Arbitration and Security for Costs Federica Iorio

Transcription

1 Arbitration and Security for Costs

2 What is Security for Costs? SECURITY for COSTS Order issued in the course of the litigation having provisional nature and subject to a final decision to secure the amount representing the costs of the arbitration. SECURITY for CLAIM Order issued in the course of the litigation having provisional nature and subject to a final decision to secure the amount representing the claim. 2

3 When Should Arbitrators Order Security for Costs? A successful party should be entitled to recover its costs Right to access to justice Form of protection for the respondent against the cost of a frivolous action Tool to put pressure on the claimant to settle 3

4 Outline 1. Power of the Arbitral Tribunal to Grant Security for Costs 2. Requirements to Grant an Application for Security for Costs 3. Relevance of Third-Party Funding on Security for Costs 4

5 Outline 1. Power of the Arbitral Tribunal to Grant Security for Costs 2. Requirements to Grant an Application for Security for Costs 3. Relevance of Third-Party Funding on Security for Costs 5

6 Source of the power of the Arbitral Tribunal 1. The agreement of the parties, as cointained in the arbitral agreement or set of arbitral rules that the parties agree to follow. 2. The national law. 6

7 Federica TitoloIorio Does the Arbitral Tribunal have the power to order security for costs? ICSID Arbitration Convention (2006) UNCITRAL (2010) CIETAC (2014) ICC (2017) Arbitral Rules Rule 39 - (1) At any time after the institution of the proceeding, a party may request that provisional measures for the preservation of its rights be recommended by the Tribunal. The request shall specify the rights to be preserved, the measures the recommendation of which is requested, and the circumstances that require such measures. [ ] (3) The Tribunal may also recommend provisional measures on its own initiative or recommend measures other than those specified in a request. It may at any time modify or revoke its recommendations. Article 26 (1) The arbitral tribunal may, at the request of a party, grant interim measures. (2) An interim measure is any temporary measure by which, at any time prior to the issuance of the award by which the dispute is finally decided, the arbitral tribunal orders a party, for example and without limitation, to [ ]: (c) Provide a means of preserving assets out of which a subsequent award may be satisfied. Article 23 (3) - At the request of a party, the arbitral tribunal may decide to order or award any interim measure it deems necessary or proper in accordance with the applicable law or the agreement of the parties and may require the requesting party to provide appropriate security in connection with the measure. Article 28 (1) Unless the parties have otherwise agreed, as soon as the file has been transmitted to it, the arbitral tribunal may, at the request of a party, order any interim or conservatory measure it deems appropriate. The arbitral tribunal may make the granting of any such measure subject to appropriate security being furnished by the requesting party. [...]

8 Secuirty for costs and arbitration Does the Arbitral Tribunal have the power to order security for costs? HKIAC Administred Arbitration rules (2013, ameded in 2016) LCIA Rules (2014) SIAC Rules (2016) Arbitral Rules Article 24 The arbitral tribunal may make an order requiring a party to provide security for the costs of the arbitration. Article 25.2 The Arbitral Tribunal shall have the power upon the application of a party, after giving all other parties a reasonable opportunity to respond to such application, to order any claiming or cross-claiming party to provide or procure security for Legal Costs and Arbitration Costs by way of deposit or bank guarantee or in any other manner and upon such terms as the Arbitral Tribunal considers appropriate in the circumstances. Such terms may include the provision by that other party of a cross-indemnity, itself secured in such manner as the Arbitral Tribunal considers appropriate, for any costs and losses incurred by such claimant or cross-claimant in complying with the Arbitral Tribunal s order. Rule 27(j) Unless otherwise agreed by the parties, in addition to the other powers specified in these Rules, and except as prohibited by the mandatory rules of law applicable to the arbitration, the Tribunal shall have the power to [ ] order any party to provide security for legal or other costs in any manner the Tribunal thinks fit.

9 Does the Arbitral Tribunal have the power to order security for costs? English Arbitration Act (1996) Hong Kong Arbitration Ordinance (2011) Singapore International Arbitration Act (2012) National Laws Section 38(3) The tribunal may order a claimant to provide security for costs of arbitration. Section 56(1) (a) Unless otherwise agreed by the parties, when conducting arbitral proceedings, an arbitral tribunal may make an order (a) requiring a claimant to give security for the costs of arbitration Section 12(1)(a) Without prejudice to the powers set out in ay other provision of this Act and in the Model Law, an arbitral tribunal shall have the powers to make orders or give directions to any party for (a) security for costs.[ ]

10 Does the Arbitral Tribunal have the power to order security for costs? France Belgium Switzerland Italy National Laws Article 1468 of the Judicial Code - The Arbitral Tribunal may order to the parties, subject to the conditions that it determines and, if necessary, to penalties, any conservatory or provisional measure that it deems necessary. However, the State jurisdiction has exclusive competence to order seizure and registration of a judicial mortgage or pledge. Article 1691 of the Judicial Code - Without prejudice to the powers accorded to the courts and tribunals by virtue of article 1683, and unless otherwise agreed by the parties, the arbitral tribunal may order any interim or conservatory measures it deems necessary. However, the arbitral tribunal may not authorize attachment orders. Article of the Federal Statute on Private International Law - (1) Unless the parties have otherwise agreed, the Arbitral tribunal may, on motion of one party, order provisional or conservatory measures. (2) If the party concerned does not voluntarily comply with these measures, the Arbitral tribunal may request the assistance of the state judge, the judge shall apply his own law. (3) The Arbitral tribunal or the state judge may make the granting of provisional or conservatory measures subject to appropriate sureties. Article 818 of the Judicial Code - The arbitrators cannot order any seizure, nor any other provisional measure, unless otherwise provided by the law*. However, arbitrators can grant interim measures, including security for costs, by way of procedural orders that are not immediately enforceable but may be spontaneously complied with by the parties. A spontaneous fulfilment of such a procedural order may be relevant to the allocation of costs and the evaluation of the overall conduct of the parties in the arbitration. Failure to comply with such an order may be considered by the arbitrators as negative in their assessment of the parties behaviour. 10* * * Art. 35(5), d.lgs. 5/2003, entiteld the arbitral tribunal to issue an interim measure to suspend the resolution that has been challenged.

11 Outline 1. Power of the Arbitral Tribunal to Grant Security for Costs 2. Requirements to Grant an Application for Security for Costs 3. The Relevance of Third-Party Funding on Security for Costs 11

12 When should Arbitrators Order Security for Costs? UNCITRAL (2010) Chartered Institute of Arbitrators 2015 Guidelines Article 26 (3) - The party requesting an interim measure under paragraphs 2 (a) to (c) shall satisfy the arbitral tribunal that: (a) harm not adequately reparable by an award of damages is likely to result if the measure is not ordered, and such harm substantially outweighs the harm that is likely to result to the party against whom the measure is directed if the measure is granted; and (b) there is a reasonable possibility that the requesting party will succeed on the merits of the claim. The determination on this possibility shall not affect the discretion of the arbitral tribunal in making any subsequent determination. Various cumulative criteria: i) the prospects of success of the claim(s) and defence(s) (Article 2); 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 (Article 3); and iii) whether it is fair in all of the circumstances to require one party to provide security for the other party s costs (Article 4). Non exhaustive list 12

13 When Should Arbitrators Order Security for Costs? English Arbitration Act (1996) Hong Kong Arbitration Ordinance (2011) Singapore International Arbitration Act (2012) The irrelevance of the nationality or control Section 38(3) This power shall not be exercised on the ground that the claimant is (a) an individual ordinarily resident outside of the United Kingdom (b) a corporation or association incorporated or formed under the law of a country outside the United Kingdom, or whose central management and control us exercised outside the United Kingdom. Section 56 (2) An arbitral tribunal must not make an order under subsection (1)(a)only on the ground that the claimant is (a) a natural person who is ordinarily resident outside Hong Kong; (b) a body corporate (i) incorporated under the law of a place outside Hong Kong; or (ii) the central management and control of which is exercised outisde Hong Kong or (c) an association formed under the law of a place outside Hong Kong or (iii) the central management and control of which is exercised outside Hong Kong. Section 12(4) The power of the arbitral tribunal to order a claimant to provide for costs as referred to in subsection (1) (a) shall not be exercised by reason only that the claimant is (a) an individual ordinarily resident outside Singapore; or (b) a corporation or an association incorporated or formed under the law of a country outside Singapore, or whose central management and control of which is exercised outside Hong Kong.

14 Outline 1. Power of the Arbitral Tribunal to Grant Security for Costs 2. Requirements to Grant an Application for Security for Costs 3. Relevance of Third-Party Funding on Security for Costs 14

15 The Relevance of Third-Party Funding 15

16 The Relevance of Third-Party Funding in Security for Costs Applications Hong Kong Arbitration and Mediation legislation (Third Party Funding) (Amendment) Bill (2016) Singapore Civil Law (Amendment) Bill (2016) and Civil Law (Third-Party Funding) Regulations (2016) Rules on Third Party Funding and Security for Costs 98O. Code of practice may be issued - (1) The authorized body may issue a code of practice setting out the practices and standards with which third party funders are ordinarily expected to comply in carrying on activities in connection with third party funding of arbitration. (2) The authorized body may amend or revoke the code of practice. 98P. Content of code of practice - (1) Without limiting section 98O, the code of practice may, in setting out practices and standards, require third party funders to ensure that [ ]; (b) funding agreements set out their key features, risks and terms, including [ ]; (ii) whether, and to what extent, third party funders (or persons associated with the third party funders) will be liable to funded parties for adverse costs, insurance premiums, security for costs and other financial liabilities [ ] The issues on security for costs were not adressed. 16

17 Should a Funded Party be Able to Recover Costs at all where These costs have been Funded by a Third Party? Ioannis Kardassopoulos & Ron Fuchs v. Georgia (ICSID Cases Nos ARB/05/18 and ARB/07/15) Award 3 March 2010 The Relevance of Third-Party Funding Para. 691 The Tribunal knows of no principle why any such third party financing arrangement should be taken into consideration in determining the amount of recovery by the Claimants of their costs. Quasar de Valores SICAV S.A. et al. v. The Russian Federation (SCC Arbitration No. 24/2007), Award (20 July 2012) Supplier v First distributor, Second distributor (ICC Case No. 7006), Final Award (1992) Para. 223 The usual arguments about the recoverability of costs where a party s representation in a case has been financed by a third party are inapposite here, because such third-party financing is typically part of a legally enforceable bargain under which the prevailing party in the arbitration has given up something in return for that support. Here, it is conceded that there is no legal duty on the part of the Claimants to hand over any recovery on account of costs to Menatep.* Para 49 - I believe that they are [recoverable], at least from the point that Defendants rather than the [indemnifier], mandated counsel to represent them in the arbitration. By so doing, they incurred the primary obligation to pay such counsel s fees and expenses-one not negated by the fact that someone else, through prior arrangement, paid them on their behalf. The counterpart to this determination is that Defendants would be obliged to reimburse their indemnifier any costs they recovered from the arbitration. 17 *Very unusual circumstances: the funded party had no obligation whatsoever to reimburse the funder.

18 The Relevance of Third-Party Funding 18 Third-Party Funding as a Proof of Party s Inability to Cover the Costs (Investment Arbitration) RSM Production Corporation v. Saint Lucia, (ICSID Case No. ARB/12/10), Decision on Saint Lucia s Request for Security for Costs of 13 August EuroGas Inc. and Belmont Resources Inc. v. Slovak Republic (ICSID Case No. ARB/14/14), Procedural Order No 3 (23 June 2015) South American Silver Limited v. The Plurinational State of Bolivia, (PCA Case No ), Procedural Order No. 10 (11 January 2016) Para. 83 Moreover, the admitted third party funding supports the Tribunal s concern that the Claimant will not comply with a costs award rendered against it, since in the absence of a security or guarantees being offered, it is doubtful whether the third party will assume responsibility for honoring such an award. Against this background, the Tribunal regards it as unjustified to burden Respondent with the risk emanating from the uncertainty as to whether or not the unknown third party will be willing to comply with a potential costs award in Respondent s favor. Para. 111 The Respondent alleges that the Claimants have a history of engaging in fraud and reneging on payment obligations 84 and that they do not have the means to pay for the costs of the arbitration proceedings, which are entirely funded by third parties. [ ] Para. 123 [ ] The Tribunal is of the view that financial difficulties and third party-funding which has become a common practice do not necessarily constitute per se exceptional circumstances justifying that the Respondent be granted an order of security for costs. Para. 77 [i]f the existence of these third-parties alone, without considering other factors, becomes determinative on granting or rejecting a request for security for costs, respondents could request and obtain the security on a systematic basis, increasing the risk of blocking potentially legitimate claims.

19 The relevance of third party funding in security for costs applications Funding Agreement as a Material Change of Circumstances (Commercial Arbitratrion) 19 X v. Y and Z, (ICC Case) Procedural Order (3 August 2012) Para. 34 The Arbitral Tribunal does not take the view that, in and by itself, the existence of third party funding would necessarily constute a fundamental chance of circumstances [that justifies the order of security for costs] [ ] Para. 35 the exceptional nature of the case at hand results from the fact that the [Funding] Agreement has been made available to the Respondent and Arbitral Tribunal and its contents need therefore to be reviewed in detail. Para. 43 The specific wording and the unique characteristics of the B Agreement, as described above, lead the Arbitral Tribunal to find that the B Agreeent created such a fundamental change in circumstances in this arbitration that it justifies the requests of the Respondents concerning security for costs. The Arbitral Tribunal takes into consideration the fact that the B Agreement rules out any payment of costs awarded to the Respondents and that B is effectively empowered to terminate the Agreement at any time, entirely at its discretion. This creates a substantive difference with, for instance, a contingecy fee arrangement [ ]. Para 44. Furthermore, the Arbitral Tribunal does not disute the relevance of the Kardassapolous case [ ] or the RSM Production Corporation case [ ]. As noted above, the conclusion reached by the Arbitral Tribunal doe not in any way imply that per se the existence of a third party funding agreement should have an impact on the manner in which costs are apportioned at the end of this arbitration. The Arbitral Tribunal merely concludes that in this case the B Agreement changed the circumstances in such a fundamental manner that security for cost in justified.

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