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Security for Costs

I. Definition - What is "security for costs"?

1.

Security for costs refers to a provisional measure that a party to an arbitral proceeding may seek from a Tribunal to order its counterparty to post security payment so as to secure that party’s right to recover its costs (i.e., legal costs and expenses incurred during the arbitral proceeding) should such party ultimately prevail in the arbitral proceeding. In particular, security for costs provides protection to a party against the costs of arbitration in situation where its counterparty is running low on funds.1 For this reason, a request for order of security for costs is predominantly initiated by respondent-States to protect themselves against potentially unmeritorious or speculative claims brought by impecunious claimant-investors.2 

2.

When ordered, security for costs are typically made in the form of a bank guarantee or a deposit into an escrow account.3

II. Grounds for application and ordering of security for costs

3.

In applying for an order of security for costs, parties have relied on their right to seek provisional measures from the Tribunal necessary to preserve their rights.4 In making such application, the applicant-party must normally establish that such order is necessary to protect its procedural right to claim reimbursement of the costs should the Tribunal grant a claim cost order in favour of that applicant-party.5

4.

In reviewing a party’s request for an order of security for costs, Tribunals have generally relied on the broad discretionary power bestowed upon them under the respective arbitration rules applicable to the arbitral proceeding to order necessary provisional measures.6 In doing so, Tribunals have observed that their authority to “recommend” interim measures should be understood as equivalent to their power to “order” any provisional measure that it finds necessary in order to preserve a party’s right.7 8

III. Consideration in ordering security for costs

5.

Notwithstanding the broad powers given to a Tribunal to order security for costs, such order has been rarely granted in an investment treaty dispute.9 That is, as of November 2019, out of 23 investor-State dispute cases in which an order on security for costs was requested, only 3 have been granted. The suggested reason for that was because an order of security for costs was said to be granted only in exceptionally extreme circumstances where an “essential interest of a party stands in danger of irreparable damage”.10

6.

On that basis, Tribunals have scrutinized requests for an order of security for costs under the strict threshold of:

  1. whether the applicant has efficaciously proven that the counterparty is incapable of paying the eventual cost award in the event the applicant prevails in the proceeding;11
  2. whether the application is necessary or sufficiently urgent to impose an interim monetary measure on the counterparty;12 and
  3. whether such order will be proportionate and thus not unduly burdensome to the counterparty.13
7.

Tribunals have considered these factors on a holistic basis and have only granted an order for security for costs where the applicant-party has established that such requirements (necessity, urgency and proportionality) have been met.14

8.

As a recurring theme in investment treaty arbitrations, in proceedings where a third-party funder or other funding sources such as an insurer exists, it is often debated whether a security for costs order is “necessary”.15 On this, Tribunals have ruled in a number of instances that the mere existence of a third-party funder would not by itself constitute an “exceptional circumstance” under which security for costs must be ordered.16 Instead, Tribunals have examined whether there exists a causal link between the existence of a third-party funder and a party’s potential inability to make payment pursuant to an adverse cost award.17 

9.

Other fact-specific considerations that Tribunals take into account when reviewing the necessity, urgency and proportionality elements include the following factors: (i) history of non-payment of costs by the counterparty,18 (ii) willingness of the counterparty to comply with an adverse cost award.19

Bibliography

Berger, B., Arbitration Practice - Security for Costs: Trends and Developments in Swiss Arbitral Case Law, ASA Bulletin, 2010, pp. 7-81.

Kee, C.D., International Arbitration and Security for Costs: A Brief Report on Two Developments, American Review of International Arbitration, 2006, pp. 273-280.

Chan, E., Proposed Guidelines for the Disclosure of Third-Party Funding Arrangements in International Arbitration, American Review of International Arbitration, 2015, pp. 17-30. 

Born, G., International Commercial Arbitration, Volume II, 2nd ed., 2014, pp. 2495-2496.

Massini, K., Risk Versus Reward: The Increasing Use of Third Funders in International Arbitration and the Awarding of Security for Costs, 7 Yearbook on Arbitration and Mediation, 2015, pp. 323-338

Rubins, N., In God We Trust, All Other Pay Cash: Security for Costs in International Commercial Arbitration, American Review of International Arbitration , 2000, pp. 307-310.

Goldberg, D., et. al., 2019 Empirical study: Provisional Measures in Investor-state Arbitration,  British Institute of International and Comparative Law, and White & Case, 2019, pp. 14, 24-25.

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