Impecuniosity Should Not Automatically Lead to Security for Costs

By Pierre-Olivier Savoie**

The ICCA-Queen Mary Task Force’s Draft Report on Third Party Funding (TPF) has to be commended. Even for those who have familiarity with TPF, the Draft Report provides a broad range of analysis and information that is both welcome and important.

However, with respect to security for costs, the report appears to create new criteria that could significantly change existing practice. Where a claimant is found impecunious, the Draft Report seems to suggest that, absent the existence of third-party funding, security for costs will automatically be ordered against the impecunious claimant.

Recommendation 15 (p 148) provides:

“If a party is found to be impecunious, that party should be given the opportunity to present additional evidence of funding or have a security for costs award imposed.”

This recommendation appears based on the principle that all security for costs applications should only be concerned with impecuniousness (p 114):

“Applications for security for costs should be determined irrespective of any funding arrangement and on the basis of impecuniousness.”

According to the Draft Report (p 166), Recommendation 15 and its underlying principle would reflect existing international arbitration practice:

“The legal frameworks and practical considerations regarding costs and security for costs, in both investment and international commercial arbitration, are analyzed in Chapter 6. The conclusions there, based on analysis of existing sources and reported investment arbitration cases is that the existence of third-party funding is generally irrelevant to either a determination of a request for security for costs or a final allocation of costs at the end of the case. The Task Force concluded that the principles articulated are a sound reflection of existing standards and economic principles that affect analysis in particular cases.”

Existing practice on security for costs is in fact more nuanced. The principle reflected in Recommendation 15 of the Draft Report is too reductionist, assuming that impecuniosity automatically leads to security for costs (unless appropriate funding that covers adverse costs is shown).

For example, Article 1 (General Principles) of the Chartered Institute of Arbitrators’ recent guideline on “Applications for Security for Costs” (p 3) establishes a balancing test that focuses primarily on what is just in the circumstances:

“When deciding whether to make an order for security for costs, arbitrators should take into account the following matters:

i) The prospects of success of the claim(s) and defence(s);

ii) The claimant’s ability to satisfy an adverse costs award and the availability of the claimant’s assets for enforcement of an adverse costs award;

iii) Whether it is fair in all of the circumstances to require one party to provide security for the other party’s costs.”

Under that test, it is possible that an impecunious claimant should be ordered to post security for costs. However, it is also possible that a tribunal will determine that it is fair not to order security for costs, even where the claimant is impecunious and has provided no evidence of funding. This may be the case where the claimant has high prospects of success. Other relevant circumstances may be the purposeful avoidance of contractual obligations by the respondent or other egregious behavior. A tribunal may also consider that, absent special circumstances, a good faith claim should simply be allowed to proceed.

Arbitral rules already contain other safeguards against impecunious claimants. They include the possibility to terminate cases where claimants fail to pay their costs advances. This is what happened in Melvin Howard v Canada, a NAFTA case under the UNCITRAL rules which the respondent described as “frivolous.” In that case, the claimant, seeking CAD 160 million in damages, failed to pay even its first advance.

Moreover, in RSM v St. Lucia, while the claimant was found by the tribunal to be impecunious, it was established that the claimant had funding. This did not prevent the tribunal from ordering security for costs. Rather, the tribunal’s analysis was influenced by the “exceptional circumstances” of the claimant’s behavior, including a number of unpaid costs awards in other proceedings.

For its final report, we therefore suggest that the Task Force reconsider its recommendation that “impecuniousness” automatically triggers a security for costs order. It may rather be important to take into consideration all circumstances.

 

** The author is an independent arbitration practitioner based in Paris and Ottawa. For full disclosure, the author was counsel to the Government of Canada in the Melvin Howard case and was also counsel to a defendant in RSM Production Corp and others v. Fridman and others, 643 F. Supp. 2d. 382 (S.D.N.Y. 2009), a New York litigation parallel to ICSID cases brought by RSM against Grenada where it failed to pay costs awards taken into consideration in RSM v St. Lucia.

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