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...