Originally from Handbook on International Commercial Arbitration - Second Edition

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The cost of pursuing or defending international commercial arbitration can be high. As the proceedings progress, a party will have to fund its own lawyers as well as the tribunal or at least pay potentially substantial deposits against those costs, as well as the administrative costs of any applicable institution.

At a simplistic level, a party accused of wrongdoing can claim to be “innocent until proven guilty.” Why should the innocent have to expend considerable money in defending themselves against the unmeritorious claims of the impecunious and be at serious risk of never recovering those costs? To address this potential for injustice, the remedy of security for costs was crafted. Accordingly, it will be the respondent who typically makes an application against a claimant. The rare occasions that a claimant makes an application against a respondent will be where the respondent claims, by counterclaim, and the claimant is in the position of respondent.

Thus the tribunal needs to be vigilant where there is a claim and counterclaim. Where the claim and counterclaim raise the same issues, it might be that the issues are going to be litigated in any event and ordering security may not be just or treat the claimant equally with the respondent. In such case, there is no reason why security cannot be ordered against a respondent in respect of the costs of a counterclaim.

If a claimant is concerned that a respondent will be unable to meet a costs liability as a consequence of a claim either it should consider whether it is worthwhile pursuing that respondent at all or consider an injunction to prevent the respondent from dissipating assets to avoid the enforcement of an award against its assets.

A. The Approach in Principle

The first question to consider is whether there is the potential for a substantive costs order if the innocent party (usually the respondent) is indeed successful. If not, perhaps because the arbitration agreement, the rules governing the arbitration, or the applicable law provide that each party will bear its own costs irrespective of the outcome, there is, generally, no potential to seek security as the security has to be against a legitimate expectation of recovering costs in the future.