‘A. Introduction

1. This memorandum records the reasons of the Tribunal for the Decision recorded in Procedural Order No. 5. That Order identifies the Respondent’s applications for security for costs and the Claimant’s response to those applications. The terms used in this Memorandum correspond to those in the Order.

B. Security for costs

2. It is common ground that the Claimant’s net worth was fully eroded by the end of the financial year 31 March 2000, and that the Claimant made a declaration in September 2000 which resulted in the Claimant being later declared a sick industrial company … as it remains today.

3. It is also common ground that the Tribunal has power to order security for costs under Article 23(1) of the ICC Rules of Arbitration … although security for costs is not an ordinary or general measure that should be granted as a matter of course …

4. The Respondent argues that the Claimant should provide security for the legal and other costs which have been and will continue to be incurred by the Respondent in defending the claims, because if the Respondent’s defences are successful and an award of costs is made in its favour there is a strong likelihood that the Claimant will not have assets available to meet that award. Indeed, the Respondent says that it will be “close to impossible’’ to enforce any order of costs made against the Claimant because of the Claimant’s financial position. In particular, the Respondent relies upon the following:

-The claim is late, large and unsubstantiated;

-As at 31 March 2003, the Claimant owed … approximately US$ 51 million to financial institutions and banks …;

- All the Claimant’s assets are charged to institutions and banks …;

- Entries in the principal bank account of the Claimant which reveal payments into the account prior to the payment out to the ICC for an advance for costs;

- Opinion of [a lawyer] that consent or special permission from [a state agency] would be required before any award of costs could be enforced against the Claimant …;

- Opinion of [the same lawyer] that there is “little possibility of [the state agency] permitting enforcement of the award against the sick company”…;

- Power of [the state agency] to suspend enforcement of awards for up to 7 years …;

- Admitted power of the Tribunal to order security for costs of the Respondent, which should be distinguished from the ICC’s advances for costs;

- Partial award of security for costs by bank guarantee made … by another ICC Tribunal sitting in Paris on the basis of a finding that the Claimant’s financial situation was “doubtful” (Société Casa v. Société Cambior 1992 Rev. Arb. 135) and other awards (e.g. the one made in 1993 by an ICC Tribunal sitting in Brussels); and

- Comments made or reported in the Law of International Business and Dispute Settlement in the 21st Century by Pierre Karrer and Marcus Desax (Munich 2001) at pages 347/8 and in the Law and Practice of International Arbitration by Redfern and Hunter (3rd edition at page 358) and in other literature.

5. The Claimant opposes the application for security for costs on several grounds, which are summarized as follows:

- Though admittedly still a sick industrial company, the Claimant is neither bankrupt nor insolvent; it is currently meeting day-to-day expenses … it paid its share of the ICC advance for costs and the published accounts show a trend of profitability …

- Claimant’s earlier financial position was caused by the conduct of the Respondent, leading to the present dispute …

- Power to order security for costs is only to be used in highly unusual circumstances … it is neither normal nor familiar to many Continental legal systems [including that of the applicable law];

- The ICC practice of advances on the costs of the arbitration offers a considerable guarantee against abusive and extravagant claims, and the Claimant has met the advance so far requested (See ICC Arbitration 7137/1993 referred to in … the Response);

- A party should not be restrained from access to justice by an order for security for costs;

- International arbitration tribunals have declined to order security for costs even in an insolvency situation unless there is an extra bad faith element …

- [Claimant’s state] is a party to the New York Convention;

- Respondent’s claim for being awarded costs would not be regarded as a counterclaim;

- If an award were made in Respondent’s favour, permission of [a state agency] to enforce it may be given …

- With the exception of the Rules of the Arbitration [of an arbitration institution in the country of the applicable law], and the ICC Rules of Arbitration, other institutional rules, such as the SIAC Rules are irrelevant to the Tribunal’s consideration.

6. As the Tribunal has admitted power to grant security for costs and the ICC Rules of Arbitration (Article 31(1)) also empower the Tribunal to make an award in respect of the reasonable legal and other costs incurred by the parties for the arbitration, the issue for determination is whether such security should be ordered at this stage of the arbitration. In considering this issue, the Tribunal has taken account of the following matters and reached certain conclusions on them:

- [Applicable] law: As this is an international arbitration with its seat in Paris, the Tribunal has concluded that no weight should be given to [practice, regulations and decisions in the country of the applicable law] to reject any provision for security for a party’s costs.

Financial weakness: Though the Claimant may not be technically insolvent, it is still under supervision ... The Tribunal has concluded that financial weakness by itself is not a sufficient ground for granting security for costs. …

- … The majority of the Tribunal is also of the view that suspension [under local insolvency law] is a risk that a Respondent contracting with [a company of the same nationality as the Claimant] has to bear …

- Enforcement: The majority of the Tribunal is also of the view that it does not make any difference that [the state agency] would have to give consent to the enforcement [in the Claimant’s country] of any award made in the Respondent’s favour.

- Late claim: The delay in bringing this arbitration and the nature of the claim are factors that the Tribunal has taken into account.

- Bad faith: Apart from the lateness of the claim, there does not appear to be any suggestion of bad faith (e.g. any attempt to divest the company of assets), although the Tribunal is aware that the Claimant has charged all its assets.

- Fee funding: The information available to us suggests that with the concurrence of the chargeholders …, the Claimant has funded its share of the advance for costs out of its current assets. Although there were some payments to the Claimant’s bank account by its promoters, the sums so paid were minor compared to the monies apparently received in the ordinary course of trade (see comments in the following paragraphs). This case can therefore be distinguished from the English Ken-Ren case.

- Advance for costs: Each party has paid its share in contrast to ICC case no 7047, although the Tribunal recognizes such advances only secure the charges of the ICC and the fees of the Tribunal, not the costs of the parties.

- Burden of proof: The Respondent has the burden of convincing us that security should be provided.

7. In the Respondent’s refreshed request, it was strongly argued that contrary to the Claimant’s submission, the payment to the ICC by the Claimant [of its share of the advance on costs] was not funded out of the current assets of the Claimant Company. On the contrary the Respondent contended that the Claimant is an empty shell and that its account with [bank], through which 85% of its business is conducted, clearly shows substantial payments in from outside sources that enabled the Claimant to meet the ICC’s demand for security for costs ... The Respondent urged the Tribunal to act fairly in accordance with Article 15(2) of the ICC Rules and to order the Claimant to put up security by way of guarantee issued by a first-class European business bank … for the Respondent costs …

8. In support of its opposition to the Respondent’s refreshed request, the Claimant’s managing director… submitted a witness statement and gave testimony at the … hearing … He also produced a list … of each debtor and the amount paid by that debtor into the … current bank account during the period … In response to a question from the Tribunal about sums paid by an associated company, [Claimant’s managing director] testified that the Claimant sold goods to that company for export …. As for the payments by promoters, the Claimant said that during the period [a much larger sum] had been paid by promoters compared to the sum … paid in by debtors ... The Claimant added that its current share valuation was €7.800.000 and that although still supervised by [the state agency] its financial state was sound ...

9, As for the burden of proof, the Tribunal paid particular attention to the test suggested in Redfern and Hunter, Law and Practice of International Commercial Arbitration (3rd edition) namely, has the Respondent shown convincingly that the Claimant (if it proves to be a losing party) ‘‘will almost certainly be unable to meet an award of costs against it” (paragraph 7.32)? Having carefully considered the parties’ submissions and weighed up the evidence, the Tribunal decided by a majority that the Respondent had not discharged its burden of proof. In the circumstances, it is not necessary for the Tribunal to consider whether the amount of security requested was reasonable or whether any order or award would be enforceable at law.’