Tuesday, June 14, 2022

The Advance on Costs in Arbitration – Issues to Consider

The payment of advances on costs in arbitration aims to ensure that an arbitral institution has sufficient funds  to  cover  the  payment  of  arbitrators’  fees  and  expenses,  as  well  as  costs  incurred  in  the administration of arbitral proceedings.  The advances on costs paid to arbitral institutions do not include party costs, such as legal fees and expert fees.  Each of the major arbitral institutions requires that parties furnish some form of advance on costs before an arbitration can proceed. 

Whilst payment of the advances on costs is often perceived as one of the more perfunctory steps in an arbitration, in practice it can give rise to strategic considerations, and can have the effect of bringing an arbitration to a standstill. 

Certainly in Oman and other countries in the Middle East, respondents often treat the payment of the advances on costs as the claimant’s financial burden to discharge if the claimant wishes to obtain a final award.  As such, it is not unusual to encounter a respondent who is unwilling to pay its share of the advances on costs.

The option of simply waiting for the defaulting party to pay its share of the advances on costs should be approached with caution.  The arbitration will not proceed where the advances on costs remains unpaid.  Aside from causing delays to the timetable and frustrating busy arbitrators, the Court will eventually dismiss the reference without prejudice to either party’s right to bring fresh proceedings concerning the same claims at a later stage.  Whilst this may sound superficially appealing to some respondents, thought should be given to the consequences of having a reference dismissed without any conclusion.  Where disputes really do need to be fully and finally resolved (such as where the employer is withholding certificates and/or performance security after completion), this uncertainty may not be a satisfactory outcome for either party.

The  parties’  obligations  to  make  payment  of  the  advances  on  costs  are  an  extension  of  the  parties’ obligations in the arbitration agreement.  Accordingly, a refusal by either party to pay the advances on costs will constitute a breach of contract.  The usual remedies for breach of contract are available against a party failing to pay its portion of the advances on costs.

However, the Court or tribunal will not levy any sanction against a party for failing to pay its portion of the advances on costs.  The Court is, at that stage, concerned only with securing payment of its own costs and the costs of the tribunal.  Usually, the Court will ask the compliant party whether it wishes to pay in substitution for the defaulting party.  A party that elects to pay in substitution has the option of seeking reimbursement. 

Unlike in litigation, where public resources are finite and there is less tolerance for non-compliance, institutional Courts and tribunals often demonstrate more patience to parties who fail to satisfy their obligations to pay the advances on costs.

It is not uncommon in the Middle East to encounter a party who refuses to pay its portion of the advances on costs, at times receiving reminders from the Court or tribunal for several months to make payment, given  multiple  warnings  before  the  tribunal  is  finally  instructed  to  suspend  work.    Alternatively,  a tribunal in Oman may allow the arbitration to proceed, and deal with payment of tribunal costs in its final award.  It may therefore fall to the parties, rather than to the Court or tribunal, to be proactive in ensuring the expeditious resolution of disagreements about payment of the advances on costs, where this is achievable.

Parties arbitrating in the Middle East should be prepared for non-paying respondents, and should be aware of the important strategic considerations of the options available under the relevant institutional rules – whether paying by substitution, splitting the advances on costs, or raising the issue in a related security for costs application.

In short, issues on the advances of costs in an arbitration should be given careful consideration and the appropriate legal advice obtained at an early stage to resolve any issues that might arise. 

Read More...