In our blog on costs in international arbitration, we explained the type of costs that may be incurred in arbitral proceedings and outlined some of the factors that are likely to be considered by tribunals when allocating costs. In this blog we consider the circumstances in which Tribunals may require one party to post security for the adverse costs it will incur in the event that its claims fail. Security for costs is designed to offer protection to a party that faces claims against it from an opponent who, on the face of it, may be unable to satisfy any adverse costs award or has very limited prospects of success.
Most arbitral institutions and national laws either expressly provide that tribunals may order security for costs or at least empower tribunals with sufficiently broad discretion in relation to interim measures to allow security for costs orders to be granted. Often, such orders will require security to be posted by the claiming party before it can further advance its claims. Accordingly, applications can be an effective strategic tool.
In what circumstances will security for costs be awarded?
Arbitrators have a broad discretion, enabling them to determine the merits of security for costs applications on a case-by-case basis. Useful guidance issued by the Chartered Institute of Arbitrators sets out points for consideration, including:-
- the prospects of success of the claims and defences;
- the claiming party's ability to satisfy an adverse costs award and the availability of the claiming party's assets for enforcement of an adverse costs award; and
- whether it is fair in all of the circumstances to require one party to provide security for the other party’s costs.
When assessing the merits and prospects of claims, it is important that a tribunal avoids pre-judging the merits of the case, otherwise it is at risk of its impartiality being called into question. Accordingly, it should not seek to determine disputed issues of fact or law as part of its assessment.
The existence of an ATE Policy (an insurance policy which covers the legal costs and disbursements involved in litigation or arbitration) ought to be taken into account when considering a party's ability to satisfy adverse costs. If the policy gives the applicant adequate security, then there is no need for further security to be granted by the tribunal. Sufficiency of the policy will of course turn on its precise terms, in particular the level of cover and the potential for the insurer to avoid paying out.
When considering whether a security for costs application is fair and reasonable in all of the circumstances, a tribunal has wide discretion to consider all factors it considers relevant. By way of example, part of the claiming party's case may be that the party applying for security caused the impecuniosity which it now relies upon to argue for security. The tribunal may take that into account, particularly if it considers there is a risk granting an order would stifle what appears to be a claim with reasonable prospects.
How a tribunal determines the level of security
The applicant will specify the amount of security it considers is required. That amount should be based on an estimate of the overall cost it will incur in connection with the arbitration proceedings. The tribunal should consider (with the benefit of submissions from parties) whether that figure is reasonable taking into account the nature of the dispute, the number of hours estimated for the required work and the chargeable rates applied to those hours.
What form will the security take?
Again, a tribunal has broad discretionary powers in this regard. Common forms of security include bank guarantees, parent company guarantees, security over property and lodging of funds in a joint account controlled by lawyers.
If security is not provided, the consequences of this will depend on the applicable national laws and institutional rules but will generally range from staying (freezing) the proceedings to dismissing the defaulting party's claims.
Security for costs is a powerful weapon in the hands of a party defending a claim or counterclaim in arbitration. How and when to make an application to require security is a key tactical decision.