Introduction
International arbitration, particularly under the patronage of the International Centre for Settlement of Investment Disputes [“ICSID”], serves as a crucial mechanism for Investor-State Dispute Settlement [“ISDS”]. The foundational principle of this system is fairness, which assures equal opportunity for all parties to present their case. However, fairness must be balanced with financial security, particularly concerning the risk of non-recovery of costs by the prevailing party. The concept of “security for costs”, though not new, has gained prominence in ICSID arbitration, especially in light of recent amendments to the ICSID Arbitration Rules.
To reflect the current state of the law as it emerges from scholarly commentary and a review of pertinent cases, this article explores the role of security for costs in ICSID arbitration. It is not meant to express the normative viewpoint. Moreover, it examines how these changes aim to balance the need for financial security with the imperative of fairness, especially for claimants who may lack significant financial resources. Additionally, the article explores the implications of these changes for third-party funders, whose involvement in ICSID arbitration has become increasingly common.
This article analyses the new rules and their practical application to offer a comprehensive understanding of the role that security for costs now plays in ICSID arbitration and highlights its potential to impact the future of international dispute resolution.
Understanding Security for Costs
Definition and Purpose
It would be a blatant lie to say that arbitration is an inexpensive process which can be established from the ICSID Annual Report 2023.[i] In 2014, as per the study concluded by Allen & Overy based on 176 ISDS average cost for claimants was around US$ Four million & forty-seven hundred thousand and around US$ Four million & fifty-five hundred thousand for respondents,[ii] considering that the respondent having consented to a legitimate arbitration agreement, does not have the freedom or discretion to choose whether or not to bear this expense, whereas the claimant does. Thus, an application of “Security for costs” also called “cautio judicatum solvi” in civil law is made to ensure equal treatment[iii] by mitigating the imbalance borne from the claimant’s sole discretion to initiate proceedings; it prevents a claimant with insufficient funds from exposing the respondent to significant costs without providing assurance that those costs could be recovered if the respondent ultimately prevails. A party to an arbitral proceeding may request a provisional measure[iv], from a tribunal to require its counterparty to post security payment to protect that party’s right to recoup its costs, which may include both legal fees and costs incurred during the arbitral process, in the event that party ultimately prevails.[v] This is illustrated in Eskosol S.p.A in Liquidazione v. Italian Republic,[vi] where the tribunal acknowledged that a request for security for costs may be justified to protect a respondent’s right to seek reimbursement of arbitration expenses, in the event it ultimately prevails.[vii]
Therefore, viewing costs as a component of damages is the theoretical foundation for awarding such party representation costs in international arbitration.[viii] Wherein, it can be seen in the majority of the cases, where respondent-States are the ones who typically obtain an order of security for costs to shield themselves against potentially unmeritorious or speculative claims made by impecunious claimant-investors.[ix]
Theoretical Underpinnings
The concept of security for costs intersects with fundamental legal principles such as the equality of arms (enshrined in ECHR Article 6) and access to justice. The equality of arms mandates to provide a reasonable opportunity to present their matter under equal conditions, while access to justice ensures that financial barriers do not preclude legitimate claims. The 2022 amendments attempt to reconcile these principles by requiring tribunals to weigh the claimant’s financial constraints against the respondent’s risk of non-recovery. The so-called “exceptional circumstances” threshold derived from ICSID Arbitration Rules 53(3) & (4), which requires the tribunal to consider a party’s ability and willingness to pay an adverse cost award, the effect of such an order on that party’s access of justice, and the conduct of both parties. Though not explicitly labelled as such in the rule, tribunals have interpreted these cumulative facts as forming a de facto threshold. Critics argue this may favour respondents; however, in reality; it preserves procedural fairness by ensuring that orders are only granted where necessary, protecting both claimant’s access to justice and respondent’s rights to cost recovery. This tension mirrors broader debates in human rights law about procedural fairness in cross-border disputes.
Procedural and Practical Insights on Security for Costs
Procedure for security for costs
The order for security for costs can be implemented in several ways, typically through a bank guarantee or a deposit into a third-party account. Tribunals often specify the least burdensome forms of security to balance fairness and financial safeguards.
For example, in the case of “Kazmin v. Latvia”,[x] the tribunal state:
“Tribunal considers that the least burdensome form which the security may take is an irrevocable guarantee from a first-class international bank according to the model attached as Annex one to the Respondent’s Application. Given the Claimant’s assertion that he or his companies have no financial difficulties, the security is to be provided within fifteen days of the date of this Procedural Order.”[xi]
Similarly, in the case of “Dirk Herzig v. Turkmenistan”, the tribunal stated that;[xii]
“For the foregoing reasons, the Tribunal orders as follows: (1) The Respondent’s Request for Security for Costs is granted; (2) The Claimant shall post security in the amount of US$ three million, to be deposited into an escrow account or provided as an unconditional and irrevocable bank guarantee within fourteen days of the Tribunal’s order………”[xiii]
Implementation and Timeliness of security for costs
Additionally, it is significant to note that while the ICSID rules don’t prescribe a specific timeframe for filling an application for security for costs, the request must be made as early as possible, subject to the establishment of the position on the merits of the case.[xiv] Application made closer to the final hearing or after the disclosure of the merits may be perceived as a tactical maneuvre intended to stifle the claimant’s case.[xv] This was one of the major discussions, which can be witnessed from the English case “Renel v. Gulf Petroleum”[xvi], wherein it was concluded that,
“The submission by Gulf that security for costs should not be ordered because Renel had delayed in their application would be rejected … there was no such delay as to render it inequitable that Renel’s application for security should be dealt with on what was otherwise its merits …”.[xvii]
These examples highlight how tribunals have approached the practical implementation of security for costs, ensuring that respondents are protected while minimizing undue burdens on claimants.
Non-compliance of the order
According to the amended ICSID Arbitration Rules, 2022, which went into effect on or after July 1, 2022, the tribunal has the express authority to halt the proceedings for up to ninety days if a party fails to abide by the security for costs order. If the proceedings are suspended past that time, the tribunal may, at its option, and after discussing with the parties, decide that they be terminated.[xviii]
Condition of self-default by the respondent
In contemporary arbitration practice, tribunals have, in certain instances, required the respondent to demonstrate “good faith” by fulfilling their own financial obligations, such as covering their share of administrative fees, before considering requests for security for costs.[xix] While this trend is particularly evident in ICC arbitration[xx], the failure to meet such obligations, which may be perceived as “unclean hands”, can heavily influence the tribunal’s decision regarding the concerned request. Though the “ICSID tribunal” has not specifically tackled this issue, the principle of self-default might greatly influence the tribunal’s ruling when considering “security for costs” applications.
Historical context, legislative intent, and the 2022 ICSID Amendments of Security for Costs
Historical Context in ICSID Arbitration
Security for costs has historically been regarded as an exceptional remedy in ICSID arbitration.[xxi] The ICSID Convention and pre-2022 Arbitration Rules did not explicitly address it, leaving tribunals to rely on general principles of provisional measures under “Article 47 of the ICSID Convention and Rule 39 of the ICSID Arbitration Rules”. This discretionary framework often led to inconsistent rulings, creating uncertainty for parties.
Tribunals have typically balanced the risk of non-recovery against the potential of stifling legitimate claims, especially from impecunious claimants. For example, in the case of “Guaracachi America, INC. & Rurelec PLC v. Bolivia”[xxii], wherein,
“The Respondent’s analysis of Rurelec’s balance sheet and other related financial documents also does not sufficiently demonstrate that Rurelec will lack the means to pay a costs award or to obtain (additional) funding for that purpose……”[xxiii]
On the other hand, a contradictory view regarding the risk of non-recovery of awards has been given in the matter of “Burimi v. Albania”,[xxiv] wherein;
“The non-payment of awards of damages or costs by respondents and claimants poses a systemic risk…. However, the Tribunal finds no reason in the circumstance of this case and at the present stage of this proceeding to intervene to ameliorate that systemic risk for the benefit of either party”[xxv]
Legislative Intent Behind Security for Costs
The Legislative intent of introducing explicit rules for security for costs in ICSID arbitration was to address the financial imbalance between parties. Respondents often face significant financial risks when defending claims brought by impecunious claimants.[xxvi] Without a mechanism for costs recovery, respondent’s vulnerabilities resemble those in a creditor-debtor relationship.
Furthermore, the tribunal highlighted the difficulty respondents face in proving impecuniosity in the case of “Guaracachi America, INC. & Rurelec PLC v. Bolivia”;[xxvii] wherein,
“The Respondent’s analysis of Rurelec’s balance sheet and other related financial documents also does not sufficiently demonstrate that Rurelec will lack the means to pay a costs award or to obtain (additional) funding for that purpose……”[xxviii]
Such cases highlighted the near-impossibility of meeting the old standard — a vacuum that Rule 53 closes by allowing tribunals to consider third-party funding, party conduct, and other contextual factors when assessing “exceptional circumstances.”
These challenges emphasize the need for clear, consistent criteria for granting security for costs, ensuring respondents are not left without recourse. Therefore, the legislative intent of Rule 53 aligns with trends in commercial & investment arbitration to address systemic risks of non-payment. However, unlike the ICC’s explicit guidance on third-party funding (TPF),[xxix] ICSID’s Rule 53(4) leaves tribunals discretion to weigh TPF as one factor among many. This procedural divergence contrasts with the SCC’s 2023 rules mandating upfront TPF disclosure for transparency purposes. However, mandatory disclosure under SCC/ICC regimes does not equate to substantive relevance in cost-security analysis, as tribunals universally require independent proof that TPF impairs a claimant’s ability to pay costs. ICSID’s ambiguity instead lies in Rule 53 (4)’s silence on how tribunals should evaluate TPF evidence once disclosed – creating unpredictability absent in frameworks like the ICC, where practice notes explicitly link TPF to ‘ability to pay’ assessments.
The 2022 Amendments to ICSID Arbitration Rules
The 2022 amendments commenced on and after 01 July 2022 to the ICSID Arbitration Rules introduced Rule 53 “security for costs”, providing a structured approach to security for costs. The rule allows tribunals to order security against either party when there is an “exceptional circumstance” that the claimant or respondent may not fulfil an adverse costs award. In practice, however, applications overwhelmingly target claimants, reflecting respondent’s need for financial safeguards against impecunious investors. This represents a departure from the previous standard of “exceptional circumstances” standard for such respondent-initiated requests and introduces predictability into the process.
These amendments aim to strike a balance between safeguarding respondents and maintaining fairness for claimants. However, till i.e., December 2024 out of all the applications that have been made for requesting security for costs, only five publicly available applications have been granted.[xxx] Further, the rationale behind this can be referenced from the case of “Guaracachi America, Inc. v State of Bolivia case”,[xxxi] wherein it is stated that
“The same goes for the analysis required by Article 26(3)(a) of the UNCITRAL Rules of the balance of inconvenience, to find whether the harm, if the measure is not granted, substantially outweighs the harm that is likely to result to the party against whom the measure is directed if the measure is granted…….”[xxxii]
Hence, despite these changes, no publicly available decision has yet granted a security for costs order under the revised framework. This limitation highlights a significant gap in the practical application of the amended rules, suggesting that either the tribunals have adopted a cautious approach or that the threshold for granting such measures is prohibitively high. This issue reflects the broader challenge of translating procedural reforms into effective remedies.
Position of third-party funders
The role of third-party funders [“TPF”] in ICSID arbitration has been a topic of considerable debate, specifically when it comes to order security for costs. A commercial funder is typically the external funder that is involved in TP Funding, providing funding to the impecunious claimant in barter of a share in the eventual award. Moreover, all five publicly available orders[xxxiii] granting security for costs were issued before the 2022 amendment, yet they consistently include discussions about third-party funding. Following the amendments, Rules 53(4)[xxxiv] has explicitly recognized the existence of third-party funding as a crucial element (or exceptional circumstance) in deliberations on security for costs orders.
There are probably a number of ramifications when TPF is taken into account while evaluating security for expenses. First, it can result in more security orders for costs, especially when the claimant is financed by a third party that has no direct financial stake in the arbitration’s expenses. This would discourage funders from supporting claims that are thought to be financially risky, which could lead to fewer speculative or pointless claims.
Second, revised regulations may require third-party funders (TPF) to adopt stricter due diligence procedures when evaluating claims. Beyond analysing the legal merits of a case, funders may need to weigh the likelihood of a court or tribunal ordering the claimant to provide security for costs—a factor that could heighten the financial burden on claimants.
Ultimately, the explicit recognition of TPF’s role in security-for-costs decisions reflects a broader acknowledgment of its growing influence in international arbitration. As third-party funding becomes more widespread, arbitration frameworks and protocols must evolve to address the unique challenges and opportunities posed by this financing model, ensuring fairness and procedural integrity in the process.
Similarly, in the case of “EuroGas v. Slovakia”,[xxxv] the tribunal noted that the mere existence of TPF alone will not an adequate ground for granting security for costs, presence of exceptional circumstance must be demonstrated;
“….The Tribunal is of the view that financial difficulties and TPF – which has become a common practice – do not necessarily constitute per se exceptional circumstances justifying that the Respondent be granted an order of security for costs.”[xxxvi]
In conclusion, TPF has become an integral consideration in ICSID arbitration, particularly in the context of “security for costs”. While its explicit recognition in Rule 53(4) reflects the evolving arbitration landscape, tribunals continue to exercise caution, requiring exceptional circumstances beyond the mere presence of TPF. This balanced approach ensures that the interests of both claimants and respondents are protected, while also addressing the financial dynamics introduced by TPF.
Conclusion
The 2022 amendments to the ICSID Arbitration Rules, particularly Rule 53, mark a pivotal shift in how security for costs is addressed within the framework of international arbitration. These changes enable tribunals to better protect respondents from the risk of not recovering costs, particularly in cases where claimants may not have the financial means to meet an adverse costs order. However, it is also crucial to note that orders for security for costs are very rare and typically granted after extensive deliberation by the tribunal. This caution approach ensures that the claimant’s access to justice is not violated by imposing financial barriers that could prevent legitimate claims of small investors from being heard. This article has also discussed the criticism and limitations of the current approach to security for costs, highlighting the complexities and challenges faced by both parties in ICSID arbitration. In light of these developments, the interplay between respondent protection and claimant access to justice remains central to the ongoing debate surrounding security for costs. The ICSID arbitration framework continues to evolve, striving to uphold fairness for all parties involved while adapting to the complexities of modern arbitration, particularly in th
[i] WORLD BANK-ICSID ANNUAL REPORT (2023); see also AJAR RAB, Security for Costs as Interim Measures, in INTERNATIONAL COMMERCIAL ARBITRATION: A COMPARATIVE REVIEW OF THE INDIAN EXPERIENCE 269–94 (2022).
[ii] VANIN CAPITAL & J COMMISSION, THE DURATION COSTS OF ICSID AND UNCITRAL INVESTMENT TREATY ARBITRATIONS 3 (2016).
[iii] Darwazeh N and Leleu A, “Disclosure and Security for Costs or How to Address Imbalances Created by Third-Party Funding” [2016] Journal of International Arbitration 125. Also see, The Cautio Judicatum Solvi in Arbitration Proceedings, or The Duty of an Alien Claimant to Provide Security for the Costs of the Defendant, 14 INT’L ARB. J. 17 (1997).
[iv] Provisional Measures, JUS MUNDI (2023). (“It means, a provisional (interim/conservtory) measure is a temporary remedy granted under special circumstances”).
[v] Security for Costs, JUS MUNDI, NOTES (2023).
[vi] Eskosol S.P.A in Liquidazione v. Italian Republic, ICSID Case NO. ARB/15/50, Procedural Order No. 03 ‘Decision on Respondent’s Request for Provisional Measures’ (12 April 2017).
[vii] Id, ¶33
[viii] Böckstiegel, Karl-Heinz, and Robert Briner, Law of International Business and Dispute Settlement in the 21st Century (C. Heymanns, 2001).
[ix] Atl. Triton Co. Ltd. v. People’s Revolutionary Republic of Guinea, ICSID Case No. ARB/84/1, Decision on Provisional Measure (18th December 1984). Young Hye (Martina) Chun, ‘Security for Costs’ Under the ICSID Regime: Does it Prevent ‘Arbitral Hit-and Runs’ or Does it Unduly Stifle Third-Party Funded Investors’ Due Process Rights?, 21 Pepp. Disp. Resol. L.J. 477 (2021)
[x] Eugene Kazmin v. Republic of Latvia, ICSID Case No. ARB/17/5, Procedural Order No. 6 (13th April 2020); see also Abdallah Andraous v. Kingdom of the Netherlands, ICSID Case No. UNCT/23/3, Procedural Order No. 03 (28th November 2024). Moreover, Burimi S.R.L. v. Republic of Albania, ICSID Case No. ARB/11/18, ¶ 49 Procedural Order No. 2, (3rd May 2012), also see, Yannaca-Small K, Arbitration under International Investment Agreements: A Guide to the Key Issues (2010) <http://ci.nii.ac.jp/ncid/BB02803608>
[xi] Id, ¶66
[xii] Dirk Herzig v. Turkmenistan, ICSID Case No. ARB/18/35, Decision on Security for Costs (Jan. 27, 2020).
[xiii] Id, ¶ 84
[xiv] Gu, Weixia, Security for Costs in International Commercial Arbitration (2005). Journal of International Arbitration 22(3), 2005 p. 38, REID, Security for Costs in International Arbitrations, 1427.
[xv] Id
[xvi] Regia Autonoma de Electricitate Renel v. Gulf Petroleum International Ltd, [1996] ALL ER 2, 319
[xvii] Id. at 72-73.
[xviii] ICSID Arbitration Rules r. 53(6) (2022).
[xix] Swiss Bull, ICC Case No. 7047/1994, 301 (1995).
[xx] Id
[xxi] Gu, Weixia, Security for Costs in International Commercial Arbitration (2005). Journal of International Arbitration 22(3): 167–206, 2005., Available at SSRN: https://ssrn.com/abstract=3200080 or http://dx.doi.org/10.2139/ssrn.3200080.
[xxii] Guaracachi Am., Inc. v. Plurinational State of Bolivia, PCA Case No. 2011-17, Procedural Order No. 14 (2013).
[xxiii] Id, ¶ 7 & 4
[xxiv] Supra Note 09
[xxv] Id, ¶49
[xxvi] KIRKHAM, Security for Costs, 3 (Paper Presented at the Millennium Conference of the Chartered Institute of Arbitrators, 1999).
[xxvii] Supra Note 20
[xxviii] Supra Note 20, ¶ 7 pg. no. 4
[xxix] International Chamber of Commerce (icc), “ICC COMMISSION REPORT DECISIONS ON COSTS IN INTERNATIONAL ARBITRATION” (International Chamber of Commerce 2015) report <https://iccwbo.org/wp-content/uploads/sites/3/2015/12/Decisions-on-Costs-in-International-Arbitration.pdf>
[xxx] Mundi J, “Wiki Note: Security for Costs” https://jusmundi.com/en/document/publication/en-security-for-costs Mundi J, “Wiki Note: Security for Costs” https://jusmundi.com/en/document/publication/en-security-for-costs
[xxxi] Supra Note 25
[xxxii] Id, ¶ 9
[xxxiii] Eugene Kazmin v. Republic of Latvia, ICSID Case No. ARB/17/5, Procedural Order No. 6, 13th April 2020, Dirk Herzig as Insolvency Administrator over the Assets of Unionmatex Industrieanlagen GmbH v. Turkmenistan, ICSID Case No. ARB/18/35, Decision on Security for Costs, 27th January 2020, Luis García Armas v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/16/1, Procedural Order No. 09, 20th June 2018, Progas Energy v Pakistan, PCA Case No. 2014-2018, 9th February 2018 & RSM Production Corporation v. Saint Lucia, ICSID Case No. ARB/12/10, Decision on Saint Lucia’s Request for provisional Measures, 13th August 2014.
[xxxiv] ICSID Arbitration Rules, r. 53(4) (2022).
[xxxv] EuroGas Inc. v. Slovak Republic, ICSID Case No. ARB/14/14, Procedural Order No. 3 (June 23, 2015).
[xxxvi] Id, ¶ 123
Author(s)
Manthan Patel
Student at NLU, Nagpur