On 16 August 2019, the International Centre for Settlement of Investment Disputes (the “ICSID”) Secretariat published its third working paper on proposals for amendment of the ICSID Rules (Working Paper #3).

In addition to many other changes, the proposed amended Rules provide, for the first time, guidance and clarity to tribunals on security for costs orders with the addition of Rule 52.

In theory, it is broadly accepted that tribunals’ jurisdiction to order security for costs is implied under the applicable arbitral rules, including under the ICSID, UNCITRAL and International Chamber of Commerce (“ICC”) Rules. In practice, however, tribunals have been reluctant to order security for costs, applying a high threshold to the circumstances that would warrant such an order. Some tribunals have even gone so far as to hold that security for costs cannot be ordered as a provisional measure in investment treaty arbitration because there is no right to cost reimbursement at this stage of the proceedings.

Proposed Rule 52 now expressly allows ICSID tribunals to order security for costs and significantly lowers the threshold by providing a non-exhaustive list of relevant circumstances that tribunals must consider in deciding whether it is appropriate to make such an order. Relevant circumstances include: (1) the party’s ability to comply with an adverse decision on costs; (2) the party’s willingness to comply with an adverse decision on costs; (3) the effect that providing security for costs may have on that party’s ability to pursue its claim or counterclaim; and (4) the conduct of the parties.

In this new version of the proposed amendments, the ICSID considered comments received from States and public commentators with respect to the importance of third-party funding in determining whether it is appropriate to order a party asserting a claim or counterclaim to provide security for costs.

While the ICSID did not include third-party funding as an independent relevant circumstance justifying an order for security for costs, it added an express reference to third-party funding, stating that it can serve as “evidence relating to a circumstance”.

The new version of proposed Rule 52 on security for costs reads as follows:

While these proposed amendments provide more guidance for proceedings under the ICSID Rules, there remains inconsistencies between applicable arbitral rules and uncertainty as to the manner in which these rules will be interpreted and applied. To address this issue, States should consider incorporating provisions on security for costs into their investment treaties. For example, the investment chapter of the EU-Viet Nam FTA includes a provision that a tribunal may order an investor to post security for costs “if there is reasonable grounds to believe that the claimant risks not being able to honour a possible decision on costs issued against the claimant”.

Security for costs orders assist to ensure that the public funds that States spend to defend unmeritorious claims will be covered, filter out claims that are speculative or marginal, and protect against investors declaring bankruptcy or absconding from the jurisdiction before satisfying an order for costs made against them.

The ICSID will hold the next in-person consultation with Member States on Working Paper # 3 from 11 -15 November 2019 before the amended rules are placed before the Administrative Council for a vote.

Tereposky & DeRose LLP regularly provides advice and counsel on investment arbitration disputes. Should you have any questions regarding investor-state dispute settlement (ISDS), we are at your disposal.