It is no secret that arbitration can be expensive. Clearly, many parties do not take this into account when agreeing to an arbitration clause in a contract. But can the fact that the proceedings turn out to be too expensive for one of the parties be a ground for walking away from the agreed method of dispute resolution?
When it comes to respondents who are not paying their portion of the advance on costs, under most rules the usual solution is to allow the claimant (that is, the party interested in moving the case forward) to pay the respondent’s share of the advance on costs. Whether or not the refusal to pay the respondent’s share renders the arbitration agreement unworkable and allows the claimant to proceed with litigation instead of arbitration is decided differently in different jurisdictions. For example, in France (Societé TRH Graphic v Offset Aubin) or Canada (Resin Systems Inc v Industrial Service & Machine Inc), the respondent’s refusal to pay may entitle the claimant to proceed with litigation instead of arbitration. In effect, the claimant has an option to decide to litigate the matter instead of arbitrating it. At the same time, the English courts are more reluctant to allow litigation in such circumstances (BDMS Ltd v Rafael Advanced Defence Systems), so the claimant would have to cover the respondent’s share of the advance on costs.
The situation becomes more complex when this is a prospective claimant who alleges not to have sufficient money to pursue its claim. Again, the comparative analysis shows that positions differ from jurisdiction to jurisdiction. For example, in England the prospective claimant does not seem to be able to litigate, instead of arbitrating, on the basis of his or her impecuniosity (Janos Paczy v Haenlder & Natermann GmbH [1981] Lloyd’s Rep 302 (CA)). The Swiss Federal Tribunal has taken a similar view (Decision of 11 June 2014, 4A_178/2014). However, the German Federal Court of Justice held that the impecunious party can validly commence state court litigation, as the lack of money to pursue the claim may render an arbitration clause incapable of being performed (Decision of 14 September 2000 III ZR 33/00). Similarly, the Ninth Circuit in the USA (Tillman v Tillman) found that the impecunious party could commence state court litigation despite the arbitration clause in the underlying contract.
Two recent Russian cases (cases No. А56-50929/2015 and No. А56-13914/2016) also dealt with the question of whether the fact that a potential claimant lacks money to pay for arbitration could render the arbitration agreement inoperable.
In both cases, Russian claimants commenced litigation despite the arbitration agreements in the relevant underlying contracts (in one case, the International Commercial Arbitration Court (ICAC) at the Russian Chamber of Commerce and Industry; in the other, the Stockholm Chamber of Commerce (SCC)). To justify this, each of the claimants alleged that the arbitration agreement was inoperable because they lacked money to pay the registration and arbitration fees. On this basis, they alleged that they should be allowed to litigate the matters before the Russian commercial court (Arbtirazh Court of St. Petersburg), which would have had jurisdiction over the matters but for the arbitration clauses. At the time of writing, both cases have been dismissed by the cassation courts in St. Petersburg (and also by the judge of the Russian Supreme Court in case No. А56-50929/2015), but further appeals are pending in the Russian Supreme Court. The courts considered that the lack of funds could not be considered as grounds for the inoperability of an arbitration clause, because this was the normal commercial risk of a commercial company. The courts also noted (consistent with the previous practice of Russian courts) that the claimants should have been aware of the potential costs implications when they agreed to the arbitration clauses.
The arguments of (allegedly) impecunious claimants are usually framed around their right to access court. From this viewpoint, such cases are entirely different from cases relating to non-paying respondents. While the former may effectively call for a public policy decision on how to ensure the availability of the fundamental rights of a party wishing to pursue the claim, the latter category requires decisions on the effect of the breach by one of the parties of its obligations under the arbitration agreement. Consequently, the decisions on the former category of cases require careful balancing between two legitimate interests: the claimant’s right to access to justice and the respondent’s right to insist on pacta sunt servanda (“agreements must be kept”).
The Russian cases differ from the German and Swiss cases, as well as from Paczy and Tillman, in one very important aspect: in the Russian cases, the prospective claimants were commercial companies rather than individuals. Arguably, individuals should enjoy greater protection when it comes to expensive arbitration. This is because individuals can rarely be held to have accepted the commercial risks and costs of potential future arbitration, and rarely can they even negotiate the dispute resolution mechanism. Individuals usually also have significantly fewer ways of attracting external funding for their cases.
However, the situations where commercial companies should be allowed to disregard their arbitration agreement should be very exceptional. To start with, it should be true that commercial companies are deemed to have calculated and accepted the risks relating to their transactions, including the potential costs involved in pursuing possible claims. If they have not done so, this omission should not be protected.
Furthermore, there are a number of options available to commercial entities to fund potential claims in arbitration, which would most likely be unavailable to natural persons. First, in certain instances, third party funding can be available to the claimant. Second, sometimes the claimant may be able to agree on full contingency fees with lawyers. Third, it is possible to obtain funds from shareholders or other similar sources. For example, in case No. А56-50929/2015, the case had been brought by the bankruptcy administrator of the claimant. Under Russian law, the bankruptcy manager can, in principle, pay the filing fees (and by analogy the arbitration fees) out of his or her own funds and then get reimbursed by the bankruptcy estate before all of the creditors. Finally, the claim can be sold to a third party able to pursue arbitration. Obviously, to avail itself of any of the above options, the claimant has to have a claim worth pursuing (that is, with a solid chance of success and recovery). Arguably, in most cases it is possible to find ways to fund worthy claims with high chances of recovery. Conversely, it is wasteful to use resources of the justice system on hopeless claims.
Consequently, commercial companies should be not allowed to walk away easily, if at all, from their obligation to arbitrate matters. Whether to pursue a certain claim is a commercial decision that should be based on weighing a number of factors, including the likelihood of success and the costs involved. At the end of the day, it is certainly counterproductive to allow commercial parties to pursue their private rights with hopeless claims in a cheaper forum.
