Author: Joaquin Garino*
| Jurisdiction: International |
Topics: Investment Disputes Costs and Damages Third-Party Funding |
I. INTRODUCTION
With the Unionmatex v. Turkmenistan award,[1] there are now three investor-state tribunals that ordered a claimant relying on third-party funding to post security for costs.[2] In doing so, the tribunal shed light on the circumstances that tribunals consider exceptional enough to warrant an order for security for costs. This post looks to restate what those circumstances are.
II. ARBITRAL TRIBUNALS’ RELUCTANCE TO AWARD SECURITY FOR COSTS
In a well-known turn of phrase, Gavan Griffith compared an insolvent claimant relying on third-party funding to a “gambler’s Nirvana: Heads I Win, and Tails I do not lose.”[3] Indeed, if a respondent state were to prevail and be awarded costs in this situation, it might be unable to enforce that award against claimant, which has no funds of its own, or against the funder, who is not a party to the arbitration.[4] Ordering a claimant to post security for costs, one could argue, may be an effective way to negate this gambler’s nirvana.
However, tribunals in investment arbitrations have been reluctant to grant this type of provisional measure. The Unionmatex tribunal addressed the following concerns that generally weigh against granting security for costs: (i) it assumes that respondent will obtain both a favorable final award and a favorable costs award;[5] (ii) it may limit claimant’s access to justice if it cannot come up with funds to post the security;[6] and (iii) it may ignore that claimant’s financial problems were caused by respondent.[7]
So, in which circumstances will tribunals in investor-state arbitrations actually order a claimant to post security for costs? Awards show that these tribunals look at the elements of the following section.
III. CIRCUMSTANCES THAT JUSTIFY GRANTING SECURITY FOR COSTS
First, it is well settled that security for costs can only be granted in exceptional circumstances.[8]
Second, a claimant’s financial struggles plus its reliance on a third-party funder are not “extraordinary circumstances” by themselves.[9] They may be relevant, though, if they are accompanied by claimant’s prior improper behavior or bad faith maneuvers or by a financing agreement which releases a funder from liability under adverse awards on costs, as discussed below.[10]
Third, improper behavior in arbitral proceedings and bad-faith maneuvers with the objective of eluding liability under adverse awards on costs may warrant the granting of security for costs. In RSM v. Saint Lucia, the tribunal ordered claimant to post security for costs based mainly on claimant’s history of failing to comply with awards on costs.[11] Though this decision was highly dependent on the specific circumstances of that case, the tribunal in Orlandini v. Bolivia expanded the reasoning in RSM v. Saint Lucia, finding that “evidence of a claimant’s bad faith or improper behavior” would justify an order for posting security for costs.[12] This includes a history of non-compliance with awards on costs, behavior that affects the conduct of the proceedings in an efficient and orderly manner, and the fraudulent concealment of assets.[13]
Fourth, the text of the financing agreement is fundamental and may constitute “extraordinary circumstances” if the funder does not assume liability for adverse awards on costs. The tribunals in Garcia Armas v. Venezuela[14] and Unionmatex[15] considered this to be a critical element. In Unionmatex, the tribunal considered that the combination of the bankruptcy of claimant, its reliance on a third-party funder, and the fact that the funder assumed no liability for adverse awards on costs meant that respondent faced “not a risk but . . . a certainty that it could not collect a costs award.”[16]
Fifth, even when the elements discussed above are present in a given case, an objective assurance that claimant will comply with an eventual award on costs would probably force a tribunal to deny a request for security for costs.[17] Despite only being explicitly stated by the Unionmatex tribunal, this rule is implied in the reasoning of all the tribunals that granted security for costs. Indeed, why order claimant to post security for costs if the tribunal is confident that it will comply with an adverse award on costs? However, it is not yet clear what this “objective assurance” would look like, especially when claimant has a history of improper behavior or employing bad-faith tactics in arbitral proceedings.
IV. CONCLUSION
Claimants relying on third-party funding have been ordered to post security for costs in three investor-state proceedings. A number of elements that are useful for identifying in which circumstances an arbitral tribunal will order a claimant to post security for costs arise from these decisions. It is well established that security for costs can only be granted in exceptional circumstances and that financial distress plus reliance on third-party-funding are not enough on their own. However, the standard is gaining accuracy. Financial distress and third-party funding, coupled with claimant’s improper behavior in arbitral proceedings or bad faith or with a financing agreement which assigns no liability to the funder for awards on costs, are likely to persuade a tribunal to order claimant to post security for costs.
[1] Unionmatex Industrieanlagen GmbH v. Turkmenistan, ICSID Case No. ARB/18/35, Decision on the Respondent’s Request for Security for Costs and the Claimant’s Request for Security for Claim (Jan. 27, 2020), https://www.italaw.com/sites/default/files/case-documents/italaw11243.pdf.
[2] See RSM Prod. Corp. v. Saint Lucia, ICSID Case No. ARB/12/10, Decision on Saint Lucia’s Request for Security for Costs (Aug. 13, 2014), https://www.italaw.com/sites/default/files/case-documents/italaw3318.pdf; García Armas v. Républica Bolivariana de Venezuela, Case No. 2016-08, Orden Procesal No. 9 (Perm. Ct. Arb. June 20, 2018), https://www.italaw.com/sites/default/files/case-documents/italaw9849_2.pdf.
[3] RSM Prod. Corp., Decision on Saint Lucia’s Request for Security for Costs, Assenting Reasons of Gavan Griffith, ¶ 13.
[4] Nadia Darwazeh & Adrien Leleu, Disclosure and Security for Costs or How to Address Imbalances Created by Third-Party Funding, 33 J. Int’l Arb. 125, 131 (2016).
[5] Unionmatex, Decision on the Respondent’s Request for Security for Costs and the Claimant’s Request for Security for Claim, ¶ 50.
[6] Id. at ¶ 64.
[7] Id. at ¶ 66.
[8] Id. at ¶ 50. See also RSM Prod. Corp., Decision on Saint Lucia’s Request for Security for Costs, ¶ 75.
[9] Unionmatex, Decision on the Respondent’s Request for Security for Costs and the Claimant’s Request for Security for Claim, ¶ 54. See alsoEuroGas Inc. v. Slovak Republic, ICSID Case No. ARB/14/14, Procedural Order No. 3, ¶¶ 121-23 (June 23, 2015), https://www.italaw.com/sites/default/files/case-documents/italaw6272_0.pdf.
[10] See Estate of Julio Miguel Orlandini-Agreda v. Plurinational State of Bolivia, Case No. 2018-39, Decision on the Respondent’s Application for Termination, Trifurcation and Security for Costs, ¶ 144 (Perm. Ct. Arb. Jul. 9, 2019), https://www.italaw.com/sites/default/files/case-documents/italaw10679.pdf.
[11] RSM Prod. Corp., Decision on Saint Lucia’s Request for Security for Costs.
[12] Orlandini-Agreda, Decision on the Respondent’s Application for Termination, Trifurcation and Security for Costs, ¶ 143.
[13] Id.
[14] García Armas v. Républica Bolivariana de Venezuela, Case No. 2016-08, Orden Procesal No. 9, ¶¶ 225-227 (Perm. Ct. Arb. June 20, 2018), https://www.italaw.com/sites/default/files/case-documents/italaw9849_2.pdf.
[15] Unionmatex Industrieanlagen GmbH v. Turkmenistan, ICSID Case No. ARB/18/35, Decision on the Respondent’s Request for Security for Costs and the Claimant’s Request for Security for Claim, ¶ 60 (Jan. 27, 2020), https://www.italaw.com/sites/default/files/case-documents/italaw11243.pdf.
[16] Id. at ¶ 61.
[17] Id. at ¶ 63.
* LL.M. candidate at Columbia Law School. Doctor en Derecho y Ciencias Sociales by the Universidad de la República, Montevideo, Uruguay. Student editor at the American Review of International Arbitration. Former associate at FERRERE Abogados.