ICSID tribunal rules that it is neither necessary nor urgent to grant security for costs from a claimant with the benefit of third-party funding

An ICSID tribunal has rejected a State's application for security for costs in circumstances in which the other party had third-party funding in the form of ATE insurance which specifically provided for cover of the State's costs.

Italy's request for security for costs

The application formed part of arbitral proceedings brought by Eskosol S.p.A. in liquidazione ("Eskosol") under the Energy Charter Treaty and the ICSID Convention against the Italian Republic ("Italy"). Italy sought security for costs in support of its ICSID Arbitration Rule 41(5) application for summary dismissal of Eskosol's claims on the basis that they are manifestly without legal merit. 

Italy argued that, as Eskosol had been declared bankrupt, there was a material risk that Eskosol would be unable to compensate Italy for an eventual costs award.  Further, despite Eskosol having third-party funding, such third party would not be bound by a costs award, nor would a tribunal be empowered to order the third party to undertake a commitment to secure payment of costs.  Italy maintained that its application was sufficiently urgent, since if its Rule 41(5) application were upheld, there would be no further opportunity to seek protection for payment of its costs.  Italy partly relied on ICSID case RSM v Saint Lucia,[1] in which it was suggested that security for costs should automatically be imposed upon a claimant funded by a third-party, a view which has been disputed by subsequent investment arbitral tribunals.

Eskosol's arguments against security for costs

Eskosol disputed the Tribunal's authority to impose security for costs under Article 47 of the ICISD Convention and ICSID Arbitration Rule 39(1). Relying on Judge Nottingham's dissenting opinion in RSM v Saint Lucia, Eskosol contended that granting such a measure would create a procedural entitlement that the ICSID framework did not envisage, as well as allow respondent States to stifle claims. 

Eskosol argued that security for costs was neither urgent nor necessary to prevent irreparable harm, since Eskosol had ATE insurance with coverage of up to €1,000,000, which rendered the risk of non-payment of costs low.  Eskosol also contended that its bankruptcy and consequent need to resort to third-party funding were, in its view, a result of Italy's wrong-doing (which also formed the basis of its claims).   As such, Eskosol argued it would be wrong to permit Italy to benefit from its own misconduct by allowing Italy to impose even further financial burden upon Eskosol via security for costs. Additionally, Eskosol contended that Italy's application was purely speculative on prevailing in the arbitration and winning a costs award and thus was not urgent.  Further, it denied that bankruptcy or use of third-party funding amounted to the extraordinary circumstances required to warrant security for costs.

Tribunal's decision

Chaired by Jean Kalicki, sitting with Guido Santiago Tawil and Brigitte Stern, the Tribunal found no exclusion or limitation on the types of provisional measures a tribunal could grant under the ICSID Convention or the ICSID Arbitration Rules, and on that basis concluded that it had authority to grant security for costs in support of arbitration. 

The tribunal confirmed that a provisional measure should only be granted if (i) it is necessary to preserve identified rights, (ii) it is urgently required for that purpose, and (iii) the requested measures are proportionate and do not impose such undue burdens on the other party so as to outweigh the justification for granting them.

While it recognised the unlikelihood of Eskosol being able to pay any eventual costs award itself, and that a third-party funder would not be bound by the terms of a costs award, the Tribunal was satisfied that Italy's request for security for costs was neither necessary nor urgent given Eskosol's ATE insurance policy. The policy was obtained for the purpose of protecting Eskosol from the risk of a potential adverse costs order or order for security of costs, and expressly covered up to €1,000,000 of Italy's costs. 

Further, Italy had not shown any imminent need for a different mechanism, or that the insurance policy's threshold would be insufficient to cover its costs. Even if later in the proceedings Italy could show that its potentially recoverably legal costs would surpass €1,000,000, it would nevertheless still have to demonstrate that protecting Italy's potential ability to recover such additional costs would be proportionate to the potential burden on Eskosol of arranging security of additional amounts.

Comment

The issue of security for costs in the investment arbitration context has been a point of discussion in recent years. 

Here, the Tribunal highlighted obiter a potential dichotomy between an ICSID tribunal's lack of power to protect a claimant's ability to collect a possible merits award, and the power to grant security for costs to protect a State's ability to collect a possible costs award.  The Tribunal recognised that, while States may be legitimately concerned that they may be unable to recoup costs from the claimant, the ICSID Convention does not provide for collection risk: Article 54(3) makes explicit that "[e]xecution of the award" is to be governed by national law, including (as confirmed in Article 55) national law relating to the immunity of State assets.  The Tribunal noted that some tribunals have doubted whether there really is any "right" in play for security for costs that is entitled to protection under Article 47 and Rule 39(1), while others acknowledge that such a right exists to be protected in exceptional circumstances.  However, the Tribunal did not consider this further, since it decided that, even if in principle the "right" Italy asserted was one deserving of protection in exceptional circumstances, Italy had not demonstrated that such circumstances exist.

In considering the concept of the "right" requiring protection and for which security for costs would be granted, the Tribunal departed from RSM v St Lucia's view that this right is one of "procedure". Rather, the Tribunal observed that in reality it will be one of "outcome", since security for costs seeks assurance that the legal pursuit will be meaningful, in the sense that there will be assets available at the end of the case against which to enforce any costs award.

The Tribunal warned that provisional measures capable of impeding access to justice should not be granted lightly, and that the proportionality of the proposed measure is a particularly critical consideration in such circumstances.

Finally, the Tribunal in this case did not consider whether security for costs would have the effect of "preferring" Italy ahead of other Eskosol creditors, a ground upon which tribunals sometimes deny security for costs.

Eskosol's claim is one of several arbitral proceedings brought against Italy under the Energy Charter Treaty over the State's reforms to its solar power industry.

For further information, please contact Christian Leathley, Partner, Natalie Yarrow, Associate, or your usual Herbert Smith Freehills contact.