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Mme Karolina Latasz

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Security for Claims

I. Definition

1.

Security for claims is a provisional measure in international arbitration. A party subject to a security for claims order is required to post security in respect of the opposing party’s substantive underlying claims before the final award is issued. If ordered, security may be provided in the form of: a bank guarantee, a deposit of the funds into an escrow account or a letter of comfort.1 The form and the amount of the security rests ultimately within tribunal’s discretion.

2.

Typically, an application for a security for claims will be made by a claimant. Nonetheless, a respondent may also resort to apply for this measure if it has made any counterclaims.

II. Theoretical background

3.

The rationale of this measure is to ensure that the applicant’s expenditure and the purpose of arbitration proceedings is not frustrated in circumstances where enforcement of an award against the respondent would prove to be impossible after the award is rendered.2

4.

Consequently, security for claims is considered to be an extraordinary, and hitherto unprecedented, measure in investor-State arbitration, given that States are considerably less likely than private parties to be proven impecunious. As of this date, only two applications had been made for a security for claims order in investor-State disputes, neither of which succeeded.3 This statistic is unsurprising given the serious financial consequences that may arise from a security for claims order, tribunals’ fear of prejudging the merits of the case, and the high evidential hurdle which must be satisfied by the applicant.4

5.

Owing to the asymmetrical nature of investor-State arbitration, this measure would be primarily of interest to the claimant investors. Nonetheless, the respondent States could in principle apply for security in respect of their counterclaims, which may arise for example from breaches of human rights obligations on part of investor or contract claims.

6.

In each case, an applicant will need to demonstrate that the conditions for granting a provisional measure have been satisfied.

III. Distinction between security for claims and security for costs

7.

Security for claims is concerned with the amount in dispute between the parties.5 Conversely, security for costs relates to the legal and arbitration costs incurred in connection with the arbitration proceedings.

8.

Security for claims is available to applicants to protect their well-founded claims, where the enforcement of the award would be impossible.6 Security for costs serves to protect respondents from impecunious claimants.

IV. Power of investor-State tribunals to order security for claims

9.

The 1976 UNCITRAL Arbitration Rules grant the tribunal a wide power to “take any interim measures it deems necessary in respect of the subject-matter of the dispute7 but they do not address the availability of security for claims expressly. However, the Tribunal in Pugachev v Russia appears to have impliedly accepted that it had power to grant a security for claims order pursuant to the 1976 UNCITRAL Arbitration Rules, although the question of jurisdiction was not disputed by the respondent.8

10.

Following revision, the 2010 UNCITRAL Arbitration Rules now grant tribunal an express power to order a party to “[p]rovide a means of preserving assets out of which a subsequent award may be satisfied”.9 Despite a slight ambiguity, there is commentary which supports the proposition that this wording: (i) expressly empowers tribunals to order security for claims;10 and (ii) encompasses “securing funds”.11

11.

Similarly to the 1976 version of the UNCITRAL Arbitration Rules, most of institutional arbitration rules vest tribunal with a power to order any interim or conservatory measure that a tribunal deems appropriate.12 On the other hand, the LCIA Arbitration Rules (2020) and the SIAC Arbitration Rules (2016) grant tribunals an express power to order “security for the … amount in dispute”.13

12.

The ICSID framework is silent on the availability of the security for claims but it allows tribunals to grant “any provisional measures which should be taken to preserve” rights of either party.14 In the past, ICSID tribunals have relied on those broad discretionary powers to order security for costs measures.15 In particular, the Tribunal in RSM v Saint Lucia considered that the ICSID Convention and Arbitration Rules “leave it entirely to the Tribunal’s discretion which measure it finds necessary and appropriate”.16 It is therefore likely that ICSID tribunals would accept that they have power to issue security for claims orders if appropriate. However, the only ICSID tribunal ever to consider this question dismissed the application and remarked that an order for security for claims “is unprecedented, and for good reasons.”17 It did not offer any views on the question of its power to consider security for claims applications.18

13.

Finally, in certain jurisdictions, such as Sweden,19 applicable arbitration statutes expressly vest tribunals with the power to order security for claims. The same approach has been adopted in Article 17(2) of the UNCITRAL Model Law,20 which mirrors the wording in Article 26.2(c) of the 2010 UNCITRAL Arbitration Rules.21

V. Relevant considerations with respect to security for claims orders

14.

The available jurisprudence is not clear as to the factual circumstances which warrant imposition of a security for claims order. As far as States are concerned, impecuniosity is unlikely to be a relevant factor, given that tribunals would likely be reluctant to find a respondent State to lack sufficient assets to satisfy an award.

15.

Thus far the following fact patterns have proven insufficient to warrant imposition of a security for claims order.

  1. While a history of unjustified, continuous non-compliance with international arbitration awards is likely to be a relevant consideration, an investor failed to prove such a pattern of non-compliance, where a respondent Sate avoided enforcement by settling, setting aside or commencing annulment proceedings with respect to an adverse award.22
  2. A clear intention or conduct aimed at avoiding compliance with a future award on the merits is likely to be regarded as pertinent. However, the fact that a State was being increasingly sued in international proceedings or enacted laws aimed at protecting its assets from enforcement proceedings was held to be insufficient to imply that a respondent State would refuse to comply with a potential adverse award in the future.23
  3. Respondent State’s alleged failure to comply with its past commitments insofar as those related to the merits of the dispute was not taken into account by a tribunal so as not to prejudge the case.24
  4. Financial difficulties of the claimant per se were found insufficient to warrant granting a security for claims order.25
  5. The underlying amount in dispute or the alleged loss suffered by the claimant was not taken to speak against the respondent’s ability or disposition to comply with an adverse award.26
  6. An application for security for claims submitted as a form of a retaliation to a security for costs application issued by the respondent State was considered disproportionate.27

Bibliography

Born, G., International Commercial Arbitration, Kluwer Law International, 2021, Chapter 17.

Caron, D. and Caplan, L., The UNCITRAL Arbitration Rules: A Commentary, Oxford University Press, 2013, Chapter 17. 

Schreuer, C., The ICSID Convention: A Commentary, Cambridge University Press, 2009, Article 47.

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