Consequences of Refusing to Pay Arbitration Deposits: Insights from the Case of JSB v ACSB

Introduction

Arbitration is widely recognised as the preferred method for resolving disputes, particularly in construction contracts. However, the associated costs – such as arbitrator fees and administrative expenses – can present significant challenges for the parties involved. Arbitration agreements, typically embedded in the dispute resolution clauses of contracts, require both parties to comply with the governing rules, including the timely payment of arbitration-related costs. But what occurs when one party refuses to fulfil its financial obligations, particularly with regard to the required arbitration deposit?

This article closely examines this issue through the lens of the recent case of JSB v ACSB,[1] which provides valuable insights into the legal and practical consequences of such non-compliance.

Brief Facts of JSB v ACSB

In JSB v ACSB, the appellant (plaintiff) and respondent (defendant) were involved in an arbitration proceeding under the Asian International Arbitration Centre (AIAC). When the Asian International Arbitration Centre (“AIAC”) gave notice to the parties requesting for a further deposit of the AIAC deposit (inclusive of the arbitrator’s fees and the administrative costs of the AIAC), the respondent, who also had a counterclaim, refused to pay its portion of the fees. In light of the respondent’s refusal to pay, the arbitrator proceeded to terminate the arbitration.

Following the arbitration’s termination, the appellant filed a claim in the High Court to resolve the dispute. The respondent objected, arguing that the arbitration agreement remained in effect and that the appellant should pay the respondent’s share of the deposit in order to continue the arbitration.

The appellant, however, countered that the respondent’s refusal to pay the AIAC’s deposit amounted to a breach of the arbitration agreement, and as such, the arbitration was effectively terminated. The appellant contended that it was now entitled to initiate court proceedings.

Of note, the appellant had filed a suit in court previously but withdrew it because of the respondent’s insistence on the arbitration agreement.

The Legal Context

Under the Arbitration Act 2005 (“AA 2005”), particularly Section 10(1), a mandatory stay of court proceedings is required if an arbitration agreement exists, unless the agreement is deemed “null and void,” “inoperative,” or “incapable of being performed.”

Since the enactment of AA 2005, particularly Section 8 of the AA 2005, there has been a notable shift in the judiciary’s approach to applications for a stay of court proceedings pending referral to arbitration. Section 8 of the AA 2005 enshrines a statutory non-interventionist approach, underscoring the core principle of party autonomy in arbitration.[2] Central to the exercise of this jurisdiction is the notion that parties should be held to their contractual commitments. As such, courts are generally disinclined to permit a party to litigate a dispute when they have already agreed to resolve it through alternative means, such as arbitration.

In this case, the respondent’s refusal to pay its share of the AIAC’s deposit is at the heart of the dispute, with the central issue being whether such non-compliance renders the arbitration agreement inoperative.

The High Court Decision

The High Court initially ruled in favour of the respondent, granting a stay of court proceedings under Section 10 of the AA 2005. The Court determined that the respondent’s failure to pay the deposit did not render the arbitration agreement inoperative or incapable of being performed. Instead, the Court suggested that the appellant could pay the respondent’s share of the deposit and recover the amount from the respondent in the final arbitration award.

The Court of Appeal’s Ruling

Dissatisfied with the High Court’s decision, the appellant appealed to the Court of Appeal.

The central issue for the Court of Appeal was whether the respondent’s refusal to pay the deposit had rendered the arbitration agreement inoperative, and whether a stay of proceedings would be futile given the respondent’s unwillingness to comply with the financial obligations.

Before addressing the issue of the respondent’s refusal to pay the deposit, the Court of Appeal first considered the respondent’s hybrid application, which included a main prayer for striking out the appellant’s claim, along with an alternative prayer for a stay of proceedings. The Court held that the striking out application amounted to “taking any other steps in the proceedings” thus disqualifying the respondent from seeking a stay pending referral to arbitration.[3] However, as the primary focus of this article is on the respondent’s conduct in refusing to pay the deposit, this issue will not be discussed in further detail in this article.

Ultimately, the Court of Appeal overturned the High Court’s decision, emphasising the importance of adhering to the rules of the arbitration process, including payment of the required deposit.

The Court of Appeal found that the arbitration agreement had become “inoperative” due to the respondent’s refusal to fulfil a key obligation under the agreement — payment of the deposit. The respondent’s refusal to make payment of the further deposit to the AIAC deposit would amount to a breach of the arbitration rules, i.e. AIAC Arbitration Rules viz a viz Rule 14. The mandatory language of ‘shall’ with respect to Rule 14(1) and (4) makes it an obligation for the parties to make payment of the necessary deposit pursuant to the Rules.[4] The arbitration agreement between the parties is stipulated in clause 6.3 of the PWD 203A (Rev 1/2010) contract and the AIAC Arbitration Rules have become incorporated into the arbitration agreement of the parties.

Therefore, compliance with the arbitration agreement would mean adhering to the AIAC Arbitration Rules, and that would include making payment of the deposit as required by the AIAC.[5] The respondent’s failure to pay its share of the AIAC deposit directly impacted the validity of the arbitration agreement.

It is both inconsistent and untenable for the respondent to insist that the dispute must be resolved through arbitration, while simultaneously refusing to fulfil its financial obligations under the arbitration process. Such a stance cannot be allowed.[6] The Court recognised that this refusal could be a deliberate strategy to coerce the other party into covering the respondent’s portion of the deposit in order to continue the arbitration. The Court condemned this strategy, noting that it undermines the arbitration process by intentionally placing financial strain on the other party. This tactic, aimed at disrupting the arbitration without consequence, must be viewed for what it is: an unfair attempt to derail the proceedings.

Consequently, the Court concluded that the respondent’s conduct clearly demonstrates an unequivocal intention not to comply with the arbitration process and, as such, has waived its right to arbitration.[7]

The Court stressed that the defaulting party must bear the consequences under these rules whereby failure to do so may result in the arbitrator exercising their right to terminate the arbitration process.[8]

Implications of the Refusal to Pay the Deposit

The case highlights the significant implications of a party’s refusal to comply with its obligations under the arbitration agreement, particularly with respect to the payment of the required arbitration deposit. This failure is not merely a minor procedural oversight; it can have profound and far-reaching consequences that directly impact the validity of the arbitration agreement itself. A party’s refusal to meet its financial obligations may even result in the waiver of its right to arbitration, effectively rendering the agreement inoperative.

While arbitration clauses are often included in contracts to provide an agreed-upon mechanism for resolving disputes, it is not uncommon for one party to fail to pay the requisite arbitration deposit, despite having previously agreed to submit disputes to arbitration. This refusal can place the non-defaulting party in a difficult and untenable position, forcing it to shoulder the entire cost of the deposit in order to continue with the arbitration proceedings. This not only imposes a financial burden but also disrupts the business operations of the party complying with the arbitration rules.

Unfortunately, this tactic of refusing to pay the arbitration deposit has become a strategy employed, particularly by parties that are financially stronger or better positioned to bear the costs. The intention behind such conduct is often to exert financial pressure on the opposing party, hoping that the latter will either be forced to cover the entire deposit or, worse, be financially drained to the point where they are no longer able to continue with the arbitration. This strategy, while regrettably effective in some cases, is unethical and undermines the integrity of the arbitration process.

In the case at hand, the Court of Appeal firmly recognised this harmful practice and expressed a strong stance against such conduct. The Court emphasised that parties who have mutually agreed to an arbitration clause must honour their commitments. Refusing to pay the arbitration deposit is not only a breach of the arbitration rules but also an attempt to exploit the process for strategic advantage, placing an unfair and undue burden on the other party. The Court’s ruling underscores that such behaviour will not be condoned, and that both parties must abide by their contractual obligations if arbitration is to remain a viable and effective dispute resolution mechanism.

Conclusion

Should you encounter similar issues or require further guidance, please feel free to contact our Senior Associate, Ms. Elise Tam, at elise@nzchambers.com. Additionally, we invite you to explore our previously published article titled ‘Strategic Cost Management in Arbitration’ for additional insights on this topic.

Author: Elise Tam

References:

[1] [2024] 1 MLJ 195

[2] Tindak Murni Sdn Bhd v Juang Setia Sdn Bhd and another appeal [2020] 3 MLJ 545 [35]

[3] JSB v ACSB [2024] 1 MLJ 195 [18] – [22]; Kebabangan Petroleum Operating Company Sdn Bhd v Mikuni (M) Sdn Bhd & Ors [2021] 7 CLJ 544 [43] – [44]

[4] JSB v ACSB [2024] 1 MLJ 195 [59]

[5] JSB v ACSB [2024] 1 MLJ 195 [40], [58]

[6] JSB v ACSB [2024] 1 MLJ 195 [42] – [48], [68]

[7] JSB v ACSB [2024] 1 MLJ 195 [54] – [55]

[8] JSB v ACSB [2024] 1 MLJ 195 [69]