What can happen if parties fail to pay the advance on costs requested by the ICC?

The High Court of Justice in Northern Ireland had to decide whether it could allow state court proceedings if the parties have failed to pay the advance on costs requested by the ICC.

Case note on: Trunk Flooring Ltd v HSBC Asset Finance (UK) Ltd and Costa Rica SRL [2015] NIQB 23

FACTS

The plaintiff purchased machinery from the 1^st defendant that was manufactured by the 2^nd defendant. The plaintiff was dissatisfied with the operation of the machine, so it commenced proceedings in the Queens’ Bench Division of the Northern Irish court against the two defendants. The 2^nd defendant successfully applied to stay the court proceedings in favour of arbitration pursuant to Section 9 of the Arbitration Act, which provided, inter alia, that court proceedings in respect of matters under an arbitration agreement shall be referred to arbitration unless the court is satisfied that the arbitration agreement is null and void, inoperative or incapable of being performed. This is similar to the effect of Section 20(1) of the Hong Kong Arbitration Ordinance (Cap. 609) and Section 6 of the Singapore International Arbitration Act (Cap. 143A).

• The arbitration agreement provided for ICC arbitration to be held in Wein before three arbitrators. The defendants commenced ICC arbitration claiming £100,000 whereas the plaintiff counterclaimed £2 million for lost profits and consequential losses. The parties agreed for the matter to be heard before a sole arbitrator (instead of three arbitrators) to save costs.
• The ICC Secretariat exercised its powers under Article 36 of the ICC Rules and fixed the advance on costs at $95,000, having taken into account the total sum of the claim and counterclaim.
• The parties were not satisfied with the sum of the advance on costs fixed by the ICC Secretariat. The 2^nd defendant went as far as write to complain that the continuation of the dispute was uneconomical to them, the advance on costs fixed by the ICC was arbitrary and unfair, and that the parties were the great losers whilst the ICC was the beneficiary. After the 2^nd defendant had initially made partial payment of its share of the advance on costs, none of the parties were willing to pay the advance on costs.
• Article 36(6) of the ICC Rules provided, inter alia, that if the request for advance on costs has not been fully paid up, the claims would be considered withdrawn after the ICC Secretariat has consulted the arbitral tribunal and provided the parties with at least 15 days to comply with the request for advance on costs. In view of the parties’ continuing refusal to pay the outstanding advance on costs, the ICC Secretariat issued a notice to the parties stating that, inter alia, “the [ICC Court] decided that the claims are considered withdrawn…without prejudice to the reintroduction of the same claims in another arbitration.”

The plaintiff applied to lift the stay on court proceedings under Section 9 of the Arbitration Act 1996 on the basis that the arbitration agreement has become ‘null and void, inoperative or incapable of being performed’.

THE DECISION

Weatherup J had to tackle the key issue of whether the arbitration agreement had become ‘null and void, inoperative or incapable of being performed’ as a result of the parties’ collective refusal to pay the outstanding advance on costs.

His Lordship considered that the arbitration agreement had not become ‘null and void’ because this was not a case where:

1. the arbitration agreement was never entered into; or
2. the arbitration agreement was found to have been void ab initio.

This was also not a case where the arbitration agreement was incapable of being performed because:

1. an arbitration agreement will only be incapable of performance where the parties were ready, willing and able to perform, but the agreement cannot be performed by them (which was not the case here); and
2. the poverty of the proposed claimant nor the inability of the party seeking the stay of court proceedings to satisfy an award does not make the arbitration agreement incapable of performance.

However, His Lordship held that the arbitration agreement had become inoperative through abandonment by both parties.

1. Abandonment occurs where party A shows that party B had so conducted itself as to entitle party A to assume and did assume that the arbitration agreement would be abandoned sub silentio. This is an objective exercise which considers how the parties would be objectively understood by each other.
2. It is clear that none of the parties intended to proceed with the arbitration after the claims were considered withdrawn by the ICC Court. The parties have accepted that none of them will be acting under the arbitration agreement.
3. However, silence and inaction, without more, is insufficient to give rise to an agreement to abandon the arbitration agreement. This is because silence and inaction can also be consistent with a party wishing that the matter will not proceed or his solicitors’ appalling delay.

OBSERVATIONS

This is a rare occasion where a court had to rule on an abandonment of an arbitration agreement. It is unfortunate that the parties were surprised by amount of the advance on costs because they could have had an idea about potential costs of ICC arbitration from the ICC Rules and the costs calculator on the ICC’s website before opting for ICC arbitration.

The outcome of Trunk Flooring is to be contrasted with the English case of BDMS v Rafael Advance Defence Systems [2014] EWHC 451 (“BDMS”). Although the facts were similar in BDMS, they were even more egregious. In BDMS, one party had fully paid up its advance on costs in a ICC arbitration, but the other party refused. The claims were therefore considered withdrawn by the ICC Court. The paying party then commenced court proceedings against the defaulting party on the grounds that the defaulting party had repudiated the arbitration agreement.

Hamblen J held that the defaulting party had not repudiated the arbitration agreement because:

1. the paying party could have proceeded with the arbitration by paying for the defaulting party’s share of the advance on costs and recovered the payment through an interim or final award;
2. the defaulting party was not absolutely refusing to pay its advance on costs, but was only refusing to pay them because the paying party was refusing to pay security for costs, so there was no intention to repudiate the arbitration agreement;
3. the defaulting party was participating in all aspects of the arbitration (except for payment of the advance on costs); and
4. the arbitration agreement can still be performed as the withdrawal of the claims were without prejudice to them being brought again in a future arbitration, so.

The only distinguishing factor between both cases is that in Trunk Flooring, all parties were unwilling to pay the advance on costs. However, the paying party in BDMS may feel aggrieved to learn that, if he had been recalcitrant and refused to pay his advance on costs, the court proceedings could have gone ahead. One cannot help feeling that the Irish court had adopted an overly legalistic approach that failed to achieve practical justice.