The English Commercial Court considers whether a party's failure to pay its share of the advance on costs is a repudiatory breach of the arbitration agreement

In BDMS Limited v Rafael Advanced Defence Systems [2014] EWHC 451 (Comm), the English Commercial Court considered whether the Respondent's failure to pay its share of the advance on costs in an ICC arbitration amounted to a repudiatory breach of the arbitration agreement entitling the Claimant to pursue its claim in court. In the particular circumstances, the judge considered that whilst a failure to pay constituted a breach of the arbitration agreement, such a breach was not repudiatory. Accordingly, the court granted a mandatory stay of the court proceedings.

This case provides useful clarification as to the repercussions of a party's failure to pay an advance of costs and the avenues available to Claimants in such circumstances.

Background

The dispute concerned sums allegedly due to the Claimant, BDMS Limited (BDMS) from Rafael Advanced Defence Systems, the Respondent (Rafael) by way of success fees under a consultancy agreement (the Agreement). The Agreement contained an arbitration clause which provided for ICC proceedings seated in London before a sole arbitrator.

As the proceedings commenced in April 2011, the arbitration took place in accordance with the 1998 ICC Rules. Following the constitution of the Tribunal, the ICC wrote to the parties fixing the advance on costs and requesting each party to contribute an equal share. Having expressed concerns about BDMS' ability to meet any adverse costs order, Rafael notified BDMS of its intention to make an application for an order for security for its costs and indicated that Rafael would not pay its share of the advance of costs until adequate security had been put in place. Rafael proposed to make a formal application for security for costs once the preliminary issues had been determined.

At a subsequent meeting with the Tribunal to discuss the Terms of Reference for the arbitration, both parties agreed that one of the issues to be determined was the payment of the advance on costs. The Tribunal subsequently handed down directions providing for a preliminary hearing which would deal with this issue, amongst others.

In the meantime, the ICC wrote to the parties in relation to Rafael's failure to pay its share of the advance on costs and inviting BDMS to pay Rafael's share. BDMS did not pay Rafael's share, and following Rafael's continued failure to pay, the ICC notified the parties that, under Rule 30(4) of the 1998 Rules, unless it received payment of the advance on costs within the time limit specified, the Secretary General could invite the Tribunal to suspend work and ultimately consider the claims withdrawn.

BDMS then wrote to Rafael purporting to accept Rafael's failure to pay its share of the advance on costs as a repudiatory breach of the arbitration agreement and stated that BDMS would now pursue its claim in the High Court. Upon commencement of the High Court proceedings, Rafael sought a stay of those proceedings pursuant to Section 9 of the English Arbitration Act.

The ICC proceedings were subsequently withdrawn by BDMS.

The Parties' Contentions

BDMS argued that Rafael's failure to pay its share of the advance on costs constituted a repudiatory breach of the arbitration agreement on the basis that Rafael's behaviour had frustrated the purpose of the arbitration agreement, which was to ensure that disputes would be resolved by arbitration, and that this was sufficiently fundamental to constitute a repudiatory breach of the arbitration agreement. BDMS further contended that Rafael's breach had rendered the arbitration agreement "inoperative" for the purposes of Section 9(4) of the English Arbitration Act (one of the grounds on which a mandatory stay would not be granted).

Rafael's position was that there was no breach of the arbitration agreement, and much less a repudiatory breach. Therefore, the arbitration agreement was not "inoperative", and the Court was obliged to grant a mandatory stay of the proceedings.

Decision

Mr. Justice Hamblen considered that the requirement to pay an advance on costs under Article 30(3) of the ICC Rules gave rise to a reciprocal contractual obligation between the parties, and a dispute with respect to this obligation fell within the scope of the arbitration agreement. Therefore, Rafael's failure to pay its share of the advance on costs constituted a breach of the arbitration agreement.

However, the judge did not consider this breach repudiatory. In order for a breach to be repudiatory, it has to be shown that the party in breach had clearly and unequivocally evinced an intention not to perform the agreement and that the breach went to the root of the contract. Here, Rafael was actively participating in the arbitration, as illustrated by its involvement in settling the Terms of Reference and preparation of the preliminary issues hearing. Although it had undoubtedly refused to pay the advance on costs, this refusal was not absolute, as it was conditional on an order for security for its costs.

Moreover, Rafael's breach did not deprive BDMS of its right to arbitrate. Pursuant to the ICC rules, it had been open to BDMS to:

1. pay Rafael's share itself (Article 30(3) of the 1998 Rules and Article 36(5) of the 2012 Rules);
2. post a bank guarantee for Rafael's share (Article 1.7 of Appendix II to the 1998 Rules and Article 1.7 of Appendix III to the 2012 Rules);
3. seek an interim order or final award compelling Rafael to pay its share; or
4. challenge the ICC's threat to withdraw the proceedings on the basis of Rafael's breach.

Moreover, the ICC Rules specifically state that even if a claim is deemed withdrawn as a result of a default in payment of the advance on costs, there is no restriction on the same claim being brought at a future time in another arbitration proceeding (Article 30(4) of the 1998 Rules and Article 36(6) of the 2012 Rules). It was not sufficient for the reference to arbitration to be repudiated; it had to be the arbitration agreement itself.

In the circumstances, BDMS was not deprived of its right to arbitrate, and therefore the breach did not go to the root of the arbitration agreement. Similarly, the arbitration agreement had not been rendered unworkable and thereby inoperative. Accordingly, the judge granted a stay of the proceedings.

Comment

This decision suggests that a party's failure to pay its share of an advance on costs in an ICC arbitration will constitute a breach of an arbitration agreement.  However, the extent to which this decision will assist Claimants who face this issue in practice is debatable.   

Although failure to pay was considered to be a breach, this decision makes it clear that such a breach will rarely be repudiatory.  This is on the basis that even if (in a worst case scenario) arbitral proceedings are withdrawn by an institution, a Claimant is not precluded from reintroducing its claim in future.  Whilst this case specifically considered the position under the ICC rules, this is the general position under the rules of other institutions.  As a result, although Claimants might be left in the unenviable position of having to pay the advance themselves, or otherwise exhausting all other avenues available to them in order to ensure that the arbitration proceeds, they are not precluded from arbitrating altogether. 

Potential avenues of recourse involve bringing an application for an interim order to compel the non-paying party to pay (or alternatively seeking an order for reimbursement if the Claimant has already paid the money itself) or, if the arbitration takes place under the auspices of the ICC, posting a bank guarantee.   Clearly, this is not entirely satisfactory for Claimants, as such recourse will lead to costs and delay.  It may also cause serious difficulties for impecunious Claimants who find themselves unable to either meet a substantial bill for the Respondent's advance on costs or supply such a bank guarantee.  Moreover, other than receipt of an order compelling payment, the only potential compensation available to the Claimant is likely to be the costs of such an application and any applicable interest incurred. There is also a question as to whether this would even be available for arbitrations conducted in accordance with some institutional rules where the Claimant is jointly and severally liable for the advance on costs alongside the Respondent (such as in the LCIA Rules), as theoretically the Claimant would also be considered to be in breach of the arbitration agreement for its own failure to pay.

For further information, please contact Craig Tevendale, Partner, Matthew Weiniger, Partner, Elizabeth Kantor, Associate, or your usual Herbert Smith Freehills contact.