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Reexamining the role of security for costs

  • Jeffery Commission, Craig Arnott
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Jeffery Commission

Jeffery Commission

Director

Former Senior Associate, Freshfields

Read Craig Arnott's Profile
Craig Arnott

Craig Arnott

Deputy Chief Investment Officer

Former Barrister and Partner, Fried Frank

In the last decade, requests for provisional measures in international arbitrations have increased significantly, roughly on par with the number of cases filed. Among these interim measures, security for costs applications have been the most frequently sought, comprising 20% of all provisional measure decisions.[1]

Yet even as such applications become more common, they rarely have been granted in practice. Of the publicly available ICSID decisions since 1984, just three represent successful security for costs applications. As affirmed in Tennant Energy, LLC. v. Government of Canada, “In considering requests for security for costs, investment arbitration tribunals have emphasized that this power may only be exercised where there are ‘exceptional circumstances’.”

Due to their low success rate and exceptional nature, such applications demand greater attention as they become more common, particularly in funded cases. While tribunals have routinely found that the fact of funding alone is not sufficient to establish the need for security for costs, the evolving nature of third-party financing reflects an important extension of that wisdom: Funding is no longer indicative of a claimant’s financial standing, as companies increasingly recognize the financial benefits and efficiencies associated with third-party financing, regardless of cash position. Given this empirical fact, it is imperative that the relationship between third-party funding and security for costs applications be reconsidered.

Security for costs: An historical analysis

In addressing the current landscape for costs applications, it is important to frame the discussion with historical data.

Notably, though tribunals have broad discretion to award provisional relief measures, security for costs applications were infrequent until very recently. Between 1984 and 2015, just 30 such applications were filed in ICSID and UNCITRAL proceedings. Since 2015, however, claimants and respondents have filed 36 applications under the same rules.

Generally, security for costs applications have been sought by respondents, and predominantly in ICSID proceedings. Indeed, respondents have filed 88% of all applications under ICSID and UNCITRAL rules. And of 66 concluded applications, 46 have been filed in ICSID proceedings.

Despite the pronounced increase in security for costs applications in the last decade, success remains elusive for the party seeking provisional relief. Across all ICSID and UNCITRAL arbitration proceedings, just 4% of security for costs applications have been granted while 77% have been rejected. In the remainder of cases, the decisions are either pending or not publicly available.

Security for costs in practice

Tribunals now regularly question whether a respondent has a procedural right worthy of preservation in seeking security for costs. For instance, in a 5 November 2019 decision in a funded ICSID arbitration—Jochem Bernard Buse v. Republic of Panama (ICSID Case No. ARB/17/12)—the tribunal denied Panama’s security for costs application, questioning whether such a right existed, given that a prospective Panama victory and tribunal cost order were entirely speculative at that stage.

What is more, although ICSID has explained that states in investment arbitrations share a central concern—the risk that claimants will fail to comply with costs awards—very few costs awards in favor of states go unpaid in practice. And this is not just anecdotal: As part of ICSID’s recent rule amendment process, it conducted a survey concerning compliance with awards of costs, based on all ICSID Convention and Additional Facility awards and post-award decisions issued between October 14, 1966 and April 1, 2017. The results were striking: Most awards in favor of States were paid, and for those few that were not paid, “States [did] not always seek to enforce awards in their favor that [had] not been complied with.”[2]

The impact of third-party financing

Historical data and recent decisions make clear that security for costs are reserved for cases in which the party filing the application can show necessity, urgency and exceptional circumstances—an undoubtedly high bar.

Yet, in what is becoming a routine occurrence in ICSID arbitrations, upon learning of the existence of third-party funding, respondents often file applications seeking security for costs. Tribunals have rightly continued to dismiss such spurious applications. Further, they have confirmed that the fact of funding alone is not sufficient to establish the need for security for costs. But in light of new data, that argument must be taken a step further.

The assumption that funding is indicative of impecuniousness can be made no longer, as companies increasingly recognize the financial benefits associated with third-party financing, regardless of cash position. Burford’s 2019 Legal Finance Report, based on responses from over 500 in-house and law firm lawyers from around the world, reveals that 67% of in-house lawyers agree that even large companies benefit by reducing the cost impact of litigation. And further, 72% of law firm lawyers cite as an important or very important benefit of outside finance that it allows firms to invest in growth and use capital efficiently. Moreover, these findings demonstrate that legal finance now resembles corporate finance for law; far from indicating a lack of resource, use of third-party capital reveals a party’s financial savvy.

Thus, arguably, security for costs applications are straying from their intended purpose—particularly in funded cases.

Still, security for costs applications remain a risk that claimants must consider—and Burford is uniquely positioned to help. Burford’s arbitration analytics can help claimants make educated choices about how to approach provisional measures before and during arbitration proceedings. Claimants can also leverage Burford Worldwide Insurance Limited, Burford’s one-of-a-kind ATE insurance vehicle, to further reduce risk in a funded arbitration.

Conclusion

There is little reason to believe that respondents will diminish their use of security for costs applications, despite the scant success of such measures. It is critical, then, for tribunals, respondents and claimants alike to better understand the evolving role of third-party financing in international and investment arbitration. To ignore the realities of an arbitration landscape in which outside financing is the norm is to put justice for claimants at risk.

 

[1] David Goldberg, Yarik Kryvoi, Ivan Philippov, 2019 BIICL/W&C Empirical Study: Provisional Measures in investor-state arbitration

[2] ICSID Secretariat, “Survey for ICSID Member States on Compliance with ICSID Awards”, 2018, p. 5.