Recently published decision confirms exceptional nature of security for costs

Out of nearly 70 known applications filed since December 1984, only four requests for security for costs have been granted in investment arbitrations brought under the ICSID, ICSID Additional Facility and UNCITRAL arbitration rules.[1] Only two of these four decisions were publicly available until September 2020, when the procedural order on security for costs issued in Eugene Kazmin v. Republic of Latvia came to light. The decision confirms the exceptional nature of the remedy.

While increasingly requested by respondents in international arbitrations, security for costs is rarely granted, with tribunals finding that it should only be available in extreme and exceptional circumstances.[2] This is largely because security for costs raises unique concerns, such as the risk of prejudging the merits of the dispute and impeding access to justice.

Prejudging merits

Because security for costs applications refer to the protection of conditional and future rights, tribunals may risk inappropriately prejudging the merits of the dispute when considering this kind of provisional relief. As noted by the tribunal in Maffezini v. Spain,[3] any right to re­imbursement for legal costs is premised on two hypothetical conditions being met: One, whether the respondent will prevail, and two, whether the tribunal will require the claimant to pay for the respondent’s costs. This latter determination is generally within the discretion of the tribunal and relevant factors may include the conduct of the parties during the proceedings. 

Impeding access to justice

In addition to risks around prejudging the dispute, requiring a party to post security for future potential adverse costs imposes an additional financial burden that may impede that party’s ability to pursue its claims. This is particularly relevant in the context of investment arbitration, where proceedings tend to be especially costly and a claimant’s financial difficulties may be caused by the very respondent actions that are the subject of the dispute. Consequently, investment tribunals assessing security for costs applications have cautioned against imposing an additional financial requirement on claimants as a condition for their case to proceed.[4]

Eugene Kazmin v. Republic of Latvia

In Kazmin, the recently surfaced procedural order reveals that the respondent state sought security in the amount of €4 million or “any amount deemed reasonable by the tribunal”. According to the state, exceptional circumstances warranting an award of security for costs included the fact that the claimant had been the subject of criminal investigations in Ukraine, pursuant to which Ukrainian authorities had seized the claimant’s assets on the suspicion that he had used his companies to further tax evasion and money laundering schemes, as well as alleged misconduct in Latvia, which involved the claimant purportedly using his companies to move assets out of the reach of creditors. Latvia also indicated that the claimant had failed to pay his former counsel in the arbitration, and that it would be impossible for the state to enforce a cost award against the claimant, given that the claimant held assets in Crimea—a territory controlled by the Russian Federation, whose annexation Latvia refused to recognize—and that assets held elsewhere in Ukraine had been seized by government authorities. 

The tribunal’s reasoning in granting the request

Taking these past misdeeds into account, the tribunal granted Latvia’s request for a security order. The tribunal found that the claimant’s “unusual business practices” underscored a risk of future non-compliance with a potential costs award. In particular, the tribunal found that the criminal investigations conducted against the claimant in Ukraine, even if ultimately closed and not resulting in convictions, provided sufficient evidence to “raise justified and serious concerns about the claimant’s business practices and eventual willingness to comply with a costs order if one were to be made”. The tribunal also found to be relevant “the claimant’s documented practice of moving assets to reduce their exposure to creditors’ claims”. 

Notably, the tribunal specified that its main concern was not the claimant’s lack of sufficient assets to pay an eventual costs award, but rather his practice of structuring investments and business transactions to skirt his financial obligations at the expense of his creditors. In other words, it was not the claimant’s inability to comply with an eventual costs award, but rather his likely unwillingness to do so which moved the tribunal to grant the extraordinary relief sought by Latvia.

The tribunal awarded the respondent security in the amount of €3 million, to be provided in the form of an irrevocable bank guarantee.[5] The tribunal based its decision on the median average of respondents’ costs claimed in other investment arbitrations rather than the mean figure, finding this to be distorted by the largest claims.

Conclusion

The Kazmin tribunal’s reasoning is consistent with prior decisions noting the high bar for security for costs applications. In particular, the decision follows the approach adopted in RSM Production Corporation v. St Lucia, where the tribunal similarly relied on the claimant’s abusive conduct to grant the respondent’s request for security for costs. Importantly, the Kazmin decision is consistent with prior decisions finding that a claimant’s impecuniosity is insufficient to justify a security order. As stated by the tribunal in the case of Lighthouse v. Timor-Leste, “[s]omething more is required”[6], with the focus often being on the conduct of the parties and whether there has been an element of bad faith.[7] 

Notably, third party funding was not an issue in Kazmin.  Respondents in international arbitrations often seek security orders upon learning that the claim or claimant is receiving external financing. What the decisions have confirmed, however, is that the fact of funding alone is not sufficient to establish the need for security for costs; something more is required. That said, security for costs applications remain a risk that claimants in international arbitration proceedings must consider. Burford can provide helpful tools, including access to Burford Worldwide Insurance Limited, Burford’s ATE insurance vehicle, to further reduce risk in a funded arbitration.

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[1] See RSM Production Corporation v. Saint Lucia (ICSID Case No. ARB/12/10), Decision on Saint Lucia’s Request for Security for Costs (August 13, 2014); Manuel Garcia Armas et al. v. Republic of Venezuela (PCA Case No. 2016-08), Procedural Order No. 9 (20 June 2018); Eugene Kazmin v. Republic of Latvia (ICSID Case No. ARB/17/5), Procedural Order No. 6 (April 13, 2020); Adamakopoulos et al. v. Cyprus (ICSID Case No. ARB/15/49) (decision not publicly available).  A request for security for costs was also initially granted in the matter of Dirk Herzig as Insolvency Administrator over the Assets of Unionmatex Industrieanlagen GmbH v. Turkmenistan, but subsequently rescinded in light of access to justice concerns, given the claimant’s inability to obtain security at a reasonable cost.

[2] See, e.g., Tennant Energy v. Gov’t of Canada (PCA Case No. 2018-54), Procedural Order No. 4 (Feb. 27, 2020), para 173.  

[3] Emilio Agustin Maffezini v. Kingdom of Spain (ICSID Case No. ARB/97/7), Procedural Order No. 2 (Oct. 28, 1999), paras 16-21.

[4] See, e.g., Julio Miguel Orlandini-Agreda and Compania Minera Orlandini Ltda v. Bolivia (PCA Case No. 2018-39), Decision on the Respondent’s Application for Termination, Trifurcation and Security for Costs (July 9, 2019), para 145; Eskosol S.p.A. in liquidazione v. Italian Republic, (ICSID Case No. ARB/15/50), Procedural Order No. 3 (Apr. 12, 2017), para 38; Burimi SRL and Eagle Games SH.A v. Republic of Albania, (ICSID Case No. ARB/11/18), Procedural Order No. 2 (May 3, 2012), para 41.

[5] The claimant subsequently failed to post security and the proceedings were suspended.

[6] Lighthouse Corporation Pty Ltd and Lighthouse Corporation Ltd, IBC v. Democratic Republic of Timor-Leste, (ICSID Case No. ARB/15/2), Procedural Order No. 2 (Feb. 13, 2016), para 61.

[7] Polasek M. & Salinas Quero C. E. (2020), Chapter 21: Security for Costs: Overview of ICSID Case Law, in S. Tung, F. Fortese, C. Baltag (Eds.) Finances in International Arbitration: Liber Amicorum Patricia Shaughnessy, The Netherlands: Kluwer Law International B.V.