Serbia: Security For Costs In Investment Arbitration: Who Should Bear The Risk Of An Impecunious Claimant?

When allocating costs, investment arbitration tribunals apply two principles: a "pay your own way" principle which provides that each party pays its own legal costs and they effectively share the costs of the proceedings, and secondly a "costs follow the event" or "loser pays" principle which provides that the losing party bears the costs of the proceedings including the legal costs of the successful party. The latter is more frequently applied in its "adjusted" form, i.e. the costs are allocated in proportion to the relative success of the parties on different issues.

The "pay your own way" principle, applied by the majority of tribunals, was perceived as the traditional approach in investment arbitration. However, this no longer seems to be the case as the "(adjusted) costs follow the event" principle becomes more frequently endorsed.

As the application of the "costs follow the event" principle increases, so do the number of issues to be dealt with by the tribunals in investment arbitration. In the context where the successful respondent state can expect to be awarded (at least some of) the costs, security for costs comes under the spotlight.

The award, naturally, has value for the parties as long as it is not just a dead letter, but an effective enforceable decision. From the aspect of the respondent state, it means that at the end of the day, if it wins the arbitration it will be able to recover at least some of the taxpayers' money spent on the defence from the groundless claim(s).

However, if an impecunious claimant is on the opposite side, recovery of the awarded costs becomes mission impossible. And although the tribunal may have recognised and acknowledged the respondent's right to recover the costs, the award becomes of no value to the respondent. Arbitration disputes are not equally burdensome in respect of various states world-wide, and while the consequences of some "worthless" awards may pass unnoticed in certain states, they can have significant adverse effects on others.

The respondent state's only recourse to prevent these situations (and indirectly protect integrity of the proceeding and the award) is to request security for costs early in the arbitral proceedings. Such request would also be a strong defence tool against arbitral "hit and run" (claims funded by a third-party funder that cannot be subject to any costs awards).

But, the tribunal confronted with such request faces another concern: would an order for security for costs prevent the claimant from pursuing a meritorious claim? To order the claimant, who may indeed be facing some financial difficulties, to post a security equivalent to the respondent's expected costs, may well be equal to depriving it of its right to access the arbitral justice. Should the claimant's financial position affect its right of access to arbitral justice in the first place? And, moreover, what if the very reason the claimant found itself in financial difficulties is as a result of the actions/omissions of the respondent state, which forms the subject matter of the claim?

Clearly, two conflicting, yet legitimate interests exist: the right of access to arbitral justice and the right to recover awarded costs. Yet, someone has to bear the risk of the impecunious claimant.

There are no set rules on this topic. The overall impression gleaned from the still very scarce cases that deal with the issue is that the tribunals were cautious and even reluctant to order security of costs save under some exceptional circumstances (claimant's track-record of failing to comply with the arbitral tribunal's order, claimants stripping itself of the assets, abuse or serious misconduct, etc.)

The first obvious step for the tribunal is to determine whether it indeed is dealing with the case of an impecunious claimant. In some existing decisions security for costs was denied as the respondent was unable to meet the burden of proof and substantiate its allegations that the claimants will not be able to pay the costs at the end of the arbitration.

However, there are other cases where this is not an issue: empty shell companies, insolvent companies, companies already involved in bankruptcy proceedings, etc. In situations where the respondent is only concerned that the claimant will not be able to pay its costs at the end of the arbitration, and it becomes clear to the tribunal that the claimant has no assets (and, therefore, that it will not be able to pay the costs of the arbitration), is it indeed necessary and justified to request existence of additional, extraordinary circumstances to order security for costs? Is it indeed necessary for some kind of bad faith to be evident on the claimant's side? From the respondent's perspective, inability to recover the awarded costs is equally harmful, regardless of whether the claimant was acting in bad faith or not.

Wouldn't it be justified for the tribunal to ensure only that it were not the respondent's actions/omissions that caused the claimants' lack of assets in such cases? However, this test is not a simple exercise either. In fact, it will likely require the tribunal to analyse and take a position on certain issues on the merits very early in the process (to determine relevant actions/omissions, attribution, consequences, etc.). Additionally, it also begs the question, what if the tribunal determines that the respondent's actions/omission only contributed to the claimant's poor financial position, but did not exclusively or even predominantly cause it? What would the threshold then be when this contribution prevents ordering security for costs?

Moreover, the heated third-party funding debate pending in investment arbitration community just adds more controversy to the issue of security for costs.

It has become the increasingly adopted view (also recommended by ICCA-QMUL TPF Task Force in their Report on Security of Costs) that the mere existence of the third-party funding agreement should not automatically and on its own indicate that the claimant is impecunious. Yet, it does stir up the debate as to what it does indicate.

Is it necessary to order disclosure of third party funding agreements when analysing securing for costs requests in this setting? How is a tribunal supposed to analyse the third party funder's influence without reviewing the terms of its engagement?

There are views that the existence of a third-party funding agreement can actually be an indication that the claim is not frivolous. This follows from the fact that third-party funders conduct their own due diligence and are arguably not willing to fund meritless claims. Prior to drawing any conclusions in this respect, it would be necessary to analyse who the third party funder is (institution or individual with interests of its own), its background and portfolio. Further, if the third-party funder finds the claim meritorious and is willing to fund it why would it not be appropriate to shift the risk to the third-party funder and request it to advance the respondent's costs?

Concerning this topic, it seems that the only undisputed facts are the following: the parties and their counsel will have a tough job making a prediction of how successful a request for security for costs will be, and we are yet to see what standards will be developed by the tribunals for this issue in arbitrations to come.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions