Thin line ? A new case on the power of arbitrators to impose sanctions
It is not uncommon in arbitration proceedings for interim measures to be required to prevent the remedy provided on the merits from being frustrated. Interim measures in support of arbitration can now fortunately be ordered not only by national courts but also by arbitrators in most jurisdictions. In most cases, interim measures granted by arbitral tribunals are usually observed voluntarily by the parties.1) But what happens when they are not? Indeed, do arbitrators have the power to compel a party to comply with an interim measure? This is precisely the question that arose in an ICC case in which we were recently involved and which we address in this article.
The plaintiff was a construction company that entered into an infrastructure renovation agreement with a public entity, which ultimately was the defendant. The contract was terminated by the plaintiff due to breaches by the defendant. However, the defendant refused to pay the plaintiff the sums triggered by the termination of the contract and also refused to return the bank guarantee that the plaintiff had provided to guarantee the performance of its obligations during the term of the contract. After the Claimant initiated the arbitration proceedings, the Respondent continued to refuse to return the bank guarantee and eventually called on this guarantee.
Accordingly, the claimant asked the arbitral tribunal to grant interim measures ordering the respondent to deposit the amount of the bank guarantee in an escrow account. Although the arbitral tribunal granted the request, the defendant failed to comply for more than six months. Accordingly, the Claimant requested that a monetary penalty be imposed on the Respondent for its persistent refusal to comply with the order of the arbitral tribunal.
In deciding whether to grant the requested sanction, the arbitral tribunal asked the parties to comment on three key issues: (i) the power of the tribunal to impose coercive economic sanctions under potentially applicable laws (i.e. -say the law of the seat and the law of the jurisdiction of the respondent, where the sanction was to be executed); (ii) the criteria for determining the amount of the sanction; and (iii) how the penalty is to be paid and to whom. We detail below the response provided by the Claimant in relation to each of these questions and the conclusions of the arbitral tribunal.
Question 1: Power of arbitral tribunals to impose sanctions
Neither the law of the seat nor the law of the defendant’s jurisdiction explicitly establishes that arbitral tribunals have the power to impose pecuniary sanctions, but neither does it contain any prohibition to that effect. Moreover, the parties in this case had not entered into any agreement limiting or confirming the court’s power to do so.
In support of its claim, the plaintiff argued that the power to impose monetary penalties on the parties is implicit in the powers granted to the arbitrators. The applicant relied on a number of authorities,2) citing in particular ICC Case No. 7895, which found that under the ICC Rules, in the absence of agreement to the contrary by the parties, the arbitral tribunal has the power to impose sanctions.3) The plaintiff also relied on Hamstein vs. Williamsa U.S. case decided by the Fifth Circuit Court of Appeals, which noted that the inherent powers of arbitrators include the power to sanction parties and, therefore, arbitrators do not exceed their authority when imposing sanctions on a part.4)
Further, the Applicant pointed out that the two potentially relevant statutes allow for the imposition of sanctions by judges in civil proceedings and that, therefore, sanctions are not foreign to those legal systems. The claimant also mentioned that the UNIDROIT Principles of International Commercial Contracts provide in Article 7.2.4 that courts may order the payment of a fine to compel a party to comply with a specific injunction and indicated that these principles could be taken into account by the arbitral tribunal in accordance with the ICC Terms of Reference and Rules.
The arbitral tribunal concluded that it had the authority to impose a monetary penalty on the Respondent in this case taking into account, inter alia, (i) the authorities and precedents submitted by the Claimant; (ii) that neither party had explicitly excluded the foregoing power and that no provision had been identified in the law of the seat or the law of the jurisdiction of the defendant which excluded such power; and (iii) that the imposition of pecuniary penalties was in accordance with public policy in the two jurisdictions concerned since such penalties were authorized in civil proceedings.
Question 2: Quantify the sanction
The second issue raised by the arbitral tribunal was how to determine the amount of the penalty. The plaintiff argued that penalties must incentivize the offending party to comply and therefore the amount should be set high enough to encourage such behavior.
In our case, the plaintiff requested a penalty that would accrue per day of non-compliance and offered as a benchmark the amount provided for in the contract for delays in completing the work (0.1% per day of delay) . In particular, the plaintiff suggested applying this percentage to the amount of the bank guarantee collected by the defendant and that the sanction accumulate with this amount as a ceiling.
The arbitral tribunal concluded that the claimant’s proposal was reasonable as it imposed sufficient financial pressure on the respondent to comply with the order to deposit the monies in escrow.
Question 3: How and to whom?
The third and final question was how the penalty should be paid and who should be the beneficiary of the pecuniary penalty.
Regarding this last point, the applicant explained that the general rule in legal proceedings is that the penalties must be paid to the courts themselves because they are to some extent responsible for protecting the integrity of the judicial system. However, sanctions in arbitration cannot serve this purpose and therefore, as suggested by a number of authorities, the beneficiary should be the party who suffers the consequences of the non-compliance (i.e. the applicant).
As to how the penalty should be paid, the plaintiff proposed that any amount accrued as penalty be awarded in the award and paid as determined by the court in the award.
The court accepted the plaintiff’s proposals on both counts.
Despite the monetary penalty, the defendant did not comply with the interim measure and the monetary penalty therefore continued to run until sentencing. As decided by the tribunal in its decision on the financial penalty, the award awarded the plaintiff the full amount due to the penalty and added this amount to the payment order contained in the award for damages suffered as a result of of breach of contract.
To deepen your knowledge of interim measures in international arbitration, including a summary introduction, important considerations, practical advice, suggested reading and more, please see the Wolters Kluwer Practical Insights page, available here.