The English High Court recently dismissed a suit for “£33.3 quadrillion” in Sangamneheri v The Chartered Institute of Arbitrators & Ors [2022] EWHC 886 (Comm) (12 April 2022), at the same time handing down a two year extended civil restraint order (ECRO) [1] against the claimant, Mr Sangamneheri, for persistently vexatious litigation. Patricia Robertson QC, sitting as a deputy High Court Judge, also referred the matter to the Attorney General for England and Wales for consideration of an indefinite civil proceedings order against Mr Sangamneheri, restraining him from commencing proceedings in the jurisdiction without the leave of the Court.
Mr Sangamneheri’s claims, which involved “fantastical sums” of money, and an amount of gold “more than the quantify of gold ever mined” stem from an aborted international arbitration regarding transfer of lots of land for the exchange of fine gold. Subsequently, Mr Sangamneheri blamed the failure of that dispute to be resolved on the original arbitrator in that arbitration, the appointing body, and in some proceedings, included various lawyers and law firms as defendants.
The original dispute concerned an agreement for the transfer land in India to the counterparty in exchange for payment in instalments in the form of gold bullion. A dispute arose under this agreement, which contained an arbitration agreement providing for an arbitration seated in Dubai under the rules of the Chartered Institute of Arbitrators (CIArb). Mr Sangamneheri duly commenced arbitration proceedings, and an arbitrator was appointed on Terms of Appointment, signed in acceptance by Mr Sangamneheri. However, the counterparty to the exchange agreement never signed the Terms of Appointment or took part in the arbitration at all. This meant that in practice, the advance on costs fell to be covered in full by Mr Sangamneheri, which he refused to pay. The arbitration therefore did not progress beyond the initial stages.
The manner in which Mr Sangamneheri chose to deal with his perceived grievances following the original arbitration was duly criticised by the judges in the High Court proceedings. This does highlight, however, the practical difficulty faced by a claimant in an arbitrable dispute where the other party to the arbitration agreement refuses to participate or cover their share of the applicable costs. [2]
A related issue that may also arise in relation to arbitrators’ fees is where a party disputes the amount of the fee. Should such an arbitration proceed it may at some point lead to a challenge to an award based on actual or apprehended bias.
In particular, a respondent may be disinclined to pay its share of an advance in a lower value dispute.
Where this issue arises the options available to a party wishing to pursue its arbitration claim will depend on the law of the seat, the institutional rules governing the arbitration, and the wording of the arbitration agreement.
Position in England and Wales – repudiatory breach of contract?
In relation to the ICC rules, there have been differing opinions across the world on whether failure by one party to make an advance on costs is a breach of a contractual obligation giving rise to a right on the part of the claimant to pursue its claim through a state’s courts.
In England, an example of such circumstances arose in BDMS Ltd v Rafael Advanced Defence Systems (2014) EWHC 451 (Comm). In this case, the contract between BDMS, an English company, and Rafael, an Israeli company, contained an arbitration agreement providing for a London seated arbitration under the ICC’s 1998 Rules. The claimant commenced arbitration proceedings and after the appointment of the sole arbitrator, the ICC wrote to the parties fixing the advance on costs, asking the defendant to pay its share. However, the defendant sought security for costs from the claimant due to concerns that any adverse costs order would not be met, and refused to pay its share until such security had been put in place.
The claimant purported to accept what it treated as a repudiatory breach of the arbitration agreement by the defendant, and stated that it would now pursue its claim in the English High Court. The claimant relied on article 30(4) of the ICC’s 1998 Rules to contend that the arbitration proceedings were now withdrawn. The defendant applied to the court seeking an order that the court had no jurisdiction to hear the claimant’s claim, and that the claim be dismissed, set aside or permanently stayed under section 9 of the Arbitration Act 1996. Hamblen J, as he then was, granted the stay, deciding that the arbitration agreement was not rendered inoperative. Though Hamblen J concluded that the failure to pay the advance did amount to a breach of the arbitration agreement, the breach was not a repudiatory one.
Relevant rules of arbitration institution
Under the ICC’s Rules (Article 37(6) of the 2021 Rules is the current equivalent of Article 30(4) of the 1998 Rules applicable in BDMS Ltd v Rafael Advanced Defence Systems), the ICC’s Secretary General may direct the tribunal to suspend its work, and set a deadline after which the relevant claims would be considered as withdrawn.
Other rules have differently worded provisions. For example, Article 24.4 of the LCIA Rules 2020 provides that “The LCIA will make reasonable attempts to contact the parties in order to arrange for the transfer of the excess amount, using the contact details provided to the LCIA during the proceedings”.
Article 24.6 of the same rules provides “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)”.
As can be seen, in England and Wales options for a party where the other party (usually the respondent) refuses to pay its share of an advance can be limited. Given it may not be possible to use a respondent’s non-payment as grounds to pursue the claim in the High Court, the only option available for the claimant may be to cover the respondent’s share and hope to recover this at some point in the future. Such recovery is spelt out under some, but not all institution’s rules. For example, under Articles 24.6 and 24.7 of the LCIA’s rules, the party covering the other side’s share of the advance may apply for an order to recover that amount as a debt “immediately due and payable to that party by the defaulting party, together with any interest”. A party might not find such recourse to be satisfactory, given it will still be temporarily out of pocket in relation to this and any future advances.
Other jurisdictions
In other jurisdictions, a claimant may more easily take action through the courts when faced with this dilemma.
The French Cour de Cassation decision, Societé TRH Graphic v Offset Aubin (Cour de Cassation, 19 November 1991, 1992 REV.ARB 462), stands for the proposition that a claimant may commence court proceedings in France where a respondent refuses to pay the advance in an arbitration.
In the US the position is usually governed by Sections 3 and 4 of the Federal Arbitration Act, and depends on how the arbitrators react to the non-payment of fees under the relevant institutional rules.
In Sink v. Aden Enterprises, Inc. (9th Cir. 2003) 352 F.3d 1197, the United States Court of Appeals affirmed a district court’s order denying a defendant’s motion to compel arbitration and stay court proceedings after the defendant had failed to pay the costs of an earlier arbitration. [3] In Cinel v. Christopher (2012) 203 Cal.App.4th 759 a trial court’s order refusing to confirm as an “award” an arbitrator’s termination of the arbitration for non-payment of fees of several of the defendants was affirmed. In so ruling, the Californian Court of Appeal stated that the right to arbitrate is a contractual right, and the defendants had waived that right.
On the other hand, in Lifescan Inc. v. Premier Diabetic Services (9th Cir 2004), the 9th Circuit of the United States Court of Appeals concluded that a respondent’s non-payment of arbitration fees did not necessarily constitute failure, neglect, or refusal to arbitrate. [4] This was because the arbitrators exercised their discretion (allowed under the American Arbitration Association rules that the parties had agreed to) by allowing the arbitration to proceed on the condition that Lifescan advance the remaining fees.
Interestingly, in Northern Ireland, the High Court of Justice held in Trunk Flooring Ltd v HSBC Asset Finance (UK) Ltd and Costa Rica SRL [2015] NIQB 23 that the arbitration agreement had become inoperative through abandonment by both parties where they both refused to pay the advance. A previous stay on court proceedings in the litigation brought by the claimant was therefore lifted.
Conclusion
Cases such as Sangamneheri highlight once again the importance of giving proper thought to the wording of an arbitration clause when negotiating any agreement. Claimants in jurisdictions such as the US and England may find themselves in legal limbo should a defendant refuse to pay fees and the claimant be unwilling to cover those.
Though still not entirely satisfactory, it may be most cost effective for the claimant to cover the share of the advance in question and then apply for a partial award for re-imbursement as soon as possible.
[1] Known by various other names in jurisdictions across the world. For example, vexatious proceedings orders (New South Wales), and prefiling orders (New York).
[2] A related issue that may also arise in relation to arbitrators’ fees is where a party disputes the amount of the fee. Should such an arbitration proceed it may at some point lead to a challenge to an award based on actual or apprehended bias.
[3] Citing Section 3 of the Federal Arbitration Act, which provides that upon application proceedings shall be stayed where such proceedings are brought upon an issue referable to arbitration until such arbitration has been had, unless the applicant for the stay is not in default in proceeding with such arbitration (emphasis added).
[4] Section 4 of the same act permits US courts to compel arbitration if a party “fail[s], neglect[s], or refuse[s] to perform” a valid and binding arbitration agreement