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Security for Costs in the Third-Party Funding Framework of International Arbitration (Part I)

[This article has been authored by Harshitha Swarna and Ishita Agrawal, fourth and third-year law students from JGLS]

Keywords: Third-Party Funding, Security for Costs, International Commercial Arbitration, International Investment Arbitration, Litigation Funding.

I. Introduction

Third-party funding has become increasingly common in international arbitration. It can be described as the financing by a third-party of part or all of the costs of the arbitral proceedings for one of the parties to the dispute. In return for this financial liability, the financier receives a certain percentage of the compensation obtained by an award or a settlement. Conversely, if the claim fails, the funder will usually receive no compensation and will remain liable for the client’s legal fees, as well as for any other adverse costs. TPF is a relatively novel concept that arose as a solution to the challenges emerging from the financial impecuniosity of a party, resulting in its inability to proceed with an arbitral proceeding.

The onset of the COVID-19 pandemic has triggered economic fluctuations that have resulted in a shortage of resources, thereby hindering the business operations of entire industries. As documented by Bloomberg Law’s 2021 Litigation Finance Survey, most funders have increased their business despite the COVID-19 economic downturn, backed by growing interest and use by law firms and clients. Thus, these conditions have allowed for the scope of litigation funding to allow businesses to fulfil their litigation claims through TPF.

However, on the one hand, while TPF helps impecunious claimants fund their claims and obtain access to justice, on the other hand, it creates the risk that a respondent may not be able to enforce a potential adverse costs award against an impecunious claimant that is funded. Thus, this article seeks to address this imbalance by exploring the prospect of tribunals granting ‘security for costs’, i.e., a method by which a respondent can ensure that it is able to recover the costs of successfully defending claims brought by impecuniously funded claimants. It is enforced as an order that requires the claimant to pay money or provide a guarantee or a bond, as security for the respondent’s costs of litigation. Part I of this article will assess this solution and the effect of TPF on a tribunal’s decision to grant security for costs in the context of international commercial arbitration. Thereafter, Part II of this article will address the scope for the liberalised granting of security for costs within India’s legal framework by recapping the legal framework surrounding an arbitral tribunal’s power to grant costs in investment treaty arbitration. Consequently, it will present TPF as a solution by analysing how it weaves into a tribunal’s decision to grant security for costs.

II. The Mechanism of Security for Costs in International Commercial Arbitration

The increased prevalence of TPF in the realm of international commercial arbitration can be attributed to its attractive promises of providing tenable solutions regarding financing preferences and risk management policies. An arbitral tribunal’s power to grant security for costs in this regard generally arises either from an agreement between the parties or the lex arbitri (law of the seat)[1] considering that a party seeking TPF is equally vulnerable to an application for security for costs. A recent judgement affirming the same is Tenke Fungurume Mining S.A. v. Katanga Contracting Services S.A.S., where the English Commercial Court on 7th December 2021, upheld an award of third-party funding costs rendered by a London-seated ICC arbitral tribunal and confirmed the stance that a tribunal has the power to grant security for costs. The case dealt with a challenge to the final Award rendered in favour of Katanga, the Respondent. The Tribunal ordered Tenke, the Appellant, to pay Katanga’s legal and expert costs. However, Tenke challenged the Tribunal’s Award under Section 68 of the English Arbitration Act, on the grounds of “serious irregularity” and “substantial injustice”. The Court held that since the parties’ arbitration clause in their contract was subject to ICC arbitration seated in London, they would be subject to the ICC Arbitration Rules, implying that the Tribunal’s TPF costs award would stand. The case further referred to another landmark decision, Essar Oilfields Services Ltd v. Norscot Rig Management Pvt Ltd, where the Commercial Court rejected a similar application to set aside an arbitral award granted under the ICC rules entitling the respondent to costs for third party litigation funding on grounds of serious irregularity.

As recognised in these cases and several other reports and guidelines, some of the potential factors considered by tribunals while granting security for costs in commercial arbitration are likely to be the party’s financial situation and the likelihood of the claims’ success on merits, with the most relevant consideration being the probability that a party may not satisfy an adverse cost award. This is particularly pertinent because TPF does not imply that a party is impecunious per se; merely obtaining funds, therefore, does not qualify as a material change in the claimant’s finances guaranteed to counteract adverse costs. Thus, the granting of security for costs is extremely subjective and dependent on a tribunal weighing the scale between commercial viability and broader fairness concerns unless the third-party possesses powers to the extent of unilaterally terminating the agreement.

III. Conclusion

Therefore, while TPF clearly emerges as a burgeoning trend in international commercial arbitration, its scope seems to be inundated by the inability of parties to satisfy adverse cost awards. Thus, arbitral tribunals have accommodated security for costs as a viable solution. Although the tests for granting security for costs remain largely subjective and discretionary, TPF emerges as an indicative factor in situations where the claimant’s ability to satisfy an adverse costs award is dubious. While TPF in itself does not warrant security for costs, it serves as a tool in assessing the capital adequacy of an ill-intentioned claimant, which is considered an important factor in international commercial arbitration. Nonetheless, since it attempts to provide a safety valve against ill-intentioned claimants, it might be more favourable in international investment arbitration where awards are generally publicly available with higher compensatory amounts requested, thus appealing to funders.

[1] J. Lew, L. Mistelis & S. Kroll, Comparative International Commercial Arbitration, (1st ed., 2003), p. 601.

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