Date: Procedural Order 2, 2014

Origin of the parties: Latin America and Europe

Place of Arbitration: United Kingdom

 

I. Background

…..

2. Parties' Positions

The Parties' positions with respect to Respondents' Applications can be summarized as follows:

2.1 Respondents' Position

2.1.1 In support of their Application for Security for Costs, Respondents submit that the relevant test for the Tribunal to decide whether to order security for costs is whether such security is fair and just in light of all the circumstances of the case.

2.1.2 Respondents point to a number of circumstances, which should persuade the Tribunal to grant the requested interim relief. Namely, Respondents argue that Claimant: (a) appears to be an impecunious shell company incorporated in [a Latin American Country] with no financial wherewithal; (b) is evidently unable to initiate or pursue arbitration against Respondents without third party funding; (c) despite being on notice that Respondents would pursue an application for security for costs, has failed to disclose basic financial information about itself; and (d) is prosecuting a manifestly frivolous claim.

2.1.3 In particular, Respondents maintain that the presence of a third party funder strengthens their case for an order for security for costs. In their view, Claimant does not and/or will not have sufficient assets to meet any adverse costs award against it. At the same time, Respondents fear that, given that the lack of this Tribunal's jurisdiction over the third party funder; the latter will not feel compelled to satisfy a costs award in Respondents' favour.

2.1.4 Further, Respondents add that Claimant pursued the same claims in a prior ICC arbitration, which was discontinued because of Claimant's inability to pay the provisional advance. Respondents also contend that ordering security for costs neither requires the Tribunal to prejudge the merits of Claimant's case, nor does it risk stifling Claimant's claim. Finally, Respondents maintain that there is a substantial risk that, if the security is not granted, their interests will be materially prejudiced.

2.1.5 …

2.1.6 Therefore, Respondents request the Tribunal to:

1. order the Claimant to provide security for Respondents' costs (i.e., attorney costs) in amount of … (or such other amount that the Tribunal determines to be appropriate);
2. order the Claimant to provide the above security within 14 days of the date of this Procedural Order:
1. by way of bank guarantee, in a form acceptable to Respondents (or, in the event of a disagreement referred to the Tribunal), from a reputable international bank with an office in London; or
2. payment into an escrow account established at a reputable international bank with an office in London, under the Tribunal's control (or as directed by the Tribunal);
3. allow Respondents to be at liberty to apply for further amounts by way of security during the course of this arbitration;
4. …
5. dismiss Claimant's request for relief.

2.2 Claimant's Position

2.2.1 Claimant submits that security for costs should only be granted if Claimant's lack of funds to satisfy a potential adverse award on costs results from a fundamental change of Claimant's financial situation. As an example, Claimant refers to situations, in which a party to arbitration proceedings becomes insolvent.

2.2.2 Claimant acknowledges that its equity consists of bearer shares of aggregate value of … However, Claimant explains that Respondent 1 requested its incorporation and that both Respondents were aware at all relevant times of Claimant's financial structure and situation, which has not changed since the signature of the Confidentiality Agreement by the Parties. Therefore, Claimant contends there has not been any fundamental change of its financial situation that could provide grounds for an order for security for costs. Moreover, Claimant submits it has timely paid its share of the advance of the costs of arbitration (i.e., administrative costs and the estimated fees and expenses of the arbitrators).

2.2.3 Further, in response to Respondents' contentions, Claimant maintains that an exercise of a right to access arbitral justice with assistance from a third party funder, in and of itself, is not sufficient ground to grant Respondents’ Security Application. Rather, Claimant contends that an order for security for costs against it would "stifle" Claimant's claim.

2.2.4 ...

2.2.5 Therefore, Claimant requests the Tribunal to:

1. dismiss Respondents’ application for security for costs against Claimant;
2. …
3. fix separately the costs related to dealing with Respondents’ applications, in due course; and
4. award the costs to Claimant.

II. Tribunal's Analysis

3. Authority of the Tribunal to Order Interim Measures

3.1 The Tribunal notes that pursuant to section 9 of the Terms of Reference and on the basis of the existing record, there are no objections to this Tribunal's jurisdiction over the present proceedings. Further, the Tribunal notes that none of the Parties expressed any objections to this Tribunal’s power s to order interim measures, including security for costs.

3.2 Under Article 28(1) of the ICC Arbitration Rules, the Tribunal is granted discretion to order interim measures as it deems appropriate:

Article 28(1): ... [T]he arbitral tribunal may, at the request of a parry, order any interim or conservatory measure it deems appropriate. The arbitral tribunal may make the granting of any such measure subject to appropriate security being furnished by the requesting party. Any such measure shall take the form of an order giving reasons, or of an award, as the arbitral tribunal considers appropriate.¹

3.3 The Tribunal notes that, although the ICC Arbitration Rules do not specifically mention security for costs, the ICC Secretariat,² commentators³ and arbitral case law⁴ confirm the wording of Article 28(1) to be broad enough to encompass such measure.

4. Legal Framework

4.1 In exercising its discretion to grant interim measures, the Tribunal looks to the nature and purpose of such measures and takes guidance from the practice of other tribunals. The Tribunal observes that 2012 ICC Secretariat's Guide to ICC Arbitration indicates that

where ... there is a substantial risk that a party ... may not be able to caver the opposing side's arbitration costs (i.e. if ultimate ordered to do so), the arbitral tribunal may be prepared to order that party [to provide security for such costs].⁵ (emphasis added)

The Tribunal also observes practice indicating that security for costs should only be ordered in exceptional circumstances,⁶ for example where there is a dear and present danger that a future award of costs would not be enforceable such as that which arises from a party's insolvency.⁷

4.2 In seeking guidance as to the at the seat of arbitration chosen by the Parties. Notably, this Tribunal observes that Section 38(3) 1996 Act governing arbitration within England and Wales authorizes a tribunal to order security for the other party's costs of arbitration. In interpreting the scope of this authority, the Tribunal recognizes the principle in English case law that a respondent's right to protect its ability to recover costs must be balanced exercise of its discretion under the ICC Rules, the Tribunal also regards as relevant the applicable standards against claimant's right to proceed with meritorious claims, despite financial difficulties.⁸ The Tribunal likewise observes that the Chartered Institute of Arbitrators in providing guidance to tribunals for the ordering of security under the 1996 Act suggests a two-stage analysis: First, the Tribunal should consider the probability that the claimant will be unable to pay the likely amount of an award of costs assuming that the respondent's defence is accepted and that the award of costs is made and if so, second, should consider whether it fair and just in all the circumstances of the case to make an order for security.⁹

4.3 This Tribunal adopts the two-stage analysis suggested in the Chartered Institute of Arbitrators Guidelines. As to the assessment in the first stage of the probability that Claimant will be unlikely to pay the likely amount of an award of costs assuming the Respondents' defence is accepted and that the award of costs is made, the Tribunal agrees that a mere existence of a doubt, that an award on costs may be impossible to enforce due to the deficiency in party's funds, is not sufficient ground for granting a security for costs.¹⁰ In assessing such probability, the Tribunal concluded it should examine persuasive evidence of all relevant circumstances including a party's ability to fund the commencement of the arbitral proceedings, presence of an undisclosed third party funder, party's conduct during the arbitral proceedings (including timely payments of the advance on costs), or any counterclaims pursued by the party requesting the security, particularly if based on the same facts as the original claims.¹¹

5. Application of the Principles to the Instant Proceedings

A. The Application for Security for Costs

5.1 Considering the circumstances surrounding the case and the facts presented, the Tribunal grants Respondents' Security Application as outlined below.

5.2 First, the Tribunal on the basis of the evidence before it finds that there is a significant likelihood that Claimant would be unable to pay an award of costs against it.

5.3 The Tribunal notes but does not give particular weight in its decision to the financial structure of Claimant. Claimant does not dispute the fact that its equity consists purely of bearer shares, the total value of which amounts to … The Tribunal notes that Respondents were aware of Claimant's financial situation at all relevant times.

5.4 The Tribunal also notes that the legal fees incurred by Respondents in relation to this arbitration (as listed in the "Schedule of Respondents' Costs Incurred to Date”)¹² already significantly exceed Claimant's equity. In this respect, the Tribunal considers Respondents' concerns that Claimant has insufficient assets to satisfy a potential costs award as having a prima facie basis.

5.5 The Tribunal observes that Claimant has been able to secure funding for the payment of costs of this arbitration (meaning administrative costs and the estimated fees and expenses of the Tribunal). However, the Tribunal also observes that the submitted correspondence between the Parties and the ICC Secretariat demonstrates that Claimant had difficulties in securing funding for the commencement of these arbitral proceedings.

5.6 Finally, the Tribunal observes, and gives weight to, the fact that the Claimant's reliance on third party funding. In the light of all other circumstances, the Tribunal finds the presence of third party funding in this proceeding to support Respondents' concern that substantial risk exists that Claimant will not have financial ability to comply with a costs award rendered against it. The Tribunal agrees that if no guarantee is offered, a third party funder may not be willing to cover a potential award on costs, leaving Respondents with no viable possibility to enforce such award.

5.7 The Tribunal therefore finds a significant likelihood that Claimant will be unable to satisfy an eventual award of costs rendered against it.

5.8 Proceeding to the second stage of analysis and looking at all relevant circumstances in this case, the Tribunal concludes that it is fair and just to order security for costs and does not find that such an order bars the Claimant from pursuing its claim before this Tribunal.

…..

6. Conclusion

6.1 In conclusion, the Tribunal finds that Respondents have sufficiently demonstrated a significant risk that Claimant may not be able to satisfy a costs award rendered against it and that the ordering of security for costs is fair and just in light of all the circumstances of this case …

6.2 Under Article 37(1) of the ICC Rules, the costs of arbitration shall include the fees and expenses of the arbitrators and the ICC administrative expenses the fees and expenses of any experts appointed by the arbitral tribunal and the reasonable legal and other costs incurred by the parties. The Schedule of Respondents' Costs Incurred to Date¹³ indicates that Respondents' total costs to date, including Respondents' share of the provisional advance on costs amount to … Therefore, the Tribunal finds Respondents' request to set the security at … reasonable at this stage.

6.3 The Tribunal agrees that Respondents may apply for adjustments of the security. However, the Tribunal does not envisage a need for such adjustment at least until after the completion of the first round of pleadings. Any subsequent applications will be subject to the Tribunal's further deliberations and an evaluation of what is fair and just in the circumstances as well as an assessment of whether such an adjustment precludes Claimant from proceeding with a meritorious claim. The Tribunal observes and bears in mind that Respondents also pursue counterclaims in this arbitration.

6.4 In addition, the Tribunal notes that pursuant to Article 28(1) of the ICC Rules it may make the granting of an interim relief subject to appropriate security being furnished by the requesting party. Thus, in conjunction with powers vested in arbitral tribunals under Article 37 of the ICC Rules, the Tribunal observes that in the event of a decision not allocating the cost of this arbitration to Respondents, it reserves the power to place the cost of maintenance of the requested security on Respondents.

6.5 Although Article 37 of the ICC Rules states that the Tribunal may make decisions on costs at any time during the proceedings, it also indicates that the decision which of the parties shall bear the costs or in what proportion , shall be fixed in the final award. Therefore, the Tribunal finds Claimant's request to fix separately the costs related to dealing with Respondents' Applications and to award them to Claimant premature at this stage of the proceedings.

6.6 Further, the Tribunal would like to draw Parties attention to Article 37(5), which provides the Tribunal with full discretion as to the circumstances relevant for making the decision as to costs, in particular mentioning only that the Tribunal may take into account the extent to which each party has conducted the arbitration in an expeditious and cost-effective manner.

III. Order

7. Decision

7.1 On the basis of the foregoing, the Arbitral Tribunal al decides hereby:

1. Decides to order Claimant to provide a security for Respondent's reasonable legal costs and other costs incurred by it for the arbitration in the amount of …
2. …
3. Agrees that Respondents' should be at liberty to apply for readjustments of the security, subject to further deliberations by the Tribunal.
4. Denies Claimant's request to fix separately the costs related to dealing with Respondents' Applications and reserves the allocation of costs, including the costs of maintenance of the security, for a later decision or award.
5. Issues this Order without prejudice to all substantive issues in dispute and asserts that this Order should not be considered as prejudging any issue of fact or law concerning admissibility of claims in the present proceedings or merits of this case.

8. Form of Security

8.1 The Tribunal invites the Parties to agree on the implementation of this Order within 30 days. If Parties are unable to come to an agreement within the prescribed period, they shall notify the Tribunal and the Tribunal will issue a supplementary decision on the form of security granted by way of this Order.

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