Bond calls: taking action through emergency arbitrator proceedings

In this current environment, calling for encashment of a bond as a strategic negotiation tactic in order to place the contractor under financial pressure is more prevalent.

Emergency arbitration allows parties to seek urgent temporary interim and conservatory relief, known as emergency measures, on an urgent basis in situations where the parties are unable to wait for the constitution of the arbitral tribunal. It provides a viable alternative to actions to obtain an injunction in court.

The rise of emergency arbitrator

The International Chamber of Commerce (ICC) reports that between 2012, when its emergency arbitrator rules were introduced, and March 2019, 120 applications were made for decisions from an emergency arbitrator (EA). We expect from the instructions we have received recently that when updated figures are published, the number of applications will have significantly increased.

Whilst through the EA procedure, the applicant can seek various remedies this article focuses on its use to challenge calls on bonds.

An on-demand bond allows the bank providing the bond to make payment without the need to scrutinise whether the breach alleged and therefore call is valid. The traditional defence to this has been to commence an action to obtain an injunction in the relevant court to prevent payment. However, in many jurisdictions, this has required the applicant to show either fraud – which is very difficult - or a failure to comply with the agreed mechanism of the call.  As such, a call is seen by some within the industry as a risk accepted by a contractor to be dealt with, if wrongful, as part of their dispute over termination.

Contractors and others within the industry are increasingly challenging this view and using EA proceedings to do this.

EA proceedings and the rules applied to achieve them are different to injunction actions in court against a bank. Firstly, the counterparty is the party making the call rather than the bank and second, the request is for a maintenance of the status quo to permit the parties to complete the agreed dispute resolution mechanism (arbitration) without the aggravation of the dispute that would result from the encashment of the bond.

EA proceedings also provide an alternative where concerns as to the availability or likelihood of success of a court injunction exist. It can also usually be used as part of a linked strategy together with court action.

Whilst most if not all arbitral institutions have included provision for the appointment of an EA, here, we focus on the requirements of ICC EA applications.

Emergency arbitration in the ICC Rules

The International Chamber of Commerce (ICC) Rules of Arbitration (the Rules) are the default arbitral rules cited in clause 20 (Dispute Resolution) in FIDIC contracts. 

Where parties have agreed to refer their dispute to arbitration under the Rules the provisions set out in Article 29 and Appendix V (Emergency Arbitrator Provisions) will apply unless:

• the arbitration agreement under the Rules was concluded before 1 January 2012;
• the parties have agreed to opt out of the EA Provisions; or
• the arbitration agreement upon which the application is based arises from a treaty.

The reissue of the Rules on 1 January 2021 removed wording present in the prior rules that prevented the appointment of an EA where there was a “pre-arbitral procedure that provides for the granting of conservatory, interim or similar measures”. It had been asserted that a dispute adjudication board (DAB) procedure under FIDIC could grant the same measures. The 2021 changes therefore dealt with this ambiguity.

Application for emergency arbitration

A party wishing to obtain emergency measures may submit an application to the ICC Secretariat after, at the same time as, or before its Request for Arbitration (RFA).   In any event, the RFA must be served within 10 days of the receipt by the ICC of the application.

There is no prescribed form of the application. However, it must contain certain basic information relating to the parties, a summary of the arbitration agreement, an explanation as to why the applicant needs urgent interim or conservatory measures, the measures required and the underlying dispute giving rise to the application.

As the process of submissions will be set by the EA itself and limited by the time available, it is recommended the application is as full and detailed as possible.

Appointing an emergency arbitrator

If it is the first application for emergency measures, the application is made to the ICC Secretariat’s case management team. Thereafter applications can be made directly to an EA after its appointment.

The applicant must pay the Secretariat US$40,000 before the Secretariat make any EA appointment. The fee is made up of a US$10,000 ICC administrative fee and US$30,000 arbitrator fee. Usually, the ICC or the arbitrator will not charge further.

If accepted, the ICC will aim to appoint an EA as soon as possible, usually within two days of receipt of the application. Early discussions with the ICC to forewarn of a forthcoming application are recommended. The ICC will then send notification to the respondent.

Whilst the applicant may raise suggested attributes or qualifications of an EA in its application, the ICC will decide on the candidate appointed as EA. There are limited rights to object to that choice. In our experience, the appointed EAs were experienced arbitrators with prior experience of the time challenges associated with emergency arbitrations.

Emergency arbitration proceedings

Once appointed, the file is transferred to the EA and the parties are notified. The EA will then usually contact the parties to convene a call to discuss and set the process. The procedural timetable should be fixed within as short a timeframe as possible, usually within two days. Subject to the requirement to act fairly and impartially, the EA can conduct the proceedings as the EA considers appropriate. This may include, in addition to the respondent’s response to the application, reply and rejoinder submissions, responses to questions from the EA and a hearing either in person or by videoconference.

What the emergency arbitrator will consider as to reliefs requested

The EA considers and decides on the measures sought by the applicant. Whilst the target in ICC emergency arbitration is 15 days from EA appointment to issuance of the order, the applicant may request a preliminary order straight away to require the respondent not to call the bond or to withdraw a bond call pending the EA’s issued order on the application. This can be deployed where a bank intends to comply with the five-day payment requirement following a call as set out in the Uniform Rules for Demand Guarantees (URDG) Article 20. 

When requesting relief it should be noted that the EA’s order must not restrict or prejudice any matter to be considered or decision that is within the jurisdiction of arbitral tribunal to be appointed. The EA will therefore not provide any definitive opinion as to the underlying merits of the dispute. It is therefore advisable to include provision that the relief must remain in place pending any further order from the Tribunal when appointed.

Deliberately, arbitral institutions have not prescribed specific tests for the order to be granted to allow the EA to have flexibility. This has left some EAs to some extent “at sea”; resulting in a lack of consistency of approach by EAs which in turn has led in some cases to reference and rely on requirements of the relevant courts. There is not yet, in our view, a sufficient body of experience and knowledge for a general approach to emerge, however as more applications are made it is expected that the situation will develop and consolidate further.

In the meantime, submissions need to be drafted effectively to propose the EA tests that the EA should apply which can include transnational and soft law concepts.

In our view, the arbitrator should approach the application in the following way:

• whether the application is admissible;
• whether the EA has jurisdiction to decide the matter and make an order;
• if the former two are answered in the affirmative, whether the EA is justified and ought to grant the application and issue an order.

In considering the above the EA should consider:

Admissibility: confirming that the file has not been transferred to the tribunal and that there is clear urgency that would preclude waiting for the appointment of the arbitral tribunal. Relevant factors will include whether the bond has already been called or merely threatened. 

Jurisdiction: confirming that a valid arbitration agreement exists between the parties and the application is not prevented under the Rules (in the Rules it is not) or prevented by any actions in national courts. Whether the procedural law permits emergency relief and on what terms.

Justification to grant the application and issue an order: whether the emergency measures requested by the applicant are justified. Whilst this must be investigated on a case-by-case basis, by way of illustration in a recent successful application in a Paris seated arbitration the applicant made submissions and the EA considered three elements to determine justification:

• reasonable possibility on a prima facie basis that the applicant will succeed on the merits of the claim. The EA will not a declare that the bond call was in breach of contract or otherwise make any statement to bind the arbitral tribunal when appointed, however it has to ensure that the claim is likely to fail;
• risk of serious harm: in the event the measure is not ordered, risk of a serious harm to the applicant requesting the emergency relief which included damage to reputation with the client or the banks, future likelihood of receiving future work in the jurisdiction, financial hardship to the applicant. In other applications on which we have advised it has been argued that the test is “irreparable harm” or “harm for which damages are not sufficient” which whilst we disagree, the test would in our view still achieved by the examples set out above; an
• urgency: imminent risk of serious harm.

Costs

It is usual for the parties to include cost submissions which will be addressed in the order within the 15-day target for completion of the EA.

Enforceability

Critics of EA proceedings usually cite challenges of enforceability compared with court injunctions. Whilst we acknowledge there are concerns, the threat of reputational damage in subsequent arbitration proceedings should the respondent ignore the order is a powerful deterrent.  We have also seen the EA order be used to support a court injunction procedure. In our experience we have, so far, not seen any EA order breached.