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

[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 Investment Arbitration, Litigation Funding.

I. Introduction

The mechanics utilised by Tribunals in granting security for costs in the sphere of International Commercial Arbitration have been discussed in Part I of the series. However, given the recent surge in global FDI flows, disputes concerning the discriminatory practices of states in sanctioning FDI have concomitantly risen. This trend has therefore ushered in the prevalence of Investor-State Dispute Settlement (“ISDS”) claims, which is a process that is extremely onerous on investors given the hefty costs associated with instituting ISDS claims against a State. Part II of this series will therefore evaluate an Investment Tribunal’s criterion for granting security for costs in ISDS disputes. It will additionally navigate the viability of the security for costs model within India’s Third-Party Funding framework.

II. The Power of Investment Tribunals to Grant Security for Costs

As per Article 47 of the International Centre for Settlement of Investment Disputes (“ICSID”) Convention and Rule 39 of the ICSID Arbitration Rules, an ICSID tribunal has the power to grant “any provisional measure[s]” for the preservation of the parties’ rights. However, they do not explicitly mention security for costs as a provisional measure that may be ordered. However, the case of RSM Production Corp v. Saint Lucia marked the first time an investment tribunal granted an order for the security for costs in 2014. The Tribunal ruled that a tribunal’s power under the Convention relating to provisional measures is in fact broad enough to permit security for costs.

More recently, the case of Herzig v.Turkmenistan triggered an onslaught of diverging perspectives on the enforceability of security for costs. In this case, the State of Turkmenistan requested that the Tribunal order the Claimant to post security for costs since it believed that the Claimant would be unable to pay the costs if he were unsuccessful in his claim. Accordingly, the Tribunal first ordered security for costs, since it found that the claimant was reliant on TPF; however, the third-party funder was not liable for a potential adverse costs award. It, therefore, held that such a scenario would prejudice the Respondent’s right to enforce cost awards. However, in a later order, the Tribunal reversed its previous order in holding that the Claimant faced ‘insurmountable obstacles’ to obtain funds for security, and the requirement of security for costs in such a situation would result in a ‘denial of access to justice’ to the investor.

In light of this uncertainty regarding the applicability of security for costs in investment arbitration, it is currently under discussion at the UNCITRAL WG III and in the ICSID Rules Amendment. However, the myriad views among states reflect the conflicting arbitral decisions on this matter, meaning that a consensus is yet to be crystallised.

III. The Indian Scenario with Respect to TPF and Security for Costs

With arbitration emerging as an increasingly popular dispute resolution mechanism in India over the past decade, the costs associated with arbitral proceedings, though less intimidating than those of litigation, are still a reality. While there is no law explicitly barring or allowing third-party funding in India, consent can indirectly be deduced from the Civil Procedure Code, 1908. Order XXV Rule 1 (State Amended) of the Code empowers plaintiffs to secure finances for litigation by requiring the financier to become a party and deposit such costs in Court. As reiterated by Courts in cases likeRam Coomar Condoo v. Chunder Canto Mukherjee and Mr ‘G’, A Senior Advocate, an agreement of the nature of TPF is legally enforceable and while it necessitates monitoring such financing, it is not against public policy. Additionally, in the recent case of Bar Council of India v. AK Balaji, the Supreme Court barred advocates from funding litigation on behalf of their clients without imposing such a bar on funding by any other third party.

Thus, such scattered instances of TPF recognition in India reflect a deficit of institutionalisation of arbitration mechanisms in this regard. Per Contra, they also bring to the foreground a growing inclination in India to legalise TPF. Such enthusiasm is also evident in the upcoming plans of a legal technology start-up, LegalPay, to launch India’s first third-party litigation funding platform. However, this bears further implications for an ancillary need to envisage the incorporation of security for costs within the TPF framework in India. Particularly so, as costs in arbitral proceedings often emerge as a site of contestation between what has been intended by the parties and any contrary decisions of a tribunal. In the recent case of Union of India v. Om Vajrakaya Construction Company, while the parties had agreed upon bearing costs on their own, the Arbitral Tribunal deriving powers from Section 31A(5) of the Arbitration & Conciliation Act, granted costs to the Respondent company. While the Appellant contended that such award of costs was contrary to the contract provisions, the Delhi High Court upheld the primacy of the Act provisions over the clause of costs in the contract. Therefore, in the backdrop of an upward trend in imposing cost liabilities on parties either through contracts or the discretion of tribunals, the requirement for security for costs becomes increasingly relevant, especially where the parties are reliant on TPF. However, with the international view itself being muddled in contradicting perspectives on security for costs with respect to TPF in investment and commercial arbitrations, it is unlikely for India to efficiently implement the inept present structure in the near future.

IV. Conclusion

Therefore, while 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 both international commercial and investment arbitration. Nonetheless, a nuanced analysis would only emerge from a balance between details of the funding agreement between the parties and the discretion of the tribunal after considering ancillary factors like unilateral termination rights. Further as explained previously, since the applicability of security for costs in investment and commercial arbitration is inundated with conflicting arbitral decisions and subjectivity of tribunals, it posits a bleak prospect for the liberalised granting of security for costs in India. With the gradually expanding ambition around third-party funding mechanisms in arbitral proceedings seated in India, it remains to be seen whether such gradual adaptation will usher developments towards security for costs or only emerge as an emulation of international perspectives on the subject matter. However, the authors propose the adaptation of the liberalised approach taken by the Tribunals in the Tenke, RSM, and Herzig cases in order to cement the assessment for the availability of TPF through the security for costs route in India.

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

[2] (2021) EWHC 3301 (Comm.).

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