By Preeti Bhagnani, Clemency Wang (White & Case LLP) / November 1, 2019
ICSID tribunals have traditionally adopted a stricter test than the claimant’s impecuniosity to justify an order of security for costs. Lack of assets, even when coupled with recourse to third party-funding, is insufficient. Tribunals have generally required evidence of “exceptional circumstances,” such as bad faith, serious misconduct or a track record of failure to comply with cost orders, in addition to the requirements of urgency, necessity and proportionality ordinarily applicable to provisional measures. The first time a security for costs application succeeded in an ICSID case, in RSM v. St. Lucia, the tribunal granted security for costs where the claimant had a proven history of not complying with cost orders. Tribunals in subsequent cases have often distinguished the RSM case on that basis.
García Armas: Emergence of an Exception or an Outlier?
The tide appeared to turn in June 2018, an ICSID tribunal granted security for costs for the second known time in the case of Manuel García Armas et al v. Venezuela. In Armas, the tribunal had ordered the claimants to disclose the actual terms of their funding arrangements. On finding that the funding agreement included a provision that the funder did not undertake to finance any adverse costs related to the arbitration, the tribunal ordered the funded claimants to provide evidence of their solvency, shifting the burden of proof of impecuniosity from the respondent to the claimants. The Tribunal ultimately concluded that the claimants had not met the burden, and ordered that they post security for costs. Notably, neither bad faith, nor a history of noncompliance with cost orders, figured in the tribunal’s reasons for ordering security for costs. The Armas decision has prompted speculation about whether a more liberal approach to ordering security for costs may be adopted where a claimant receives third party funding.
But more recent developments suggest that the Armas decision is an outlier. Just a month after the Armas decision, an ICSID tribunal in Lao Holdings and Sanum Investments v. Laos denied a request for security for costs, finding that the respondent had not shown that the claimants would refuse to pay costs. It was significant to the tribunal that there was no “history of repeat defaults on legal obligations,” “hiding assets” or other “bad faith measures to avoid successful enforcement efforts.”
Likewise, in a July 2019 decision, Orlandini v. Bolivia, an ICSID tribunal distinguished Armas and embraced the stringent approach to security for costs applied by prior ICSID tribunals. The tribunal identified four main factors as relevant to assessing a request for security for costs: (i) a track record of non-payment of costs; (ii) conduct that interfered with the efficient and orderly conduct of the proceedings; (iii) evidence of a claimant moving or hiding assets; or (iv) bad faith. All four factors focus on the non-moving party’s conduct.
Echoing the decision in EuroGas v. Slovakia, the tribunal added that other factors, such as a claimant’s “serious and proven financial difficulties” or third party funding “may play a role” in the assessment, but would “typically not, in and of themselves, constitute a sufficient basis” for ordering security for costs. It observed that the Armas decision was “distinguishable” in that it concerned a combination of third-party funding and insolvency.
In denying the request for security, the tribunal declined to rely on an analysis of the claimants’ financial situation. It focused instead on evidence of the claimants’ “willingness to shoulder the necessary financial burden to ensure the continuation of the proceedings,” including the fact that they had paid their share of the advance payments. Also significant to the tribunal’s decision was the apparent absence of “any abuse, serious misconduct, inappropriate behavior, dilatory tactics or bad faith actions” by the claimants during the proceedings.
One of the main rationales for setting a high standard is that orders for security may limit or eliminate the investor’s ability to pursue its claims, impeding access to justice for potentially deserving claimants. Often, investment arbitration is the only avenue available for an investor to obtain a remedy for damage caused by a State; an order for security for costs that the investor cannot pay would leave the investor with no recourse.
Several commentators have criticized the requirement of abuse as setting the bar too high, pointing out that a respondent State bears the same economic burden when it defends an unmeritorious claim against an impecunious claimant, whether or not the claimant was acting in bad faith. It is also argued that where the claimant is funded by a third party funder, there is no genuine concern about access to justice, as funders would simply factor security into the cost of funding.
As these debates play out, ICSID has proposed amendments to its rules, providing for a stand-alone rule to address requests for security for costs. This is a shift from the current framework, in which security for costs is treated as a form of provisional measure. The proposed new rule sets out a non-exhaustive list of relevant circumstances that tribunals must consider in deciding whether to order security for costs, including:
- a party’s ability and willingness to comply with an adverse costs decision,
- the effect that providing security for costs may have on the party’s ability to pursue its claim or counterclaim, and
- the parties’ “conduct.”
These considerations effectively require tribunals to consider the interests of states (who are typically the parties that request security for costs) in collecting on costs orders and the interests of investors to pursue their claims. In striking this balance, tribunals are required consider the conduct of both parties, not merely the party against whom security for costs would be order.
The proposed rule also provides that tribunals may consider third-party funding “evidence” relating to these factors but that “the existence of third-party funding by itself is not sufficient to justify an order for security for costs.” ICSID resisted calls for an automatic order of security for costs whenever the non-moving party is funded by a third party. This aligns with the approach adopted by ICSID tribunals in cases such as EuroGas v. Slovakia and Orlandini, and avoids relying on the unrealistic assumption that third-party funding is used primarily by parties who lack assets.
ICSID’s proposed rules do not include any language suggesting that “exceptional circumstances” or a high threshold must be met for security to be granted. One explanation is that ICSID declined to set out the substantive standard for an order of security for costs, choosing to leave this question for tribunals to decide based on the circumstances of each specific case. On this basis, there is no reason in principle why the principles developed under the current case law would not remain persuasive. On the other hand, tribunals operating under the amended rules may consider the current principles a product of the provisional measures framework, and of little relevance, given the shift from a provisional measures regime to a stand-alone rule.
Against this backdrop of uncertainty, States, increasingly frustrated with being unable to collect on cost orders, have begun to include language in their bilateral investment treaties and free trade agreements setting a lower threshold for the tribunal to order security for costs. For example, the investment chapter of the EU-Vietnam FTA provides that the tribunal may order security for costs where there are “reasonable grounds” to believe that the claimant risks not being able to honor a possible decision on costs issued against the claimant.
Current jurisprudence indicates that ICSID tribunals continue to view security for costs as warranted only in exceptional circumstances, usually where there is a showing of bad faith, abuse or misconduct. Parties requesting security therefore bear a heavy burden. It remains to be seen how the standard will evolve if the proposed amendments to the ICSID Rules enter into force. States wishing greater certainty or a materially different standard should consider incorporating provisions on security for costs into their investment treaties.
The views expressed in this blog post are those of the authors alone and do not reflect the opinions of White & Case LLP.