BDMS Ltd v Rafael Advanced Defence Systems

A party’s failure to pay its share of an arbitration advance may breach the arbitration agreement, but it is not necessarily repudiatory. The question is whether the refusal clearly evinces an intention not to perform an essential obligation or whether the breach goes to the root of the agreement. Where the applicable rules provide machinery to preserve the arbitration, including substitution of payment, security, objection to withdrawal and later reintroduction of the claim, non-payment may not deprive the other party of the benefit of arbitration. An arbitration agreement is not “inoperative” merely because a particular reference is withdrawn. A stay under section 9 of the Arbitration Act 1996 may be refused if the agreement has become finally and irrevocably inoperative, even if that position arose after proceedings began.

The claimant brought High Court proceedings against the defendant concerning success fees under a consultancy agreement containing an ICC arbitration clause. In the arbitration, the claimant paid its share of the advance on costs. The defendant refused to pay its share unless security for costs was provided. The ICC subsequently treated the claim as withdrawn under Article 30(4) of the ICC Rules.

The claimant contended that the defendant’s refusal was a repudiatory breach which rendered the arbitration agreement inoperative under section 9(4) of the Arbitration Act 1996. The defendant applied for a mandatory stay. The central questions were whether non-payment constituted a breach, whether it was repudiatory, whether the arbitration agreement was inoperative, and when that question should be assessed.

1. Stay granted. The claimant had not established that the arbitration agreement was null and void, inoperative or incapable of being performed. The defendant was therefore entitled to a stay under section 9 of the Arbitration Act 1996.
2. By agreeing that the arbitration would take place under the ICC Rules, the parties contractually undertook to comply with mandatory obligations imposed by those Rules. Article 30(3), requiring the advance on costs to be payable in equal shares, therefore created a contractual obligation. The defendant’s failure to pay its share was a breach of the arbitration agreement.
3. The applicable test for repudiation was whether the defendant had clearly and unequivocally evinced an intention not to perform its obligations in an essential respect, or had committed a breach going to the root of the contract. The defendant’s refusal was clear and continuing, and withdrawal of the claim eventually became likely. However, the breach was not repudiatory on the facts.
4. The defendant continued actively participating in the arbitration. Its refusal concerned payment of the advance and was conditional on security for costs. The Rules supplied mechanisms by which the claimant could preserve the arbitration, including posting a bank guarantee, seeking an interim award or interim measure, objecting to withdrawal before the ICC Court, and reintroducing the claim later. The claimant was therefore not deprived of substantially the whole benefit of the arbitration agreement.
5. The court was prepared to assume, without deciding, that an arbitration agreement could be inoperative even though it had not ceased to have legal effect. The same considerations meant that the agreement had not become unworkable or inoperative.
6. The commencement of proceedings was not an inflexible date for assessing whether an arbitration agreement was inoperative. If it became finally and irrevocably inoperative, the court could give effect to that conclusion on the evidence available at the hearing. That issue did not arise on the facts.

The court did not determine the defendant’s other proposed jurisdictional objections. It observed that there was real doubt whether the claim form had been valid when served and noted the requirement of promptness under CPR 7.6(3)(c).