Arbitration is projected as one of the fairest sources of dispute resolution between disputing parties, and deservedly so. Unlike the National Courts of states, Arbitration is a global mechanism that has been used for dispute resolution of all kinds between different parties. However, Arbitration is not all white as the cost of running proceedings still lingers around the system.
Costs in Arbitration are a major concern for disputing parties, and disputing parties are always seeking ways to reduce proceedings cost to help them adequately cope with the expenses a ruling may take. While there are a couple of measures that parties usually implement during a dispute to save cost, one of the most discussed ways is by filling for security for costs.
Security for Costs in Arbitration
Now security for cost is a measure taken by one part of the disputing party and is usually a formal request that gives the applying party the right to recover all of its expenses if the award is ruled in its favor. Security for Costs in Arbitration cannot be applied by both parties. The claimant that triggers the arbitration clause of a deal usually does not seek an order for security for costs, while most respondents dragged to a tribunal usually try to activate such order as a means to recover all expenses from a claimant in the event that the award is ruled in their favor.
Formally defined, security for cost is a provisional measure that one of the parties in an arbitral dispute seeks from the tribunal to order the other party known as the counterparty to make secure payments for all incurred expenses to give it the right to recover its cost. Following the order, if the applicant party duly succeeds in getting the award in its favor, the security payment will also be awarded to it as compensation for all expenses in the process.
Security for costs is a measure that helps ensure that the applicant expenses cover-up payment is already secured even before the ruling. Hence if the counterparty begins to run low on funds in the middle into the proceeding, the applicant part will be assured of its secured remunerations for all expenses.
Usually, security for cost payments is in bank deposits, a bank guarantee, or could be paid to an escrow account.
Grounds with Which a Tribunal Can Approve and Order Security for Costs
Usually, the respondent’s goal in disputing parties is to decrease accrued cost in Arbitration proceedings, so it is not unusual for them to ask the tribunal for security for costs. However, tribunals do not exactly grant all requests and would normally consider a number of factors before approving party security for cost requests and ordering the counterparty to provide such. This section outlines the ground on which a tribunal order a claimant or counterparty to provide security for cost.
Under arbitration laws, respondent parties do not have a legal backing to demand for security for costs, but these parties usually use their right to Arbitration provisional measures to request tribunals to help them preserve their rights. When such application is made, the requesting party usually present and establish the need for the order on the basis of its procedural rights to seek reimbursement on the implied cost by the counterparty. After giving the order, the tribunal will only fully establish it if the requesting/applicant party has the award in its favor.
When reviewing an applicant party’s order for security for costs, Tribunals generally rely on the power passed unto them based on general arbitration rules as applicable to the case on hand.
Consideration for security for costs orders
Despite the popularity of security for costs and the general request by applicants for the tribunal to set up an order that forces the counterparty to cover for its cost on the advent that it is successful, such orders and requests are rarely given. All through 2020, there have been over 33 investor-state-related disputes with requests for security for cost. However, only 5 of the lot were granted. The reason for this is because tribunals do not intend to scare off claimants who believe they are unfairly treated in a deal by more powerful parties such as a host state.
The tribunal will only grant such orders only on strict circumstances that the applying may be significantly affected, barring securing cost for its expenses
Security for Costs in Arbitration is a very important discussion. It is very necessary that you understand it before going into any dispute, whether as the claimant or respondent. While there is always a possibility that you may have an award in your favor, you must also ignore the possibility of having things not going your way, and if the counterparty has a security-for-cost order against you, you will end up losing more than your claim.
To successfully navigate through a dispute such that you come out with the smallest damage, you may need to seek professional counsel, so you are not left vulnerable to a bigger loss. Several professional firms and arbitral tribunals stand out in the system with a reputation for helping clients get the best outcome in a dispute.
Rattsakuten is a top leading professional firm that offers arbitral services to clients to help them get the best out of a dispute. The firm comprises skilled and highly experienced arbitrators in helping clients, whether claimants or applicants, successfully navigate security for cost orders. You can contact the firm management for more inquiries on the institution process.
Rattsakuten is a leading law firm focused on Commercial Arbitration and Dispute Resolution. Based in Sweden, Rattsakuten handles dispute resolution and Arbitration matters before the SCC (Swedish Chamber of Commerce), ICC, HKIAC, and several other Arbitration tribunals.