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Partial award on advance deposits: what happens if there is a jurisdictional challenge?

Under major institutional rules, there is a clear obligation on the parties to pay advance deposits towards the costs of the arbitration in equal proportions. However, there are times when a wayward respondent, as a frustration tactic, refuses to pay its share of advance deposits. If the respondent fails to pay advance deposits, the arbitral institution, after sending various reminders to the respondent, will eventually request the claimant to pay the respondent’s share. If the claimant does not pay the respondent’s share, then the tribunal may suspend its work and the institution may suspend administration of the arbitration.

In most cases, to ensure that the arbitration goes ahead, the claimant agrees to pay the respondent’s share of advance deposits. In such a scenario, how can the claimant recover the advance deposits which it paid on behalf of the respondent?

Final or partial?

A claimant essentially has two options. They can wait until the end of the proceedings to recover such payment in the final award on costs that involves examination of the merits of the dispute and behaviour of the parties during arbitration proceedings.

Alternatively, some institutional rules expressly grant power to the tribunal to award reimbursement of advance deposits to the non-defaulting party by way of a partial award. These include Article 24(4) of the LCIA Arbitration Rules 2014, Rule 27(g) of the SIAC Rules 2016 and Article 51(5) of the SCC Rules 2017.

Unlike the final award on costs, a partial award on advance deposits is final in terms of deciding a respondent’s obligation to pay its share of advance deposits and a claimant need not wait until the end of the proceedings to enforce a partial award (although, enforcement of such partial award may remain pending until the final award on merits is rendered depending on the enforcement jurisdiction).

Such an approach is supported by the “contract theory” advanced by many practitioners, which states that the parties, by agreeing to arbitrate under the institutional rules, have a contractual obligation to comply with such rules that extends to payment of their share of the advance deposits. A failure to pay advance deposits would, therefore, be a breach of the party’s agreement to pay advances, which could be recovered by way of a partial award.

Jurisdictional challenge

But what factors should a tribunal consider when deciding whether to exercise its discretion to grant a partial award for the reimbursement of unpaid deposits? There is no guidance on this topic under the institutional rules and arbitration laws of most jurisdictions.

One such consideration which is quite often encountered in practice is the respondent objecting to payment of its share of advance deposits by claiming that it has raised a jurisdictional challenge against the claimant’s claim. Such an objection is based on the premise that, “if the respondent is disputing the arbitral tribunal’s jurisdiction, then why should it pay anything towards the costs of the arbitration?” (a logic which has some merit at the outset). However, is this a legitimate ground to resist payment of advance deposits? The answer ultimately depends on the type of jurisdictional challenge raised by the respondent.

It is arguable that if a respondent raises a jurisdiction challenge based on the validity or effectiveness of the underlying contract, then this should be no immediate basis to refuse payment of the unpaid deposits. This is because the doctrine of separability makes it clear that an attack on the underlying contract does not affect the validity of the arbitration agreement.

However, the situation is different when a challenge is made to the validity or legality of the arbitration agreement. In these situations, it is difficult to generalise how an arbitral tribunal should exercise its discretion to award unpaid advance deposits. It is equally difficult to generalise a tribunal’s exercise of discretion when a challenge to the legality of the underlying contract is based on lack of consent (if a party did not sign the contract, duress, fraud) or lack of capacity/authority to enter into contract, which are also established exceptions to the separability doctrine in some jurisdictions. This is because the respondent can effectively contend that it never consented to the arbitration agreement in the first place to be compelled to pay advance deposits as advocated by the “contractual approach” (as described above).

Last, in situations where the respondent alleges that the dispute is beyond the scope of the arbitration agreement, the arbitral tribunal may be more inclined to award unpaid advance deposits as a matter of practice. The tribunal can draw support from the doctrine of kompetenz-kompetenz, which permits the tribunal to decide whether a claim is within the scope of arbitration agreement. It can also draw support from the respondent, by agreeing to the arbitration agreement also consented to empower the tribunal to decide this issue.

While the tribunal should ordinarily award unpaid deposits by way of a partial award, unless the jurisdictional challenge relates to the validity of the arbitration agreement or the legality of the underlying contract based on lack of consent or lack of capacity, every case ultimately needs to be decided on its own facts. The tribunal must exercise its discretion judiciously. When it is clear that the respondent, by refusing to pay costs, is only trying to increase the claimant’s burden, the tribunal should grant the partial award on unpaid deposits. This approach finds further support in the possibility that, even if the tribunal ultimately decides the dispute against the claimant or finds that it does not have jurisdiction, the tribunal can allocate costs appropriately in the final award to ensure that there is no prejudice to the respondent if any payment is made under the partial award.

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