Case Spotlight: Consequences of Non-Payment of Arbitration Deposit

Case Spotlight: Consequences of Non-Payment of Arbitration Deposit 

In arbitration the common practice is for parties to share arbitration costs (eg: arbitrator’s fees, arbitration institute’s administrative fees) equally, until there is an award on liability. For example, in institutionalised arbitrations, the rules will provide as a default that parties pay the deposits of the arbitrator’s fees and administrative fees in equal proportions.

What happens if one party refuses to pay its share of the costs? Are there any repercussions? 

The Court of Appeal decision of JSB v ACSB [2023] MLJU 2406 explored these issues. 

Brief Facts 

• • The Appellant, JSB, commenced an arbitration administered by the Asian International Arbitration Centre (AIAC) against the Respondent, ACSB. 
  • As per usual practice, the Director of AIAC requested both parties to pay the deposits to commence arbitration. 
  • Both parties paid the provisional advance deposit of RM77,268.15 each. Later, when there was a request for further deposits, only the Appellant made payment. The Respondent refused to pay the further deposit. 
  • As a result, the arbitrator terminated the arbitration under Rule 14(7) of the AIAC Arbitration Rules 2018. 
  • The Appellant then pursued its claims against the Respondent through litigation at the High Court. 
  • In court, the Respondent filed 2 applications – (i) an application to strike out the Appellant’s suit; and (ii) an application to stay the proceedings pending arbitration. 
• The High Court found that the arbitration agreement was still operative and the Appellant could have paid the Respondent’s share of the deposit to proceed with the arbitration, and recover the same from the Respondent if it succeeds in the arbitration. As such, the High Court allowed the Respondent’s stay application.

At the Court of Appeal 

• The Court of Appeal was tasked to determine mainly 2 issues:
  • whether the Respondent is considered to have taken “any other steps in the proceedings” by virtue of section 10 of the Arbitration Act 2005 when it applied to strike out the Appellant’s claims; and
• whetherthe arbitration agreement became inoperative when the Respondent refused to pay its portion of the deposit. 

First Issue – Is a striking out application a “step in the proceedings”?

• Although the first issue does not form the crux of this article, it will be briefly discussed here.
• Section 10(1) of the Arbitration Act provides that if a party applies to stay the court proceedings pending arbitration “before taking any other steps in the proceedings”, the Court shall stay those proceedings unless it finds that the arbitration agreement is “null and void, inoperative or incapable of being performed”.  
• The Court of Appeal was of the view that filing a striking out application amounts to “taking any other steps in the proceedings” under section 10(1) of the Arbitration Act. 
• When one applies to strike out a suit, they are inviting the Court to consider that application. Therefore, that party is submitting to the jurisdiction of the Court. This is regardless of whether the Court allows or dismisses the striking out application.
• A party should not be allowed to submit to the Court’s jurisdiction when filing the striking out application, and then be allowed to also stay the Court proceedings pending arbitration.   

Second Issue – Does non-payment of the deposit renders the arbitration agreement inoperative?

• The Court of Appeal held that the Respondent cannot now insist to have the dispute resolved through arbitration, when it was not willing to abide by the AIAC Arbitration Rules in paying its share of the deposit. 
• If the other party who has been paying its share of the arbitration fees is compelled to pay for the non-paying party’s share of the fees to keep the arbitration alive, this may be seen as rewarding the behaviour of the non-paying party and punishing the paying party. 
• The Court of Appeal followed another earlier Court of Appeal’s decision of Kebabangan Petroleum Operating Co Sdn Bhd v Mikuni (M) Sdn Bhd & Ors [2021] 1 MLJ 693 which also held that the first respondent’s action in refusing to pay the arbitration fees had rendered the arbitration agreement inoperative. It indicates that the party is disinterested and abandoning its intention to proceed with arbitration. 
• The Court of Appeal also looked into the wordings of Rule 14(1) and (4) of the AIAC Arbitration Rules 2018 which made it mandatory for parties to pay their share of the deposits for the arbitrator’s fees and AIAC administrative costs. It is not an obligation for a party to pay the other party’s share of the deposit, but it is merely an option presented for that party to do so. As the Court of Appeal puts it, “[s]uch an opportunity to exercise an option does not convert the option into an obligation”. 
• Given the Respondent’s failure to pay its share of the deposit, the arbitrator was within his rights to terminate the arbitration and parties are then free to pursue litigation in Court. 

Key Takeaways

A respondent in arbitration may sometimes adopt a strategy of not contributing its share of the arbitration deposits. This pressures the claimant (the party commencing the arbitration) to bear the respondent’s share of the deposits, which are rarely insignificant. If the claimant refuses to bear the respondent’s share, the arbitration could grind to a halt.

As highlighted by the recent Court of Appeal rulings, these practices have consequences. A party that refuses to pay its share of the arbitration deposits might be seen as relinquishing its intent to arbitrate. That party can then be sued in the civil courts. In this scenario, that party would no longer be entitled to assert that the dispute should be settled through arbitration – in line with the principle that no party should benefit from their own wrongdoing.

***
This article was written by Sean Ferdinand Ng (Senior Associate) from Donovan & Ho’s dispute resolution practice. 

Donovan & Ho is a law firm in Malaysia. Our dispute resolution provides advice and legal representation in the civil and industrial courts. We also represent clients in both domestic and international arbitration, as well as other forms of alternative dispute resolution. Our experienced lawyers are also able to assist in commercial and civil disputes (such as debt recovery, shareholders’ or directors’ disputes, breach of contract and claims for injunctive relief), constructive disputes (arbitration and/or adjudication proceedings, disputes relating to delays, liquidated damages, defects and rectification work) and employment disputes (unfair dismissal claims, judicial review proceedings, and employment-related civil claims). Have a question? Please contact us.