The continuation of international arbitration is often subject to payment of advances on costs, which are generally required to be paid equally by the claimant and the respondent. The arbitration cannot continue until the advance has been paid in full. It is becoming more and more common that respondents fail to meet this requirement as part of, in most cases, a dilatory tactic.
The post aims to explore the option available to a claimant in such situations.
What are provisional advances?
During the course of an arbitration, in particular when administered by an institution such as the ICC, LCIA, DIAC, SIAC, HKIAC or the DIFC-LCIA, costs are incurred by the institution and the arbitral tribunal.
The common practice among these institutions, regardless of the basis upon which they charge costs (which varies, including on a time spent basis, or percentage of sums claimed), is to request from the parties at the commencement of an arbitration an initial payment as a down payment towards the costs to be incurred.
This initial payment is often referred to as a provisional advance or advance on costs, and is typically to be borne equally by the parties subject to certain exceptions.
The Respondent’s non-payment
As above, it is not uncommon for respondents to decline to pay their share of the provisional advance. In these circumstances most institutions will ask the claimant to pay the respondent’s share of the advance (or potentially provide a bank guarantee or equivalent, which also imposes a financial burden), which if not paid generally would result in discontinuation of proceedings.
This obviously imposes greater financial burdens on claimants seeking to pursue their claims.
How to tackle this problem?
When faced with a refusal by a respondent to pay their share of the advance on costs, a potential remedy for claimants is to apply to the tribunal for an order or partial award requiring the respondent to reimburse the claimant for the additional expense they were put to.
Whilst some institutions expressly authorise the arbitral tribunal to render an order or partial award for reimbursement of the provisional costs at the request of the paying party. For instance, Article 24(5) of LCIA Rules, Article 27(g) of the SIAC Rules 2016 and Article 41(5) of the HKIAC Rules 2018, the rules of other institutions, such as ICC or DIAC, do not expressly grant that power. However, that need not mean that recovery prior to a final award is excluded.
The other factor to consider is the reasons for non-payment. In circumstances where the respondent refuses to pay the advance on costs on the basis that it has a jurisdictional challenge, non-payment might be considered justified. The presence or absence of such reasons would generally factor into any decision to make such an application.
If an application is granted, but the respondent declines to comply, the claimant can potentially rely upon local legislation, or (if applicable) the New York Convention, to seek enforcement of the order or award, as appropriate, against the respondent to recover the awarded costs. An order requiring the respondent to pay its share of the advance on costs also might discourage the response from making delaying applications.
Recent experience
Our experience suggests that it is perhaps more common for respondents not to pay their share of the advance on costs in arbitrations seated in the Middle East or involving parties based there. Details of one such instance, and the result are set out below.
We represent the claimant in arbitral proceedings under the supervision DIAC and pursuant to its rules. As usual, prior to appointment of the Tribunal, DIAC fixed the advance of costs to be paid equally by the parties. The Respondent refused to pay its share of the advance on costs.
As a result, our client had to pay the respondent’s share, incurring substantial expense, to continue pursuing its claim.
On appointment of the Tribunal, we brought an application requesting an award ordering the respondent to reimburse the claimant in the amount of the respondent’s share of the advance, which our client had paid.
We were successful in the application. The factors considered by the Tribunal included: (i) power of the Tribunal under the arbitration rules and law of the seat; (ii) role and power of the arbitral institution; and (iii) whether there was a justifiable reason for the non-payment.
