Security for costs is a key weapon in the arsenal of a respondent facing an unmeritorious claim. By applying for and obtaining security for costs, a respondent can obtain some comfort that if it ultimately prevails in the arbitration, it can recover what are often the substantial legal fees incurred in defending the claim. Indeed, faced with an order for security for costs, a claimant may be inclined to reach a settlement or drop its claim altogether. In the event that a claimant fails to comply with an order to provide security, the tribunal may dismiss the claim.1 Utilised strategically, a security for costs application can therefore influence the dynamics of an arbitration to the respondent's considerable advantage.
The LCIA has released for the first time statistics regarding applications for interim relief, highlighting that security for costs is the most frequent type of application, and the most often successful. 32% of the 31 applications for security for costs received by the LCIA in 2017 were granted by tribunals.2
This SpeedRead considers: (1) the grounds for an application for security for costs in arbitration; and (2) practical tips for making an effective application.
Obtaining security for costs assists a respondent in recovering the costs of defending claims brought by claimants whose assets may be hard to locate, or of limited value. Should a respondent succeed in defending the claims in the arbitration, the respondent's legal costs can be recovered from the secured sums.
Under section 38 Arbitration Act 1996, a tribunal is empowered to order a claimant to provide "security for the costs of the arbitration", unless otherwise agreed by the parties. This position is reflected in a number of the major institutional rules on arbitral procedure. Under Rule 25.2 of the LCIA Arbitration Rules (2014), a tribunal has the power, upon the application of a party, to order a claiming or cross-claiming to provide or procure security for legal costs3 and arbitration costs4.
All other parties to the proceedings are afforded a "reasonable opportunity" to respond to the application.
In deciding whether to grant security, a tribunal is likely to give consideration to a number of factors including:
As to the form of the security, that may be provided by way of deposit, bank guarantee, or in any other appropriate manner. The LCIA itself is able to hold funds on the parties' behalf.
In similar fashion to other forms of interim relief, the tribunal may order payment of security upon such terms as it "considers appropriate in the circumstances". Those terms may include the provision by the applicant of a cross-indemnity for any costs or losses incurred by the claimant or cross-claimant. The tribunal has the power to determine in an award any amount payable under a cross-indemnity and any consequential relief.
That is to say, if it later transpires that the order for security for costs should not have been granted and the provision of such security by the claimant caused the claimant damage and loss, the applicant for such security may well be required to make good that loss.
Whilst a number of procedural rules are as not explicit as the LCIA's are on a tribunal's power to award security for costs, tribunals have a broad discretion to order interim relief under the rules of the ICC,6 ICSID,7 and UNCITRAL.8
Before making an application to a tribunal, it is good practice to write to a claimant asking for security to be provided on a voluntary basis.
An application for security for costs is typically supported by a witness statement setting out the factual basis on which security is sought, as well as substantiating documents. The applicant should seek to provide the tribunal with credible evidence, for example regarding the claimant's financial position, any history of non-payment, and sufficient evidence of the claimant's inability or unwillingness to pay any adverse costs order. Extracts from the claimant's financial reports and reputable news sources are likely to assist in this regard.
A tribunal may be assisted by information regarding, for example, the claimant's operating assets, profit margins, and ratio of net interest, each across a number of years. Equally, if such information is not available, or the claimant fails to provide it, this may further strengthen an application.
In considering an application, a tribunal will normally consider whether the sum requested is realistic and proportionate, in view of the complexity of the dispute. A party should give careful consideration therefore as to the amount of security requested. Providing the tribunal with a schedule of costs, setting out estimated fees for each phase of the proceedings, may be of value.
Tactical considerations that should be considered include the timing of any application for security for costs, which can be made at any point in the proceedings.
Part of Bird & Bird's series of Arbitration SpeedReads aimed at providing busy practitioners and in-house counsel with easy to read updates on topical Arbitration issues.
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1 Arbitration Act 1996, section 41(6).
2 LCIA, '2017 Casework Report', p.3, available at: http://www.lcia.org/News/lcia-releases-2017-casework-report.aspx. In contrast, only 10 applications were made for provision of security for the total amount claimed.
3 Defined in the LCIA Rules as "legal or other expenses incurred by a party".
4 Defined in the LCIA Rules as "costs of the arbitration other than the legal or other expenses incurred by the parties themselves".
5 Chartered Institute of Arbitrators, 'Applications for Security for Costs' (2015) and 'Applications for Interim Measures' (2015).
6 Arbitration Rules (2017), Article 28.
7 ICSID Arbitration Rules (2006), Rule 39; ICSID Convention, Article 47.
8 UNCITRAL Arbitration Rules (2010), Article 26.