THE EVOLVING LANDSCAPE OF SECURITY FOR COSTS IN INTERNATIONAL ARBITRATION: IMPLICATIONS OF THIRD-PARTY FUNDING BY - GOVIND RAJ SUTHAR
THE EVOLVING LANDSCAPE OF SECURITY
FOR COSTS IN INTERNATIONAL ARBITRATION: IMPLICATIONS OF THIRD-PARTY FUNDING
AUTHORED BY - GOVIND RAJ SUTHAR
IntroductionInternational arbitration serves as a
vital mechanism for resolving cross-border disputes, especially in the realms
of commercial and investment disputes. A notable evolution within this
landscape is the rise of third-party funding (TPF). This funding model involves
entities that are not party to the arbitration providing financial support to a
disputing party, typically in exchange for a share of the proceeds from a
favorable award. While TPF has democratized access to justice by enabling
financially constrained parties to pursue legitimate claims, it has also
introduced complexities, particularly concerning security for costs. This paper
explores the interplay between TPF and security for costs, examining legal
provisions, tribunal practices, and the underlying principles guiding such
decisions.
Definition and Purpose of Third-Party FundingThird-party funding in arbitration
refers to the financial support provided by an external entity to a party
involved in arbitration. This funding covers legal fees, arbitration costs, and
potentially adverse costs if the funded party loses the case. The funder, in
return, receives an agreed portion of the arbitral award or settlement. This
arrangement aims to balance the scales of justice by allowing parties with
valid claims but limited financial resources to pursue arbitration.
Security for Costs: Concept and Legal FrameworkSecurity for costs is an interim
measure in arbitration that requires a party to provide a financial guarantee
to cover the opposing party's legal costs should they be unsuccessful. The
intent is to protect respondents from the risk of non-recovery of costs if the
claimant is unable to pay. In the context of TPF, security for costs orders is
particularly pertinent, as they address concerns about the claimant's financial
standing and the risk of funder insolvency or non-liability for adverse costs.
International Legal RegimesSeveral legal regimes address the
issue of security for costs, including:
1. ICSID Convention (Article 47): Provides tribunals with the authority to recommend
provisional measures, including security for costs, to preserve parties' rights.
The rule reads: - Except as the
parties otherwise agree, the Tribunal may recommend any provisional measures
that may be necessary to preserve the parties' rights during the proceeding
(Article 47 of the ICSID Convention, Arbitration Rule 39). A party may seek
provisional measures at any time after proceedings have been instituted.
2. UNCITRAL Rules (Article 26(2) (c)): Allows tribunals to order interim measures to
preserve assets for satisfying future awards.\
The rule reads:- An interim measure is any temporary measure by
which, at any time prior to the issuance of the award by which the dispute is
finally decided, the arbitral tribunal orders a party, for example and without
limitation, to:
(c) Provide a means of preserving
assets out of which a subsequent award may be satisfied;
3. SCC Rules (Article 38): Explicitly empowers tribunals to order security for costs in
exceptional circumstances, considering factors such as the prospects of success
and the funded party's ability to comply with an adverse costs award.
Disclosure of FundingThe transparency of TPF arrangements
is critical for the integrity of the arbitration process. Various arbitration
rules have incorporated provisions for the disclosure of third-party funding:
1.
Singapore International Arbitration
Centre (SIAC) Rules:
Grant tribunals the authority to order disclosure of the existence and details
of TPF arrangements (Rule 24(l)).
2.
ICC Rules: Include provisions for the
disclosure of funding arrangements, reflecting revisions made in 2021 (Article
11(7)).
The rule reads: – In order to assist prospective arbitrators
and arbitrators in complying with their duties under Articles
11(2) and 11(3), each party must promptly inform the Secretariat, the arbitral
tribunal and the other parties, of the existence and identity of any non-party
which has entered into an arrangement for the funding of claims or defences and
under which it has an economic interest in the outcome of the arbitration.
3.
ICSID Rules: Mandate parties to disclose any
third-party funder involved in funding the arbitration (Arbitration Rule 14(1)).
The rule reads:-
Notice of Third-Party Funding
(1) A party shall file a written notice
disclosing the name and address of any non-party from which the party, directly
or indirectly, has received funds for the pursuit or defense of the proceeding through
a donation or grant, or in return for remuneration dependent on the outcome of
the proceeding ("third-party funding"). If the non-party providing
funding is a juridical person, the notice shall include the names of the
persons and entities that own and control that juridical person.
(2) A party shall file the notice referred
to in paragraph (1) with the Secretary-General upon registration of the Request
for arbitration, or immediately upon concluding a third-party funding
arrangement after registration. The party shall immediately notify the Secretary-General
of any changes to the information in the notice.
(3) The Secretary-General shall transmit
the notice of third-party funding and any notification of changes to the
information in such notice to the parties and to any arbitrator proposed for
appointment or appointed in a proceeding for purposes of completing the
arbitrator declaration required by Rule 19(3) (b).
(4) The Tribunal may order disclosure of
further information regarding the funding agreement and the non-party providing
funding pursuant to Rule 36(3)
Tribunal Practices and Case Lawv Factors Influencing Security for
Costs Decisions
Tribunals consider
several factors when deciding on security for costs, including:
1.
Prospects of Success: Evaluating the merits of claims and
defenses.
2.
Financial Stability: Assessing the claimant's ability to
pay an adverse costs award.
3.
Exceptional Circumstances: Identifying special conditions such
as the claimant's history of non-payment or improper conduct.
v Key Cases
Ø RSM v. Saint Lucia
I.
Facts:
RSM Production Corporation initiated arbitration against Saint Lucia, seeking
damages for alleged breaches of contract and investment treaty obligations.
Saint Lucia requested security for costs, arguing that RSM had a history of
non-payment and was funded by a third party.
II.
Arguments:
Saint Lucia contended that RSM's financial instability and the presence of a
third-party funder justified security for costs. RSM argued that security for
costs would impede access to justice.
III.
Decision:
The tribunal granted the request for security for costs, highlighting RSM's
past conduct and the exceptional circumstances of the case.
IV.
Reasoning:
The tribunal emphasized that RSM's failure to pay previous costs awards and the
risk posed by third-party funding warranted protective measures for Saint Lucia.
Ø Garcia Armas v. Venezuela
I.
Facts:
The claimants, Spanish investors, filed a claim against Venezuela under the
Spain-Venezuela BIT. Venezuela sought security for costs, citing the claimants'
insolvency and third-party funding.
II.
Arguments:
Venezuela argued that the claimants' financial difficulties and the lack of
coverage for adverse costs in the funding agreement necessitated security for
costs. The claimants countered that their financial situation was a result of
Venezuela's actions.
III.
Decision:
The tribunal granted Venezuela's request, ordering the claimants to provide
security for costs.
IV.
Reasoning:
The tribunal found that the claimants' insolvency and the structure of the
third-party funding arrangement created significant risks, justifying the
imposition of security for costs.
Ø Herzig v. Turkmenistan
I.
Facts:
Investor Herzig brought a claim against Turkmenistan under the
Germany-Turkmenistan BIT. Turkmenistan requested security for costs,
highlighting Herzig's financial instability and third-party funding
II.
Arguments:
Turkmenistan argued that the claimant's financial instability and the lack of
coverage for adverse costs warranted security for costs. Herzig maintained that
TPF alone did not justify such an order.
III.
Decision:
The tribunal denied the request for security for costs.
IV.
Reasoning:
The tribunal concluded that neither the presence of TPF nor the claimant's
financial difficulties alone constituted exceptional circumstances sufficient
to order security for costs.
v Notable Denials
Ø Eskosol v. Italy
I.
Facts:
Eskosol, an Italian solar energy company, brought a claim against Italy under
the Energy Charter Treaty. Italy requested security for costs, arguing that Eskosol
was insolvent and funded by a third party.
II.
Arguments:
Italy contended that Eskosol's insolvency and the involvement of TPF warranted
security for costs. Eskosol argued that its financial difficulties were due to
Italy's wrongful actions.
III.
Decision:
The tribunal denied Italy's request for security for costs
IV.
Reasoning:
The tribunal found that Eskosol's financial instability resulted from Italy's
alleged misconduct, and imposing security for costs would unjustly hinder
Eskosol's access to justice.
Ø Tennant Energy v. Canada
I.
Facts:
Tennant Energy, a U.S. renewable energy company, filed a claim against Canada
under NAFTA. Canada requested security for costs, citing Tennant Energy's
financial instability and TPF.
II.
Arguments:
Canada argued that Tennant Energy's financial instability and third-party
funding necessitated security for costs. Tennant Energy countered that such an
order would impede access to justice.
III.
Decision:
The tribunal denied Canada's request for security for costs.
IV.
Reasoning:
The tribunal emphasized the access to justice issues posed by security for
costs orders, particularly in cases involving TPF.
Ø Hope Services LLC v. Republic of
Cameroon
I.
Facts:
Hope Services LLC, a U.S. company, brought a claim against Cameroon under the
U.S.-Cameroon BIT. Cameroon requested security for costs, citing Hope Services'
financial instability and TPF.
II.
Arguments:
Cameroon argued that Hope Services' financial instability and the presence of
TPF warranted security for costs. Hope Services maintained that TPF alone did
not justify such an order.
III.
Decision:
The tribunal denied the request for security for costs.
IV.
Reasoning:
The tribunal found that the high threshold for security for costs orders was
not met, as neither TPF nor financial instability alone constituted exceptional
circumstances.
Theoretical and Practical Implicationsv Access to Justice
A core argument against security for
costs in the context of TPF is its potential to restrict access to justice.
Requiring security may disproportionately impact claimants whose financial
distress results from the respondent's alleged misconduct.
v Balancing Interests
Tribunals must balance the claimant's
right to pursue arbitration with the respondent's interest in securing
potential costs. This involves assessing the comparative harm to both parties,
considering factors such as insolvency risk, bad faith, and the integrity of
the arbitration process.
v Inherent Powers of Tribunals
Tribunals often derive their
authority to order security for costs from their inherent powers to ensure the
integrity of proceedings, even in the absence of explicit rules. This
underscores the broad discretion tribunals possess in managing interim
measures.
ConclusionThe intersection of third-party
funding and security for costs in international arbitration presents a nuanced
and evolving challenge. While TPF enhances access to arbitration, it raises
legitimate concerns about cost recovery and the financial integrity of
claimants. Tribunals, guided by established legal frameworks and case law, must
navigate these complexities, balancing fairness and procedural integrity. As
TPF becomes more prevalent, continued refinement of disclosure requirements and
security for costs provisions will be essential to uphold the principles of
justice and equity in international arbitration.
References1. ICSID Convention, Article 47
2. UNCITRAL Arbitration Rules, Article
26(2)(c)
3. SCC Arbitration Rules, Article 38
4. SIAC Arbitration Rules, Rule 24(l)
5. ICC Arbitration Rules, Article 11(7)
6. ICSID Arbitration Rules, Rule 14(1)
7. Cases: RSM v. Saint Lucia, Garcia
Armas v. Venezuela, Herzig v. Turkmenistan, Eskosol v. Italy, Tennant Energy v.
Canada, Hope Services LLC v. Republic of Cameroon
8. BORN, International Commercial
Arbitration
9. Chartered Institute of Arbitrators,
Report on Applications for Security for Costs
10. ICCA-Queen Mary Task Force on
Third-Party Funding in International Arbitration