One of the most recent decisions by an ICSID tribunal on an application for security for costs, the Eskosol v. Italy tribunal raises a threshold question as to whether or not a right to security for costs even exists as a procedural right capable of preservation under the ICSID Convention and Arbitration Rules. In the words of that tribunal, the reason is straightforward: “[I]t is not truly a concern about a procedural right (to preserve a path to obtain a cost award), but instead an outcome-related worry about collection.” It remains to be seen if the current ICSID rule amendment process—which includes consideration of separate provisions on security for costs—will resolve this question.
In what has become a frequent occurrence in ICSID arbitrations, upon learning of the existence of a third-party funding arrangement, respondents proceed to file applications seeking security for costs. They do so either as a stand-alone application or as part of a sequence of strategic procedural requests. The results are unambiguous: A 5% success rate for security for costs applications (as of 1 June 2018), among the lowest for any procedural application advanced in ICSID arbitrations. In the 20 cases where a respondent filed a security for costs application, only one has been successful. In the other 19 arbitrations, tribunals denied security for costs applications because the exceptional circumstances required for provisional measures to issue (imminent and irreparable harm, urgency) were absent. In those 19 decisions, the involvement of a third-party funder, if any, has proven not to be an exceptional circumstance. The most recent of those 19 decisions, Eskosol v. Italy, raises a threshold question as to whether a right to security for costs even exists as a procedural right capable of preservation under the ICSID Convention and Arbitration Rules.
Eskosol v. Italy: Is there a “right” in play for security-for-costs that is entitled to protection?
The dispute in Eskosol v. Italy arose from a series of measures adopted by Italy that allegedly affected Eskosol’s investments in a 120-megawatt photovoltaic energy project in Italy. In January 2017, Italy sought provisional measures requesting the claimant, Eskosol, to post a bank guarantee and disclose details of any external funding. The tribunal denied Italy’s request, finding that Eskosol had obtained an ATE insurance policy, with the assistance of a funder, thereby obviating the need for security for costs and disclosure. In so doing, however—as with any provisional measures request—the tribunal first had to identify the particular “rights” that Italy claimed should be preserved under Article 47 of the ICSID Convention and Rule 39(1) of the Arbitration Rules. The tribunal struggled to identify any such rights, finding instead that Italy’s issue was “not truly a concern about a procedural right (to preserve a path to obtain a cost award), but instead an outcome-related worry about collection on such an award.” The tribunal went on to observe that:
“Against this backdrop, therefore, there is something analytically curious about the notion that an ICSID tribunal, while not empowered to protect a claimant’s ability to collect on a possible merits award, nonetheless should intervene to protect a State’s asserted ‘right’ to collect on a possible costs award.”
The Eskosol tribunal (Kalicki, Tawil, Stern) is not the first to question whether a respondent has a procedural right worthy of preservation in seeking security for costs. Indeed, close to twenty years prior, the Maffezini tribunal (Orrego Vicuña, Buergenthal, Wolf) faced a similar security for costs application seeking the imposition of a guaranty or bond in a dispute about an investment in an enterprise for the production and distribution of chemical products in Spain. There, the tribunal held that Spain’s rights must exist at the time of the request and must not be hypothetical. However, Spain’s alleged rights in that case—that it might be difficult for it to obtain reimbursement of its costs if the claimant did not prevail and if the tribunal ordered costs—contained numerous hypotheticals. In denying Spain’s application, the tribunal held that “[w]hile hypothetical issues are stimulating and academically challenging, they are beyond the ken of an arbitral tribunal determining real issues of fact and law.”[1]
The ICCA-Queen Mary Task Force Report on security for costs and disclosure
Against this background, in April 2018 the ICCA-Queen Mary Task Force released its final Report on Third-Party Funding in International Arbitration. We have elsewhere explained our concerns about the Report, including its reliance on outmoded terms and assumptions in its definitions.
The Task Force’s findings on the issue of security for costs also merit consideration. Despite its 40-page chapter on costs and security for costs, the Task Force fails to consider the threshold question raised in Eskosol, if there is a “right” in play for security-for-costs entitled to protection. Decided a year before the final report, the Eskosol decision did not go entirely unnoticed, but the Task Force concluded it was “still an emerging matter” and that it did not wish to take a position.
The Task Force did set out guiding principles on the related issue of disclosure. It examined the issue in a binary manner, as an option between required disclosure or no required disclosure. In so doing, the Task Force failed to consider the impact disclosure has on proceedings, including the potential for unnecessary delay, frivolous challenges to arbitrators or unfounded applications for disclosure, which we have seen time after time in practice.
A middle ground on disclosure: Addressing potential conflicts of interest but protecting the proceedings
Although the text of the Report does not discuss in much detail to whom disclosure must be made, the principles announced by the Task Force leave scope for interpretation. The essential principle recognized by the Task Force on disclosure is that “[a] party and/or its representative should, on their own initiative, disclose the existence of a third-party funding arrangement and the identity of the funder to the arbitrators and the arbitral institution or appointing authority (if any)”. The language of the Task Force in its principles appears deliberate. And so must be the exclusion of any language requiring disclosure directly to respondents in that principle.
If mandatory disclosure is to be required—and that appears to be the direction recent treaty practice and arbitral rule revisions are heading—why not require that parties make that disclosure to the institution in a separate instrument, not directly to the respondents, as the Task Force appears to suggest? That way, the disclosure can be considered by the institution and arbitrators once the tribunal is constituted, which will serve the stated purpose of avoiding conflicts but avoid the associated procedural maneuvering.
A systemic risk to the arbitration of international investment disputes
The non-payment of awards of damages or costs is a problem faced by respondents and claimants alike, and in the words of one tribunal, “poses a systemic risk to the arbitration of international investment disputes.”[2] But intervention to ameliorate that systemic risk for the benefit of one party—by transforming an outcome-related worry into a procedural right—is not what the drafters of the ICSID Convention intended. Indeed, it would amount to an additional financial requirement as a condition for a case to proceed, a condition without any basis in the provisions of the ICSID Convention or the Arbitration Rules. Were that not the case, tribunals should be regularly entertaining applications to protect both a claimant’s ability to collect on a possible merits award, as well as to intervene to protect a State’s asserted ability to collect on a possible costs award. It remains to be seen if the current ICSID rule amendment process—which includes consideration of new provisions dedicated to security for costs separate from those on provisional measures—will resolve this question.
[1] Maffezini v. Spain, Procedural Order No. 2, 28 October 1999.
[2] Burimi v. Albania, Procedural Order No. 2, 3 May 2012.
