Originally from Handbook on International Commercial Arbitration

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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 Arbitral 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. If a claimant is concerned that a respondent will be unable to meet a costs liability 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.

The first question to consider is whether there is the potential for a substantive costs order if the innocent party 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.

Even if there is the potential for a substantive costs order, applications for security are relatively unusual although there is an increasing trend. Nevertheless, the exercise of jurisdiction will be relatively rare. In Coppee Lavalin SA NV v. Ken-Ren Chemicals & Fertilisers, the English House of Lords made an award of security in support of an ICC arbitration relying not so much on the fact that the party was insolvent but that it was being funded by a third party and that justice required the funder, if it wanted the fruits of the reference, to bare the risk of failure. There are two factors that make applications unusual. First, issues over whether there is any jurisdiction to grant security and, second, the reluctance of the Arbitral Tribunal to exercise such jurisdiction as it may have.