The views expressed in this article are the author’s own and do not, in any way, reflect the views of Hogan Lovells.

Introduction

Article 28(1) of the ICC Rules of Arbitration (the ‘ICC Rules’) provides an arbitral tribunal with general power to grant ‘any interim or conservatory measure it deems appropriate.’¹ Included within this general power is the ability to grant security for both costs and claims, which are interim protective measures available to parties in arbitration.

A request for security for costs allows an applicant to ask the tribunal to order the opposing party to set aside enough money to cover any adverse costs award issued in the applicant’s favor. An application for security for a claim or claims, on the other hand, allows an applicant to ask the arbitral tribunal to order the opposing party to set aside enough monies to secure the amount of underlying claim(s) from either side before a final award is issued. Usually, security will be provided by the opposing party through a payment made into an escrow account, or by way of a bank guarantee. Both measures are designed to protect the applicant from an opposing party that is unable or unwilling to honor an award issued in the applicant’s favor.

The ICC Rules do not lay out a specific procedure for requesting security or requesting any interim measures at all. But an examination of publicly available awards and procedural orders reveals the emergence of a general test for granting interim measures, such as security for costs and claim. Under this test, the party requesting an interim measure typically must show:

1. That it will suffer irreparable harm if the interim relief is not granted;
2. That such harm will outweigh any harm that might be caused to the other party if the interim relief is granted;²
3. Urgency; and
4. That the requesting party has a reasonable chance of success on the merits of the claim.

Based on published ICC awards, requests for security, however, do not arise frequently in ICC arbitrations. Indeed, for a long time, security as a remedy was considered ‘inappropriate in most circumstances for ICC arbitrations.’³ Some authors even went further, stating that ‘[i]t would be particularly unfortunate if the granting of security for costs were to become the norm, as is the case before the courts of a number of countries when the plaintiff is foreign.’⁴ This hostility stemmed from different factors, in particular, the consensual nature of arbitration and the fear that meritorious claims would be impeded and security orders would prejudge the merits of a case.⁵ These various concerns are palpable when reviewing procedural orders and final awards rendered by ICC tribunals addressing this topic. It is indeed quite striking that the tribunal’s analysis often starts with a reminder that security for costs ‘should only be ordered in exceptional circumstances’⁶, or that it ‘is justified only in exceptional circumstances.’⁷

Because it is difficult to prevail on an application for a security, lawyers have been reluctant to launch them.⁸ As a consequence, there are relatively few resources available to a party considering a request for security in an arbitration governed by the ICC Rules. In particular, potential applicants may find it difficult to assess whether a request for security is likely to succeed or determine which factors will be most persuasive to the tribunal.

This article provides a survey of all ICC procedural orders and final awards published on the topic of security. Of the twenty-three (23) published opinions surveyed, only four (4) requests for security were granted. This confirms that although arbitral tribunals are often hesitant to award security, such orders are possible. The survey also provides a useful guidance regarding the various factors tribunals may consider when determining whether security is warranted. Finally, this article distills the key takeaways from all the available decisions, and frame the elements of a systematic test to evaluate requests for security.

I. Overview: what factors weigh in favor of security?

The results of the survey show that a tribunal is most likely to award security where the applicant has shown a fundamental change in circumstance since the parties entered the agreement to arbitrate resulting in a clear and present danger that a future award will not be enforceable. Other factors also weigh in favor of an order for security.

A. Main factor: the existence of a fundamental change in circumstances

Different situations amount to ‘a fundamental change in circumstances’ and allow arbitrators to decide in favor of security. The following four circumstances typically qualify as such.

The opposing party has organized its own insolvency

First, tribunals have shown a willingness to award security where the opposing party organizes its own insolvency to avoid the financial risk of arbitration.⁹ For instance, in Procedural Order of June 2003 in ICC Case No. 12035, the tribunal established that ‘the party seeking security for costs should establish, on a prima facie basis, that the opposing party is organizing its own insolvency . . . or that it deliberately provoked its insolvency in order to avoid the financial risks related to an arbitral proceeding . . . or for any other fraudulent reason.’¹⁰ Recently, in ICC-PO3-2020-228, the tribunal found that ‘two circumstances may warrant an order for security for costs,’ one of them being ‘situations in which the party against whom the request is directed appears to have engaged in bad faith maneuvers specifically intended to frustrate the other party’s potential future claim.’¹¹ (Emphasis added). The second circumstance is ‘situations in which a serious deterioration of a party’s financial status has occurred compared to the time when the arbitration agreement was concluded’. This, again reflects the idea that tribunals are more willing to award security when a fundamental change has occurred.

The opposing party has a new identity and significantly less funds

Second, tribunals are more willing to provide security if (i) the identity of the opposing party has changed since the parties agreed to arbitrate and (ii) the new entity has significantly less funds or appears to be an empty shell company.¹² As stated by the tribunal in Procedural Order of December 2007 in ICC Case 14993, a security for costs may be warranted ‘in cases where the claimant acts as a special purpose vehicle and the suspicion is that the claim was only assigned for the purpose to litigate through an entity which in comparison to the former contractual partner does not have funds or significantly less funds (an empty shell company)’¹³. However, if some inferences can be drawn from the method through which a party organizes its business, those inferences do not come without limits, as will be explained below.

There is no reasonable chance to enforce a future award on costs

Third, security may be warranted if there has been a change in circumstance that resulted in ‘no reasonable chance for the defendant to enforce a future cost award in its favour…unless the plaintiff would prove that its financial troubles are directly connected to a behaviour of the defendant contrary to the principle of good faith’ and that the opposing party, at the time arbitration is initiated, has become ‘manifestly insolvent.’¹⁴ Bankruptcy alone is not enough to determine that a party is ‘manifestly insolvent’; a bankrupt party may not be considered manifestly insolvent if it has ‘sufficient realizable assets to finance arbitration and honor future costs.’¹⁵

The opposing party has taken action to avoid the financial risk of arbitration

Finally, security may be warranted if the opposing party has taken some other action designed to avoid the financial risk of arbitration, such as moving its place of residence or registered office in an effort to avoid the enforceability of an award.¹⁶ Specifically, in Procedural Order of December 2007 in ICC Case No. 14933, the tribunal stated that a security may be warranted ‘[i]n situations where the claimant moves its residence to a state where the execution of arbitral awards is not warranted, or when the suspicion cannot be averted that the claimant only moved its residence in order to extricate itself from liability for a future award of cost if it lost.’¹⁷

B. Other factors which weigh in favor of security

There are a number of other factors tribunals have considered in determining whether to grant a request for security. The factors most frequently considered include the behavior of the parties to the arbitration,¹⁸ the bona fides of the underlying claim and the likelihood of success,¹⁹ the timing of the application for security,²⁰ and whether awarding security would be ‘just.’²¹

The parties’ behavior

The behavior of the parties is particularly relevant when one party’s actions significantly and unduly increase the financial burden of the opposing party. Procedural Order of December 2007 in ICC Case No. 14661 granted the claimant’s request for security, partially on the grounds that ‘costs had been increased as a result of Respondent’s counterclaims, ‘which greatly exceed in size Claimant’s claims.’ The Arbitral Tribunal deems, therefore, that there is scope for granting the relief requested by Claimant.’²² A tribunal is also less likely to grant a request for security if the requesting party has declined to pay its share of advance on costs for arbitration. In Procedural Order of May 2006 in ICC Case No. 13620, the tribunal determined that the requesting party’s failure to pay its advance on costs ‘although not automatically disqualifying the… Respondent from seeking interim relief from the Tribunal, does create a substantial obstacle to the success of the application.’²³ Similarly, in the Final Award in ICC Case No. 7047, the Respondent had not paid its share of advance on costs; subsequently, the tribunal stated that because ‘the burden to pay the total advance on costs or to provide a bank-guarantee fell to Claimant alone … the Arbitral Tribunal holds that Claimant would be unduly burdened if requested to provide an additional security to the Defendants for their costs.’²⁴. Some tribunals have gone even further. In ICC-PO3-2020-227 the tribunal found that ‘a party cannot claim for security for costs if that party has failed to pay its share in the ICC cost advance.’²⁵ Here, the tribunal was urged by the claimant to take into consideration the fact that the applicant (the respondent) had failed to pay its share of the advances. The tribunal did so, under a rationale similar to the one followed in Case No. 7047, arguing that such conduct shifted ‘the burden (however big or small) to finance the advance entirely on the claimant.’²⁶. It can be inferred from this assertion that a claimant would be unduly burdened if it had to finance the advance in its entirety as well as provide security for costs. However, this is not the only rationale behind the tribunal’s decision. Indeed, the latter also underlines that the payment of ICC cost advances is something that parties agree to ‘by agreeing on arbitration under the ICC Rules.’²⁷ This suggests that barring a party who failed to pay such advance from claiming security for cost can operate as a punishment for bad faith or at least improper conduct.

Likelihood of success of the initial claim

Tribunals also take into account the bona fides of the initial claim and its likelihood of success. Specifically, tribunals may consider the facts of the case to be exceptional enough to warrant a security for the respondent if the claimant’s initial case is ‘abusive or extravagant’. For instance, in Procedural Order of 6 June 2003 in ICC Case No. 12035, the tribunal established that ‘the party seeking security for costs should establish, on a prima facie basis, that the opposing party is organizing its own insolvency.’²⁸ The timing of the application for security can be detrimental to the likelihood that it is accepted if the application is either too early or too late. In Procedural Order of January 2006 in ICC Case No. 12732, it is provided that an application for security should be ‘made in time to have been considered by the Tribunal prior to its first procedural order’ and in this specific case ‘[a]t the latest, it could and should have been made during the procedures leading up to, or immediately after, the Partial Award dated ... 2005 determining jurisdiction.’²⁹ Alternatively, Interim Award in Case No. 11405 demonstrated that an application for security can be rejected if introduced prematurely because ‘[i]n this case, the relief requested by the Claimants could possibly be considered if it would appear likely that at the end of the proceeding the [Respondent] should bear the legal costs incurred by the Claimants. This is not the case, at least at this stage of the arbitration proceedings, when the Claimants have not yet presented fully their main claim.’³⁰

In order to grant security, the tribunal must also ensure that doing so will not deprive a party of access to justice. Procedural Order of 6 June 2003 in ICC Case No. 12035 emphasizes this principle, stating that ‘the Tribunal finds that ordering security for cost involves the inherent risk that it may result in precluding access to justice by claimants who are in a precarious economic situation.’³¹ More recently, in Procedural Order ICC-PO2-2020-225 the tribunal followed a two-steps analysis which led it to grant security for costs. The second prong focused on the fairness of ordering such security. The tribunal, after having found a significant likelihood that the claimant would be unable to satisfy a potential award on costs, concluded that ‘looking at all relevant circumstances in this case,’ ‘it is fair and just to order security for costs.’³² The tribunal added that awarding security for costs would not bar the opposing party (the claimant) from pursing its claim before the tribunal. The order associates fairness to the idea that an order of security shall not prevent a party from submitting a claim to arbitration.

It is worth noting that each of these themes are based on the fact that tribunals appropriately are focused on preserving and ensuring the efficacy of the arbitration process itself, including an ultimate award of costs. To the extent that a potential arbitral award of costs will be rendered moot or irrelevant as a result of the conduct of one of the parties to the arbitration during the arbitration proceedings, the tribunal is far more likely to issue an award for security.

Therefore, a number of factors help a tribunal decide that security should be awarded. However, certain circumstances do not influence the tribunal's decision – or at least influence it in an unfavorable way.

II. What factors do not weigh in favor of security

The idea that often permeates a tribunal’s refusal to award security is that the choice to resort to arbitration implies that the parties have assumed certain risks. In Procedural Order ICC-PO3-2020-228 the tribunal emphasized that ‘parties entering into international arbitration agreements must be presumed to have assumed some degree of risk that the opposing party would not be able to satisfy a costs award.’³³ Therefore, if the underlying reason for seeking security is deemed a risk that the parties accepted at the time they entered the agreement to arbitrate, the tribunal is unlikely to award security.

There is a strong presumption that by submitting to arbitration, the parties have undertaken to carry out any resulting award. There is also a strong presumption that the parties have weighed the pros and cons of arbitration and have considered the possibility of the enforcement of an award. In Final Award of ICC Case No. 7047, the tribunal justifies its rejection of an application because ‘[i]f the Defendants were concerned about the enforceability of potential claims against the Claimant awarded to them in an arbitration procedure, it was up to them to ascertain this possibility before signing the Agreement.’³⁴

As such, financial instability and risk alone are typically not enough to establish that the opposing party is unable or unwilling to pay a future award.³⁵ An ICC tribunal emphasized this point in Procedural Order of 6 June 2003 in ICC Case No. 12035, stating that, ‘insolvency is not sufficient, in itself, to form the basis of a request for security for costs.’³⁶ Following that same logic, the tribunal in ICC-PO2-2020-225, after having found that a clear and present danger of insolvency amounts to an exceptional circumstance under which security can be awarded, added that for security to actually be awarded, it ought to be fair under the circumstances. Therefore, insolvency risk alone is insufficient.

It is also insufficient for a party seeking security to argue that it will be difficult to enforce an award based on the opposing party’s nationality or place of residence.³⁷ These are typically deemed accepted risks and, therefore, do not warrant security.³⁸

Other factors have been deemed non-controlling as to the issue of security. For instance, the tribunal in ICC-PO6-2020-226 decided that it was of no importance that the ICC Court had extended the time limit for issuing its final award. Such a fact did not constitute a change in circumstances creating an immediate danger for the requesting party to be deprived of any potential payment and cost claim.

The corporate form of the party which is asked to provide security for costs is also of no incidence. Indeed, in ICC-PO-2020-224, the claimant argued that the nature of the First Respondent – who was a ‘sole purpose vehicle […] supported by other entities’³⁹ – could lead to the inference that security for cost should be awarded. The tribunal however responded that ‘this method of organizing a project is not unusual’ and ‘certainly does not allow an inference to be drawn as to the First Respondent's financial status.’⁴⁰

III. The results: awarding security is rare, but possible

The table in the Appendix below summarizes the twenty-three (23) ICC procedural orders and final awards published on the topic of security. The table provides the published title of each opinion, details regarding the request for security, whether the request was granted, and information regarding the relevant factors and the tribunal’s analysis. Of the twenty-three (23) ICC procedural orders and final awards surveyed, just four were granted. That is a success rate of just over seventeen (17) percent.

IV. The existence of a systematic analysis?

Can we find behind the different criteria mentioned above in underlying reasoning or approach followed by the different tribunals? Is the development of a systematic ‘security for costs analysis’ applicable by tribunals, foreseeable?

For such a systematic approach to be established, tribunals would first have to concur on the legal test to apply when deciding to grant security. As of now, they see eye to eye on one element: their authority to grant such conservatory measures is found in Article 28(1) of the ICC Rules.⁴¹ However this provision alone does not answer all questions because ‘Article 28 ICC Rules, […] does not set out any prerequisites that must be met for conservatory or interim measures to be granted.’⁴² The emergence of a single approach to the question of security is therefore a priori challenging, considering the little guidance available on the subject.

However, this struggle is only apparent. Tribunals often rely on the same sources and general legal principles in considering whether to grant security. Arbitrators are indeed often minded to consider available arbitral ‘jurisprudence,’ which allows awards to converge. For instance, the tribunal in ICC-PO2-2020-225 decided to observe ‘practice’ to determine that security should only be awarded in exceptional cases. A number of tribunals have also relied on the Secretariat’s Guide to Arbitration, usually referring to the same statement regarding the possibility ‘to award security for costs where there is a substantial risk that a party may not be able to cover the opposing side's arbitration costs.’⁴³

When evaluating the standards for granting a request for security, some tribunals inquire as to the applicable procedural law, or lex arbitri, usually determined by the seat of arbitration. For instance, in an arbitration seated in Qatar, ICC-PO3-2020-228 emphasizes that nothing in Qatari procedural law prevents an arbitral tribunal from granting security. In the same manner, the arbitrators in ICC-PO3-2020-227 considered it proper to look into appropriate provisions of the lex arbitri, namely, Austrian law.⁴⁴ Similarly, in ICC-PO2-2020-225, the tribunal found that it ‘regards as relevant the applicable standards’ at the ‘seat of arbitration chosen by the Parties.’⁴⁵ For instance, the tribunal in ICC-PO2-2020-225 applied the English case law principle under which ‘a respondent's right to protect its ability to recover costs must be balanced’ against ‘the claimant’s right to proceed with meritorious claims, despite financial difficulties.’⁴⁶ In ICC case ICC-PO3-2020-227, the tribunal noted that Austrian law imposes other criteria such as: the necessity of the measure, the risk of frustration or impairment of the enforcement of the claim and the occurrence of irrevocable damage. These various elements sourced from relevant domestic arbitration laws will undoubtedly continue to support a case-by-case approach to requests for security.

Nevertheless, it would be incorrect to assume that because different domestic arbitration laws are taken into account, tribunals do not follow somewhat similar approaches to analyze the necessity to grant security. It is indeed striking to see, for example, that the tribunal supra applying Austrian law, tried to do so in the light of the Secretariat’s Guide to Arbitration, previously mentioned. The award actually underlines that the Secretariat’s Guide to Arbitration ‘is not a far cry from the criteria developed by Austrian courts and commentators.’⁴⁷

Therefore, even though tribunals will not rely on the same legal sources, some similarities appear regarding the legal bases on which they rely. This has not quite yet enabled the emergence of a systematic approach when dealing with requests for security. While tribunals will often start their analysis by reminding applicants that security should not be awarded other than under extraordinary circumstances, the rest of the analysis will likely continue to be guided by a case-by-case approach.

Conclusion

Although tribunals are hesitant to award security for costs or for claim, the survey results show that such requests can be successful. Financial instability or difficulty enforcing an award, standing alone, will not typically suffice. In order to succeed, it is critical that the applicant point to some fundamental change in circumstance—beyond the accepted risks inherent in international commercial agreements—resulting in a clear and present danger that a future award would not be enforceable. This is a high bar for applicants to meet, but the survey results confirm that it is possible. The results also show that although tribunals follow similar approaches, they have yet to determine a single test, applicable to any security application.

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