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Partial Awards on Unpaid Costs in International Arbitration

Unpaid costs in international arbitration are relatively common. Most rules of arbitral institutions provide that the parties must bear the costs of arbitration in equal shares. Difficulties may arise when one of the parties, usually the respondent, refuses to pay its share of advances on costs to cover the expenses related to the arbitration, including the arbitrators’ fees.[1] While this is frowned upon by arbitral tribunals, it is often seen in practice. In this respect, a party may typically pay on behalf of the defaulting party and seek a partial award for the reimbursement of the paid sum.[2]

Unpaid advance on costs arbitration

The Legal Basis for Partial Awards on Unpaid Costs in International Arbitration

In international arbitration, there are two main legal bases for a partial award on unpaid costs. The first approach is based on the wording of the institutional rules, whereas the second derives from a contractual obligation between the parties.

Explicit Mechanisms in Institutional Rules

Some arbitration rules expressly provide that arbitral tribunals are empowered to render a partial award for the reimbursement of advances on costs paid by one party on behalf of the other one.[3] Below are a few examples of these rules:

2016 SIAC Arbitration Rules

Rule 27(g) of the 2016 SIAC Rules expressly empowers the arbitral tribunal to issue an order or award for the reimbursement of unpaid costs of the arbitration:[4]

Rule 27: Additional Powers of the Tribunal

Unless otherwise agreed by the parties, in addition to the other powers specified in these Rules, and except as prohibited by the mandatory rules of law applicable to the arbitration, the Tribunal shall have the power to:

[…]

g. issue an order or Award for the reimbursement of unpaid deposits towards the costs of the arbitration;

2020 LCIA Arbitration Rules

The LCIA Arbitration Rules provide that if one party fails to pay its advance on costs, the LCIA Court may direct the other party to pay in substitution of the defaulting party. In such a case, the party paying on behalf of the defaulting party is entitled to recover that amount accrued by interest:[5]

Article 24 Advance Payment for Costs

[…]

24.6 In the event that a party fails or refuses to make any payment on account of the Arbitration Costs as directed by the LCIA Court, the LCIA Court may direct the other party or parties to effect a further Advance Payment for Costs in an equivalent amount to allow the arbitration to proceed (subject to any order or award on Arbitration Costs).

24.7 In such circumstances, the party effecting the further Advance Payment for Costs may request the Arbitral Tribunal to make an order or award in order to recover that amount as a debt immediately due and payable to that party by the defaulting party, together with any interest.

2017 SCC Arbitration Rules

Likewise, Article 51(5) of the 2017 SCC Arbitration Rules authorizes the tribunal to make a separate award for the reimbursement of the payment made in substitution of the defaulting party:[6]

Article 51 Advance on Costs

[…]

(5) If a party fails to make a required payment, the Secretariat shall give the other party an opportunity to do so within a specified period of time. If the payment is not made within that time, the Board shall dismiss the case in whole or in part. If the other party makes the required payment,the Arbitral Tribunal may, at the request of that party, make a separate award for reimbursement of the payment.

Whereas arbitral institutions usually have no power to force the defaulting party to pay, the party that has paid on behalf of the other one may (1) proceed with the arbitration and claim these costs at the end of the arbitration as general costs incurred or (2) formally request the arbitral tribunal to order the defaulting party to reimburse the paid sum.[7]

A Potential Contractual Obligation

Some scholars argue that arbitration rules are incorporated into the parties’ arbitration agreement, becoming, therefore, part of their contract.[8] Thus, even in the absence of a specific provision regarding partial awards on unpaid costs, the party’s refusal to pay its advance on costs amounts to a breach of contract.

ICC Arbitration

The ICC Rules do not contain a specific provision expressly authorizing arbitral tribunals to issue a separate award for reimbursement of advances on costs.[9] It has been argued, however, that the wording of Article 37(2) of the 2021 ICC Arbitration Rules constitutes a contractually-binding obligation of the parties to pay advances on costs:[10]

Article 37: Advance to Cover the Costs of the Arbitration

[…]

2) As soon as practicable, the Court shall fix the advance on costs in an amount likely to cover the fees and expenses of the arbitrators, the ICC administrative expenses and any other expenses incurred by ICC related to the arbitration for the claims which have been referred to it by the parties, unless any claims are made under Article 7 or 8 in which case Article 37(4) shall apply. The advance on costs fixed by the Court pursuant to this Article 37(2) shall be payable in equal shares by the claimant and the respondent.

Thus, under the ICC Rules (like virtually all other arbitration rules), the parties are required to pay their advances on costs equally.[11] A party may choose to pay on behalf of the defaulting party, normally, without prejudice to claim these costs back through an application for a partial award, on the basis of Article 37(2), or at the end of the arbitration when costs are usually allocated by the tribunal.[12] In a small number of cases, parties have requested an order for the defaulting party to pay the advance on costs directly to the ICC Secretariat.[13]

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Many ICC decisions characterize Article 37(2) (and its predecessor) as a contractual obligation between the parties.[14] ICC tribunals have accepted to issue partial awards ordering defaulting parties to pay their advances on costs. In Case No. 17060, the ICC tribunal recognized that “[t]he Respondents have an obligation to pay the advance fixed by the ICC, and they are in breach of their contractual obligation”.[15] In Case No. 16812, the arbitral tribunal held that the parties’ obligation to pay their advances on costs did not only result from the ICC Rules, to which the parties were contractually bound, but it also derived from the parties’ duties to perform their arbitration agreement in good faith.[16]

While other institutions do not contain an express provision as to the possibility of a partial award for immediate reimbursement,[17] many arbitral tribunals have accepted the parties’ right to apply for a partial award on unpaid costs as implicitly enshrined in the arbitration rules:[18]

The UNCITRAL Arbitration Rules, like most other arbitration rules, do not expressly address the issue of reimbursement of advances on costs made by one party on behalf of the other party. The fact that some arbitration rules make explicit provision for a reimbursement claim by the party making the substitute payment against the other party does not necessarily mean that a corresponding obligation may not be implicit in other arbitration rules, however.

Accordingly, a party, in most cases, should be able to apply for a partial award for immediate reimbursement of unpaid advances, even if such a right is not expressly provided in the arbitration rules.[19]

The Requirements for Obtaining a Partial Award on Unpaid Costs in International Arbitration

If the parties’ duties to pay their advances on costs form part of their arbitration agreement, the law applicable to the arbitration agreement shall determine the requirements for obtaining a partial award.[20]

For instance, under Swiss law, one seeking compensation for damages incurred as a result of a contractual breach shall demonstrate:[21]

  • the existence of a damage;
  • the breach of a contractual obligation; and
  • a causal link between the damage and the breach.

In most of cases, the party will have to demonstrate damages caused by the defaulting party’s lack of payment, which is generally the difference between the actual financial position and the position it would have been had the counterparty paid its advance on costs.[22]

Further, it is necessary to show the breach of the parties’ agreement to arbitrate, which is, as noted above, a ground for claiming unpaid costs.[23]

Finally, the party needs to demonstrate causation between the damage and the breach. Put differently, the party seeking the relief shall demonstrate that no damage would have been incurred if the defaulting party had paid for its share.[24]

Are Partial Awards on Unpaid Arbitration Costs Enforceable?

When deciding to order the reimbursement of unpaid costs, the arbitral tribunal needs to decide whether the decision will take the form of a (1) partial award or (2) a procedural order.

The main advantage of issuing a partial award is that it will increase the chances of enforcement through the 1958 New York Convention, which applies to both final and partial awards (technically, the partial award will be final with respect to the party’s obligation to pay for its share on advances on costs).[25] Nevertheless, the characterization of “award” may be different in the court where enforcement is sought: some domestic legislations will not accept a tribunal’s interim deliberation as an award, irrespective of its title or form.[26]

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On the other hand, procedural orders require less legal formalities and, therefore, can be issued more quickly (under the ICC Rules, for instance, awards must be scrutinized by the ICC Court). Besides that, a procedural order may be advantageous if the tribunal is not prepared to rule on whether the defaulting party has breached its contractual obligation.[27] Lastly, even if procedural orders cannot be enforced as partial awards, many parties voluntarily comply with procedural orders rendered by arbitral tribunal for the sake of good faith.

[1]             T. Rohaner and M. Lazopoulos, Respondent’s Refusal to Pay its Shares of the Advance on Costs, 29(3) ASA Bull., p. 549.

[2]             G. Born, “Chapter 17: Provisional Relief in International Arbitration” in International Commercial Arbitration (3ed, 2021), p. 2682.

[3]             T. Rohaner and M. Lazopoulos, Respondent’s Refusal to Pay its Shares of the Advance on Costs, 29(3) ASA Bull., p. 551.

[4]             2016 SIAC Arbitration Rules, Rule 27(g).

[5]             2020 LCIA Arbitration Rules, Articles 24.6 and 24.7 (emphasis added).

[6]             2017 SCC Arbitration Rules, Article 51(5) (emphases added).

[7]             See, e.g., N. Darwazeh and S. Greenberg, No One’s Credit Is As Good As Cash: Awards and Orders for the Payment of the ICC Advance on Costs, 31(5) J. of Intl. Arb., p. 559.

[8]             N. Darwazeh and S. Greenberg, No One’s Credit Is As Good As Cash: Awards and Orders for the Payment of the ICC Advance on Costs, 31(5) J. of Intl. Arb., p. 560.

[9]             Y. Derains and E. Schwartz, A Guide to the ICC Rules of Arbitration (2nd ed, 2005), p. 345.

[10]            2021 ICC Arbitration Rules, Article 37(2) (emphasis added); See, e.g., Y. Derains and E. Schwartz, A Guide to the ICC Rules of Arbitration (2nd ed, 2005), p. 347.

[11]            N. Darwazeh and S. Greenberg, No One’s Credit Is As Good As Cash: Awards and Orders for the Payment of the ICC Advance on Costs, 31(5) J. of Intl. Arb., p. 558.

[12]            Ibid.

[13]            See N. Darwazeh and S. Greenberg, No One’s Credit Is As Good As Cash: Awards and Orders for the Payment of the ICC Advance on Costs, 31(5) J. of Intl. Arb., p. 558.

[14]            Ibid.

[15]            X (Cyprus) v. Y (Luxembourg), Z (Luxembourg), Award, ICC Case No. 17050/GZ, 12 November 2010, 29(3) ASA Bull. 634, para. 35.

[16]            N. Darwazeh and S. Greenberg, No One’s Credit Is As Good As Cash: Awards and Orders for the Payment of the ICC Advance on Costs, 31(5) J. of Intl. Arb., p. 561; see also C. Sim, “Chapter 14: Advance on Costs under the SIAC Rules” in P. de Oliveira and S. Hourani (eds), Access to Justice in Arbitration (2020), p. 302.

[17]            See, e.g., 2021 Swiss Arbitration Rules, Articles 40 and 41, 2021 VIAC Arbitration Rules, Article 42; UNCITRAL Arbitration Rules, Article 42; see also F. Peter and U. Weber-Stecher, The Myth of Partial Awards on Advances on Costs in International Commercial Arbitration in Switzerland under the Swiss Rules, 29(3) ASA Bull., p. 548.

[18]            G. Born, International Commercial Arbitration (3rd ed, 2021), p. 2400 (citing Partial Award in Ad Hoc Case of 2008, XXXIV Y.B. Comm. Arb. 22 (2009)) (emphasis added); see also T. Rohaner and M. Lazopoulos, Respondent’s Refusal to Pay its Shares of the Advance on Costs, 29(3) ASA Bull., p. 555.

[19]            G. Born, International Commercial Arbitration (3rd ed, 2021), p. 2400.

[20]            T. Rohaner and M. Lazopoulos, Respondent’s Refusal to Pay its Shares of the Advance on Costs, 29(3) ASA Bull., p. 559.

[21]            Ibid.

[22]            Ibid.

[23]            T. Rohaner and M. Lazopoulos, Respondent’s Refusal to Pay its Shares of the Advance on Costs, 29(3) ASA Bull., p. 560.

[24]            Ibid.

[25]            See G. Born, “Chapter 17: Provisional Relief in International Arbitration” in International Commercial Arbitration (3ed, 2021), p. 3270

[26]            N. Darwazeh and S. Greenberg, No One’s Credit Is As Good As Cash: Awards and Orders for the Payment of the ICC Advance on Costs, 31(5) J. of Intl. Arb., p. 564.

[27]            Ibid.

Reference Article: https://www.international-arbitration-attorney.com/partial-awards-on-unpaid-costs-in-international-arbitration/

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