The decision of one party or group of parties to an international arbitration, more often than not the Respondent(s), to decline to advance their share of the deposits required for the fees and expenses of the arbitrators, has become so common that it may almost be said to be a standard feature of international arbitrations. And this is not necessarily or primarily a function of impecuniousness of the non-paying party. It is more often rather a business decision. This is less often the case of course when the Respondents assert counterclaims against the Claimants, or cross-claims against one another, for significant monetary amounts, and under the applicable arbitration rules would be deemed to have withdrawn such claims, or by order would be prevented from prosecuting them, if the proportionate share of deposits were not paid. Such non-payment decisions introduce significant inefficiencies, particularly when Tribunals are required to or consider it prudent to suspend proceedings until full payment of requested deposits has been made. Case managers in provider organizations, not to mention depository/payment agents designated solely for that purpose in ad hoc arbitrations, face the challenging task of explaining to the parties how the rules operate, what their obligations are and what recourse they may have, while not crossing a line to furnish legal advice to either the paying party or the non-paying party. These conditions motivated your Commentator to spend a recent afternoon considering what a Guidance Note to parties on this subject might contain.
Two caveats before we begin: First, this Post is not endorsed by or encouraged by any provider organization or any group seeking to influence a provider organization. It is not written in parallel to any known endeavor of any provider organization to promulgate any such Note. And it is not based on any interviewing of provider organization personnel to determine if the perceptions reflected in this draft are on the mark. Second, this Post is written with reference to the practices of those provider organizations that strive to withhold from the arbitral tribunals the identity of the paying and non-paying parties in case payments have not been made equally. The ICC obviously is the exception to this, as its publication of Financial Tables to the Tribunal provides full transparency at all stages as to the respective contributions of the parties.
The imagined Guidance Note now follows:
“Dear Parties: This Guidance Note concerns an important element of arbitration under the XYZ Rules: the parties’ duty to submit deposits to the XYZ that will be used to pay the fees and expenses of the Arbitral Tribunal. The Rules provide that it is the joint responsibility of the Claimant (or Claimants as a group) and the Respondent (or Respondents as a group) to pay in equal shares the deposits requested by the XYZ — unless of course the agreement to arbitrate provides for a different allocation. When the Claimant(s) and Respondent(s) each timely comply with these requests — which are based on the Tribunal’s estimates of fees and expenses for the entire arbitration or one or more phases of it, as reviewed and approved by the XYZ — this goes far to secure the efficient progress of the arbitration. The refusal of a party to meet its obligation to pay its share of the deposits is strongly discouraged. However, this occurs with considerable frequency, and so the consequences of such a refusal should be understood. These consequences are stated concisely in Rule __ , but experience indicates that the Rule leaves room for misunderstanding, which this Guidance Notes seeks to remedy.”
“Once the case manager has determined that a party will not pay its share of a requested deposit, the case manager will notify the other party of this circumstance and invite that party to pay the non-paying party’s share. This is an invitation, not a direction, but it is important that the consequences of a party’s refusal to bear the opposing party’s share of deposits, when invited to do so, should be understood. First, if the non-paying party is the Respondent, as is most often the case, any counterclaim (or cross-claim) asserted by the Respondent [is to be deemed withdrawn] [is subject to being dismissed on application by the Tribunal] by reason of the non-payment. This is so whether or not the Claimant elects to pay the Respondent’s share of the requested deposits.”
“To effectuate the counterclaim’s withdrawal, under a rule that provides for such treatment, it will be necessary for the case manager to notify the Tribunal of the non-payment by Respondent whether or not Claimant elects to pay Respondent’s share.”
“A Respondent’s non-payment does not entail any other limitation upon the ability of the Respondent to defend and otherwise participate in the arbitration. Rather, if the Claimant declines the invitation to pay the Respondent’s share of requested deposits as well as its own share, it is the Claimant who bears procedural risk: specifically, that the Tribunal, notified by the case manager of an unresolved non-payment situation, may suspend the case and, if the non-payment situation is not resolved after a stated period of time after the suspension, may terminate the case. The consequences of such a termination may depend upon the arbitration law at the seat of the arbitration; however, there is no provision in the Rules that would render such termination to be equivalent to a dismissal with prejudice. Subject to any mandatory provision of law to the contrary at the seat of the arbitration, the XYZ regards such termination as having no consequences in regard to the merits. We do however consider that the Tribunal has completed its mandate upon such a termination, and that if the same claim were re-asserted in another arbitration, a new process of selecting a Tribunal would be undertaken.”
“Further, a Claimant that is considering whether to accept the termination of the case may wish to consider whether under the applicable law one or more claims may be time-barred if and when they are raised in a new arbitration. The Rules take no position on such time limitation questions.”
“In our experience a Claimant placed in the position of having to bear the Respondent’s share of deposits in order for the case to proceed, and then to have the case proceed with no adverse procedural consequence of the non-payment for the Respondent, often finds this situation to be inequitable. The Rules do provide discretion to the Tribunal to allocate costs including the fees and expenses of the Tribunal in the Final Award, and it has been our experience that Tribunals often rectify the disproportionate bearing of Tribunal compensation by one party in the determination of costs in the Final Award.”
“The XYZ cannot properly discuss with a party its legal options in relation to the other party’s refusal to pay in the context of a specific case, as to do so would arguably entail providing legal advice to the party and is not consistent with the XYZ’s position as a neutral administrator. We also can offer no opinion on whether a Tribunal constituted under and conducting an arbitration governed our Rules would be affected, in any of its decisions, by an aggrieved party making submissions that draw attention to the non-payment of the opposing party. The XYZ takes no position on what a Tribunal should do in such circumstances and would not offer advice to or seek to influence a Tribunal’s discretion.”
“Our comments to this point have focused on non-payment by a Respondent. Non-payment by a Claimant occurs less often. But the XYZ will follow the practice of inviting the Respondent to pay the Claimant’s share of requested deposits once it has been determined that Claimant will not pay. This invitation has different implications however as compared to when the invitation is extended to the Claimant. If the Respondent has made one or more Counterclaims and wishes to proceed thereon, Respondent faces the same conundrum more usually faced by a Claimant: the potential for suspension or termination of the case if the substitute payment of Claimant’s share is not made. If Respondent on the other hand is strictly in the posture of defending against a Claimant’s claim, the Respondent will often have no reason to make the substitute payment for Claimant because the non-payment redounds to Respondent’s benefit: Claimant’s claim, as the Rules provide, shall be deemed withdrawn or is subject to dismissal without prejudice upon application to the Tribunal.”
“An important subject related to the foregoing rules and practices concerns communications among the parties, the XYZ, and the Tribunal concerning deposits for arbitrator compensation. It is the practice of the XYZ to avoid to the maximum possible extent notifying the Tribunal as to which of the parties has failed to make a required payment. Although the identity of the non-payor may be evident from a party’s communications to the Tribunal or from other circumstances, XYZ as a neutral administrator seeks to avoid the risk of pre-disposing a Tribunal against a non-payor by avoiding whenever possible to identify the non-payor to the Tribunal. Thus when a Tribunal is invited to consider whether a case should be suspended and eventually terminated, the Tribunal will be notified of the fact of non-payment but not the identity of the non-payor, unless identifying the non-payor is in the circumstances important to the Tribunal’s exercise of discretion as to suspension and/or termination.”
“This brings us to the important and sensitive subject of the parties’ communications to the Tribunal about a party’s failure to pay its share. Underlying the XYZ practice of communicating the identity of the non-payor to the Tribunal only rarely, and in the circumstance of perceived necessity, is our expectation that arbitrators will maintain the same degree of impartiality without regard to whether a party has or has not paid its share. This implies that the parties also should refrain from communications to the Tribunal that identify an opponent as a non-payor, where the objective is mainly or entirely to cast that party in a negative light. This may be seen by a Tribunal as improper argument of the merits, as our Tribunals understand that they are bound to decide cases based upon the facts and the law, and not upon the basis of any subjective judgments about the worthiness of a party based upon its payment or non-payment of advances for arbitrator compensation.”
“Further, whereas the Rules are rather specific on what procedural steps a Tribunal may take in response to a non-payment, a party’s argument that the non-payor should be denied some procedural relief it has requested based in part on its failure to pay, or that the requested relief should only be granted on condition that the non-payment be rectified, invites the Tribunal to take measures the Rules do not authorize. This does not exclude the possibility, however, that a party may properly seek certain relief resulting from a non-payment and may necessarily have to identify the non-payor.”
It is our hope that parties will be mindful of this Guidance Note and that, by acting in conformity with it, fewer delays will be encountered based on temporary suspensions of proceedings. In a regrettably high percentage of cases, a party that is willing in case of necessity to bear the full cost of the proceedings, subject to re-allocation later on, only fully appreciates the situation of necessity after suffering a suspension, whereupon the rescheduling of hearings and pre-hearing deadlines may bring about delays that could have been avoided.”