Date: Procedural Order 3, 2014

Origin of the parties: Central and Eastern Europe

Place of Arbitration: Vienna, Austria

I. Respondents’ Requests for Security for Costs

1. In a submission dated 8 November [Year Y], Respondent 1 requested that Claimant be ordered to provide for security costs in the amount of EUR … either by way of payment into an account held in escrow by the ICC or by posting a first demand guarantee.

2. In a submission dated 13 November [Year Y], Respondent 2 also requested a Security for Cost Order. Respondent 2 requested an amount of EUR … In all other respects the terms of the requested order are the same as those in Respondent 1’s request.

II. Respondents’ Positions

3. Respondent 1’s position can briefly be summarized as follows

i. Claimant is still in the process of leaving an administrative bankruptcy procedure, has been teetering on the brink of bankruptcy for some time and owes its creditors … US Dollars;

ii. Recently, it is reported that Claimant’s revenues have seriously declined and it has fired many staff members;

iii. The 28-day extension requested by Claimant to substitute for Respondents’ unpaid advance towards costs suggests that Claimant cannot determine itself how it can spend the money;

iv. There is a very high risk that Claimant will be unable to meet its payment obligations towards Respondent 1 if the latter prevails in the arbitration;

v. Claimant’s situation is a textbook case in which the Arbitral Tribunal should order security for costs;

vi. The Arbitral Tribunal has the power to order the security requested under the ICC Rules.

4. Respondent 2 adopts the position of Respondent 1 and additionally submits that an order for security for costs is particularly justified as the Arbitral Tribunal prima facie lacks jurisdiction over Respondent 2. Claimant’s Request offers no threshold evidence that (i) there is a dispute between Claimant and Respondent 2 and (ii) if there were one, it has been properly put before a DAB in order to be admissible in arbitration.

III. Claimant’s Position

5. Claimant’s position can briefly be summarized as follows:

i. An ICC arbitral tribunal may, in certain circumstances, award security for costs but should do so only in exceptional circumstances. No such circumstances exist in the present case.

ii. Despite academic texts there is no consensus on the circumstances in which security for costs may be awarded. However in legal writing, common themes emerge which Claimant sets out in detail.

iii. The evidence relied upon by Respondents is out of date and so cherry-picked as to be misleading.

iv. After having undergone a court controlled procedure of financial restructuring, which was successfully completed by a recapitalization, Claimant is of good financial standing (several indicators for such standing are given).

v. Respondents’ failure to pay their share in the advance of fees and costs must be taken into account. So must be the late hour at which Respondents requests were brought.

vi. The relative merits of both sides’ cases must also be considered.

IV. Discussion

6. Claimant does not dispute the power of an ICC arbitral tribunal to award security for cost in general. The Arbitral Tribunal agrees.

7. Claimant’s case is more about the prerequisites that must be met before an Order for Security for Cost can be made in the Arbitral Tribunal’s discretion than about anything else. Now, what are these prerequisites?

8. Article 28 ICC Rules, which the parties correctly invoke, does not set out any prerequisites that must be met for a conservatory or interim measure to be granted. The Arbitral Tribunal has considered the discussion in the legal writing Claimant has supplied. In addition, the Arbitral Tribunal considers it appropriate to look into mandatory provisions of the lex arbitri which, with Vienna, Austria, being the seat of the arbitration, is Austrian law.

9. Austrian arbitration law is contained in sections 577 to 618 of the Austrian Code of Civil Procedure, as amended in 2013 (in German: Zivilprozessordnung; hereinafter referred to as “ZPO”).

10. The mandatory provision of section 593 ZPO deals with interim and conservatory measures by arbitrators. Section 593, subsection (1) ZPO enumerates the prerequisites that must be met for an interim or conservatory measure to be granted, namely:

i. The measure must be deemed necessary in relation to the subject matter of the dispute if, in the absence of the measure, either

ii. the enforcement of the claim would be frustrated or substantially impaired, or

iii. irrecoverable damage would occur.

11. Section 593 ZPO deliberately mirrors the relevant wording of section 381 of the Austrian Enforcement Code (in Geman: Exekutionsordnung; hereinafter referred to as “EO”). The EO applies to conservatory or interim measures by courts.

12. Although it is not entirely clear whether the concepts of “frustration” and “substantial impairment” as developed under the EO also apply to security for cost orders in the context of arbitration, the Arbitral Tribunal will discuss them together with the notion of “irrecoverable damage”. In the Arbitral Tribunal’s mind, the result is the same whichever of these concepts is the more relevant or applicable one.

13. Respondent 1 relies on “The Secretariat’s Guide to ICC Arbitration”. The Guide says that, where “there is a substantial risk that a party (usually the claimant) may not be able to cover the other side’s arbitration costs […], the arbitral tribunal may order” security for costs. The Secretariat’s commentary is not a far cry from the criteria developed by Austrian courts and commentators.

14. Damage is “irrecoverable” if, for instance, harm cannot be compensated due to the wrongdoer’s (the other party’s) inability to pay.¹

15. Respondents, in essence, maintain that Claimant will not be able to reimburse their arbitration costs (if awarded) due to its dire financial situation.

16. On the evidence, it appears that Claimant has undergone a court controlled financial restructuring. The necessary pre-bankruptcy settlement between Claimant and its creditors was approved by the court on 29 January [Year Y]. It was signed on 14 February [Year Y]. Claimant’s recapitalization was successfully completed by 22 July [Year Y]. The recapitalization attracted huge interest and was actually oversubscribed. A “Company Solvency Report” by … dated 17 November [Year Y], among other things, shows that there were no account freezes within the last 60 days and records zero outstanding liabilities.

17. In contrast to the more, and partly even very, recent evidence provided by Claimant, the evidence provided by Respondent 1 (Exh…) is clearly outdated.

18. The burden to prove an instance that warrants a Security for Costs Order lies on the Respondents. It lies in the nature of an application for conservatory or interim measures that the standard of proof is somewhat lower (no matter where exactly the threshold lies) than the standard applicable if the matter concerned the substance of the case. While it may be relatively easier for an applicant to “prove” its case, it is also relatively “easier” for the other party to “disprove”.

19. In the instant case, Claimant’s evidence is overwhelmingly stronger than that provided by Respondents. The Arbitral Tribunal is unable to see a serious, or any, risk that Claimant’s financial situation would render Respondents’ claims for reimbursement of costs, if any, frustrated or impaired or irrecoverable.

20. The above analysis in itself is fully dispositive of Respondents’ requests.

21. In addition the Arbitral Tribunal considers that a party cannot claim for security for costs if that party has failed to pay its share in the ICC cost advance as it has agreed it would do by agreeing on arbitration under the ICC Rules, thereby shifting the burden (however big or small) to finance the advance entirely on the claimant.

22. As to the relative merits of the parties’ cases, the pleadings and the evidence are still incomplete and it would be wrong for the Arbitral Tribunal to venture any opinion at this stage, however preliminary it may be. This is finding is also dispositive of Respondent 2’s additional argument that it has a prima facie case of lack of jurisdiction.

V. Order

23. Respondents’ requests for an Order for Security for Costs are dismissed.

---

---