No Money, No Defence? Non-Payment of Advance on Costs and Due Process in Arbitration
In arbitral proceedings, advance on costs, or deposits, are required to secure the arbitrators’ fees and, where applicable, the administering institution’s expenses. By ensuring that arbitral and administrative costs are funded in advance, such deposits enable the tribunal to conduct the proceedings efficiently. As a general rule, these advances are shared equally between the parties, with the arbitral institution/ arbitrator(s) issuing payment requests to both the claimant and the respondent.
Despite this framework, disputes concerning the non-payment of advance on costs frequently arise in arbitral practice. The typical factual configuration is well established. Party A and Party B enter into an arbitration agreement subject to a regime that mandates equal sharing of advances on costs. In the ensuing proceedings, the claimant pays its share of the advance, while the respondent, often without having raised any counterclaim, forsakes to pay its corresponding share, either due to legitimate financial constraints or as dilatory tactic premised on the view that a party should not be required to fund proceedings brought against it solely to contest liability. To prevent the arbitration from being brought to a standstill, most arbitral regimes permit the claimant to substitute the unpaid portion of the advance on costs.
Against this backdrop, this article examines the procedural consequences of a party’s failure to pay its share of the advance on costs. The central theme of the present article is whether such non-payment can justify measures affecting a party’s ability to participate in, or defend, the arbitration, or whether the tribunal’s response must remain confined to financial and cost-related mechanisms.
The practical significance of this question is illustrated by Sumana Verma v. Arti Kapur & Anr.1Sumana Verma v. Arti Kapur & Anr., W.P.(C) 16203/2024, order dated 25 November 2024 (Delhi High Court), where the Delhi High Court was called upon to consider whether an arbitral tribunal was justified in striking off the respondent’s defence on account of its failure to pay its share of the advance on costs. The judgment, which could have settled the surrounding uncertainty regarding the stated proposition, goes on to a different aspect of non-interference of the Court in arbitration matter while exercising its supervisory power.
According to Section 38 of the Arbitration and Conciliation Act, 1996 (the “Act”) which deals with ‘Deposits’, it is evident that when one party refuses to pay its share of the costs, the Act expressly allows the other party to step up and make that payment. A bare reading of the provision makes it clear that the obligation to secure the tribunal’s fees initially lies on both parties equally, and if one party defaults, the burden shifts to the other party to ensure payment so that the proceedings may continue2Harshbir Singh Pannu v. Jaswinder Singh, Civil Appeal No. 14630 of 2025, decision dated 9 December 2025 (Supreme Court of India).
However, where the non-defaulting party also declines to cover the shortfall, the tribunal is vested with the discretion to either suspend or terminate the arbitral proceedings in respect of the concerned claim or counterclaim.
Implications of Non-Payment
The intent of Section 38(2) of the Act is to not hurt the pocket of the arbitrator. The provision is designed to ensure that arbitral proceedings are adequately funded and that the tribunal is not left uncompensated due to a party’s refusal to contribute to the advance on costs. While payment of its share of the advance on costs is a prerequisite for a claimant to pursue the arbitration, the question that arises within this statutory scheme is the scope of the arbitral tribunal’s powers when confronted with non-payment, and in particular whether the tribunal is empowered to strike off a party’s submissions solely on account of its failure to pay its share of the advance on costs.
Before addressing this question directly, it is useful to consider how Indian courts have approached analogous situations involving non-payment under Section 38 of the Act.
A related but distinct situation arose before the Gujarat High Court in Manbhupinder Singh Atwal v. Neeraj Kumarpal Shah3Manbhupinder Singh Atwal v. Neeraj Kumarpal Shah, 2025 SCC OnLine Guj 2200, in a challenge under Section 34 of the Act alleging bias and violation of natural justice. In that case, the arbitral tribunal declined to adjudicate the respondent’s counterclaim on account of the respondent’s failure to pay the requisite advance on costs. The respondent contended that the payment of costs made by the claimant in respect of the claim ought to suffice, and that a separate deposit for the counterclaim was unnecessary. The High Court rejected this contention. Relying on the Supreme Court’s decision in ONGC v. Afcons4ONGC v. Afcons, (2024) 4 SCC 481, the Court reiterated that a counterclaim is not a defence to a claim and that its adjudication is independent of the outcome of the claim. Since Section 38 of the Act expressly contemplates separate deposits for claims and counterclaims, the tribunal was justified in treating the non-payment of the advance on costs for the counterclaim as determinative of its non-adjudication.
This position stands in contrast to the situation considered in Sumana Verma v. Arti Kapur & Anr., where the arbitral tribunal struck off the respondent’s defence on account of non-payment of the advance on costs. Unlike the non-adjudication of an unpaid counterclaim, which flows directly from the statutory scheme under Section 38 of the Act, the striking off of a defence raises a critical issue, as it affects a party’s ability to contest the claim itself. The distinction between declining to entertain an unpaid counterclaim and disabling a party from defending the arbitration forms a critical point of departure for assessing the scope of an arbitral tribunal’s powers in cases of non-payment. Although the said matter presented the Court with an opportunity to clarify the permissible limits of tribunal’s powers in cases of non-payment of advance on costs, the Court was ultimately unable to settle the issue conclusively. Given the limited scope of supervisory review under Article 227 over arbitral proceedings and the consensual arrangement between the parties permitting the respondent to file its defence upon deposit of the requisite costs, the Court confined itself to disposing of the petition on agreed terms, leaving the underlying question of law open.
Comparative Arbitral Practice across Jurisdictions
Despite the statutory provisions being in place, the lack of authority in Indian jurisprudence on the precise measures an arbitral tribunal may adopt when a party fails to pay its share of the deposits, raises a procedural lacuna in Indian arbitration law.
For this reason, qua the striking off the defence for non-payment, substantive guidance has to be drawn from other relevant arbitration frameworks such as AAA Rules, HKIAC Administered Arbitration Rules, the LCIA Rules, the ICC Rules, and the ICDR Rules, all of which treat non-payment as a procedural issue to be managed through cost substitution rather than punitive sanctions on participation. Even comparative literature on this point is limited, and several jurisdictions stopping short of articulating any detailed consequences beyond empowering the tribunal to suspend or terminate proceedings in respect of the unpaid claim.
In this context, reliance is placed primarily on U.S. practice, which is among the most developed on issues of non-payment, particularly through the framework of the American Arbitration Association. The AAA’s Commercial Rule R-59 expressly sets out the measures available when a party fails to pay arbitrator compensation, expenses, or administrative fees and explicitly states that “in no event, however, shall a party be precluded from defending a claim or counterclaim.”
Under AAA Commercial Rule R-59, an arbitrator may impose procedural restrictions for non-payment, including limiting a party’s ability to assert or pursue a claim and prohibiting a non-paying party from filing any motions, however, the Rule categorically states that the party cannot be precluded from defending a claim or counterclaim.
This principle aligns with the broader international position that the appropriate remedy for a party’s failure to pay its share of the deposits is not the striking off of a defence, but the adoption of cost-substitution mechanisms, coupled with a right of reimbursement in favour of the paying party, or, where warranted, the suspension or termination of proceedings in accordance with the statutory framework.
This approach is reflected consistently across leading arbitral regimes, which address non-payment through mechanisms of cost substitution and reimbursement rather than sanctions affecting participation. Under Article 41.5 of the HKIAC Rules, where one party pays the required deposits on behalf of another, “the arbitral tribunal may, at the request of the paying party, make an award directing reimbursement of the amount paid”. A similar position is adopted under Article 39(4) of the ICDR Rules, which expressly contemplates that, where deposits are not paid in full, another party may advance the required amount and seek a separate award for recovery of the deposit, together with interest.
The LCIA Rules proceed on the same footing as Article 24.7 permits the “party effecting a further advance payment for costs to request an order or award from the tribunal for recovery of that amount as a debt immediately due and payable by the defaulting party, along with any applicable interest”.
Even where institutional rules do not expressly provide for reimbursement, the underlying principle remains the same. In the context of ICC arbitration, the English High Court in BDMS Limited v Rafael Advanced Defence Systems5[2014] EWHC 451 (Comm) has recognised that arbitral tribunals retain the power to address non-payment by directing the defaulting party to pay the advance, including through interim awards or measures, or by permitting the unpaid portion to be secured by a bank guarantee.
This cost-substitution model is also expressly reflected in Indian institutional practice under the MCIA Rules. Rule 44.4 of the MCIA Rules provides that “parties are jointly and severally liable for the costs of the arbitration and authorises the Registrar to direct one party to pay the advance on behalf of a non-paying party”. Further, Rule 44.5 further permits the suspension of the arbitration, in whole or in part, or the treatment of unpaid claims, counterclaims, or cross-claims as withdrawn on a without-prejudice basis. Moreover, where a party pays the advance on costs on behalf of another, Rule 44.6 read with Rule 39(c) empowers the tribunal to issue an award for reimbursement of the unpaid deposits. The said rationale and intent can also be gathered and is followed by prominent Indian institutional arbitration centre such as Delhi International Arbitration Centre, as Rule 33 of the DIAC Rules are analogous to Rule 44.4 of the MCIA Rules. The same rationale and intent are also reflected in the approach of prominent Indian institutional arbitration centres. For instance, Rule 33 of the Delhi International Arbitration Centre (DIAC) Rules is analogous to Rule 44.4 of the MCIA Rules and similarly embodies this principle. Significantly, none of these provisions contemplate the T striking off of a party’s defence as a consequence of non-payment.
This approach is consistent with judicial treatment in Manbhupinder Singh Atwal v. Neeraj Kumarpal Shah, where the Gujarat High Court upheld the arbitral tribunal’s award of costs against the respondents jointly and severally, requiring them to indemnify the claimant for the costs and expenses incurred in the arbitration proceedings.
Taken together, these regimes demonstrate a consistent international approach: non-payment of advances on costs is managed through financial adjustment and post-payment recovery mechanisms, not by disabling a party’s ability to participate in or defend the arbitration.
Conclusion
In light of this, and as clearly reflected in the American Arbitration Association framework, AAA Commercial Rule R-59(b) is particularly instructive. The Rule, which governs situations where a party fails to pay its share of the fees, outlines the procedural measures available to the arbitrator while also establishing the decisive safeguard that “in no event, however, shall a party be precluded from defending a claim or counterclaim.”
Consistently, non-payment of the advance on costs is treated as a procedural default addressed through payment substitution and later reimbursement, not as a basis to penalise the defaulting party on the merits. As a result, a respondent’s refusal to pay its share of the advance cannot justify striking off its defence or restricting its participation in the arbitration. The proper remedy lies in substitution of costs and subsequent recovery, not in depriving a party of its right to be heard and if the domestic courts are to follow the widely accepted and recognised international practices, it ought not preclude the non-paying party to contest or defend itself in the arbitral proceedings.
In this regard, an amendment expressly clarifying that a party’s defence cannot be struck off on account of non‑payment of arbitral fees would be particularly useful. Such an amendment would align the Indian statutory framework with the safeguard embodied in AAA Commercial Rule R‑59(b), while also putting a quietus to recurring disputes on this issue. It would further prevent the passing of orders striking off a party’s defence, an outcome clearly not intended under the present scheme of the Act.
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