbitration to proceed, and seek to recover these costs through an interim or final award;
ii. The respondent’s refusal to pay the advance on costs was not an absolute refusal as it was engaging in the arbitration proceedings as it had filed an application for security for costs owing to concerns over the claimant’s financial position;
iii. The withdrawal by the arbitral tribunal of the claims did not hinder the claimant from re-introducing the claims at a later date as provided under Article 36 (6) of the ICC Rules.
iv. On the basis of the above grounds, the non-payment could not be understood to be a breach that goes to the root of the contract, ‘depriving the claimant of substantially the whole benefit of the arbitration agreement.22
J.Hamblen in concluding the matter, ordered that the court proceedings be stayed and that the dispute should be ‘determined in accordance with the arbitration agreement.23Whilst the non-payment of the advance on costs was held not to be a repudiatory breach due to the surrounding circumstances of the case, parties should be keen to ensure that such an approach will be futile should the breach in question not meet the test applied to fundamental breaches.
Comparison of ICC Arbitration Rules (2017) with institutional/ad-hoc rules
Key institutional/ad-hoc rules also mirror the clauses that relate to the non-payment of advance on costs under the ICC Rules (2017). Article 24.1 of the LCIA Arbitration Rules (2014) for instance, obligates the LCIA Court to direct parties to pay advance on costs in proportions and periods it considers appropriate. This provision slightly differs from article 37 (2) of the ICC Rules (2017) which is more particular in providing that the advance on costs should be borne equally by the disputing parties.
However, article 24.5 of the LCIA Arbitration Rules (2014) differs materially from the ICC Rules (2017) by offering a significant remedy to non-defaulting parties that opt into paying the whole advance on costs. A non-defaulting party is entitled to request the Arbitral Tribunal to issue an award/order ‘to recover that amount as a debt immediately due and payable to (it) by the defaulting party, together with any interest. 24
In the same breath, article 43 (4) of the UNCITRAL Arbitration Rules (2010) requires parties to pay the advance on costs in equal shares within 30 days from the date of receipt of the Request For Arbitration. A non-obligatory option is offered to the disputing parties to pay the advance on costs in full, should a party default. Where such payment is not made, the Arbitral Tribunal is obligated to order ‘the suspension or termination of the arbitral proceedings.25
Non-payment of the advance on costs by defaulting parties in ICC proceedings places significant hurdles for non-defaulting parties seeking resolution to a dispute under the arbitration process. The fact that the ICC Rules (2017) do not pose sanctions on defaulting parties, limited remedies prescribed might regrettably, encourage mischievous parties to rely on this loophole as a tactical strategy to delay the arbitration.
It is our view that as far as the ICC Rules are concerned, the safest option available to a non-defaulting party is to pay the full advance on costs and claim this amount at the end of the arbitration proceedings.
As such, the non-defaulting parties should carefully consider what options and remedies are available to them to recover sums already paid as advance costs. The failure to pay the advance on cost calls for the amendment of the ICC Rules to resolve this issue permanently. Apart from the BDSM Ltd. v Rafael case, in most ICC cases reviewed in this article, it is the Respondent party that has failed to pay the advance on costs. As expected, it reflects the Claimant’s interest in sustaining the arbitration process: an interest not all Respondent parties might be keen to pursue.
1 Article 37 (2), ICC Rules (2017)
2 Nadia Darwazeh & Simon Greenberg, ‘No one’s credit is as good as cash: Awards and Orders for the payment of ICC advance on costs’ (2014) 557 para 3
3 Article 37 (6), ICC Rules (2017)
4Darwazeh & Greenberg; Note 2 above 558 para 5.
5Sherina Petit, ‘Failure to pay the advance on costs: Will the non-defaulting party be entitled to bring a claim in court instead of arbitration?’ Norton Rose Fulbright website publication (last accessed on 6 February 2018)
6Saemee Kim & Wonyoung Yu, ‘Default on costs: A review under the ICC rules’ Lee & Ko website publication (last accessed on 6 February 2018)
7 ICC Case No. 10526
8 Saemee Kim & Wonyoung Yu, ‘Default on costs: A review under the ICC rules’ Lee & Ko website publication (last accessed on 6 February 2018)
10 Nadia Darwazeh & Simon Greenberg, ‘No one’s credit is as good as cash: Awards and Orders for the payment of ICC advance on costs’ (2014) 562 para 3
11 Peter Ashford, ‘The consequences and tactics of a failure to pay an advance on costs’ Website publication (last accesed on 6 February 2018)
12 Darwazeh & Greenberg; Note 10 above 562 para 3
13 Ibid, para 4
14 Saemee Kim & Wonyoung Yu, ‘Default on costs: A review under the ICC rules’ Lee & Ko website publication (last accessed on 6 February 2018)
21 Peter Ashford, ‘The consequences and tactics of a failure to pay an advance on costs’ Website publication (last accesed on 6 February 2018)
22 Sherina Petit, ‘Failure to pay the advance on costs: Will the non-defaulting party be entitled to bring a claim in court instead of arbitration?’ Norton Rose Fulbright website publication (last accessed on 7 February 2018)
24 Article 24.5, LCIA Arbitration Rules (2014)
25 Article 43(4), UNCITRAL Arbitration Rules (2010)
-By Leah Njoroge-Kibe and Charles Kimani