Khóa luận tốt nghiệp: Security for costs under investment treaties and in investor-state arbitration

Sam Luttrell to bring an effective proposal for the rules to be applied After the ICSID Arbitration Rules 2022 came into effect, theInternational Center for Settlement of Investment Disp

MINISTRY OF JUSTICE MINISTRY OF EDUCATIONAND

TRAINNG

HANOILAW UNIVERSITY

HA NOI -2024

NGUYEN VAN ANH

STUDENT CODE: 452613

HA NOI — 2024

STATEMENT OF AUTHORSHIP

I hereby declare that this is my own research workand that the conclusions and data in the graduationthesis are truthfid and ensure reliability./

Confirmation by Instructor Author of graduation thesis

(Sign and full name)

Investor-State Dispute SettlementMultilateral Investment Treaty

Permanent C ourt of Arbitration

Stockholm Chamber of CommerceTreaty with Investment ProvisionsUnited Nations Commission on International Trade LawUnited Nations Conference on Trade and DevelopmentVienna Convention on the Law of Treaties

World Bank

1 Rationale of the researc!

Summary of of thesis research results

Research scientific and practicalvalues

Object and range of thesis

Research methods

CHAPTER I: GENERAL LEGAL ISSUES oN SECURITY FOR costs

1.1 General understandings of Security for Costs

11.1 Origin of Security for Costs

112 Definition of Security for Costs

1.2 Definition of Investment Treaties

13 Definition of Investor-State Arbitratio:

1⁄4 The role of Security for Costs in investor-state arbitration

CONCLUSION OF CHAPTER 1

CHAPTER 2: PRACTICES OF SECURITY FOR COSTS UNDER INVESTMENTTREATIES AND INVESTOR-STATE ARBITRATION 2202.1 Analysis of the Security for Cost Under Investment Treaties .202.1.1 Legal frameworks for the Security for Costs 202.1.1.1 The intemational investment treaties 202.1.1.2 The arbitration mules 232.1.2 Entitlement for Security of Cos! 282.1.2.1 Conditions for Security for Costs order 28

2.1.2.2 Investor's obligations for cost wamanty within and without the

involvement of third-party funding 322.1.3 Authority to approve Security for Cos 342.14, Procedures and timing for granting the Security for Costs in ISDS 35

2.15 Consequences of non-compliance with Security for Costs 37

2.2 Assessment of Security for Costs application in investor-state a 38

CONCLUSION OF CHAPTER 2 isssiisisissiscossssssssssssscassscesssesteveecsivicunstesnvnsitisensesste AL

CHAPTER 3: PROPOSALS FOR AMENDMENTS OF SECURITY FOR COSTS

AND RECOMMENDATIONS FOR VIETNAM 23.1 Observation and proposals for a regime of Security for Costs a23.1.1 Treaty hnguage on Security for Costs a

3.1.2 Arbitration rules amendments on Security: fez Costs 44

3.2 Recommendations for Vietnam on Seay for Costs in its engagement in

3.2.1 The ee Ret carey: of pelts regulations on ead for Costs in Vietnam

413.2.2 Recommendations for Vietnam xui the provision of SH, for

48CONCLUSION OF CHAPTER 3 =— =e 51

IS CONGEUISION G53 iste Seria teiteee ce astae oi Leena rg ea nn Ne ae 52

REFERENCES 53

A INTRODUCTION

1 Rationale of the research

Investment arbitration proceedings typically involve significant costs for both

parties, approximate millions of US dollars F oreign investors are frequently holdingcompanies operating through local subsidiaries with few assets of their own, whichraises concerns about respondent states’ ability to recover their costs In many cases,the claimant may be in the process of business bankruptcy, and unable to pay for their

own legal fees in the dispute This posed an inquiry to provide a security to cover

the estimated costs that the other party will incur in the proceeding includingarbitration costs and legal fees Security for C ostsis anissue attracting more and moreattention in investor-state dispute settlement (ISDS), as states, if awarded in theirfavor, expect to recover their high costs Security for Costs is increasingly in thespotlight, in part because tribunals have moved away from the traditional defaultapproach of “pay your own way’ This is when both parties bear their own costs of

the proceedings, regardless of the outcome The more common approach now is that

the losing party is ordered to pay the costs of the winning party

More recently, states have been concluding BITs and FTAs with investment

chapters that explicitly affirm the power of the tribunal to order Security for Costs

Some of this treaty language guides the tribunal on grounds for granting a request for

Security for Costs, but some remain silent Due to this lack of guidance, both fromthe arbitral rules and the treaties, arbitral tribunals have been largely free to developtheir own tests for determining the circumstances in which Security for Costs should

be ordered Another reason for the increasing attention given to the issue of Securityfor Costs is the growing use of third-party funding in ISDS Third-party funder willbear investor's legal fees and costs in a respective case, that has a stake in the finalaward Because a third-party funder is not a party to the arbitration, they cannot beordered to pay the state’s costs

2 Summary of of thesis research results

‘ Metal Tech Led v Republic of Uzbekistan (ICSID Case No ARB/10/3), Final Avvard (4 October 2013),p.

17; see also Valeri Belokon v Kyrgyz Republic (UNCITRAL), Asvard (24 October 2014),para 139

In terms of the international researches, the International Institute for

Sustainable Development has officially published the “JISD Best Practices Series:

Security for Costs”? by Sarah Brewin, Nathalie Bernasconi-Osterwalder in 2018 to

explores challenges for states in obtaining orders for security of costs and provides

model treaty language designed to help overcome those challenges Prior to the

ICSID Arbitration Rules 2022 has been released a variety of research has been

conducted based on the Draft Rules 51 of ICSID rules regarding the Security for Costs

measure, specifically “Observations on the Proposed new ICSID Regime for Security

for Costs”? authored by Dr Sam Luttrell to bring an effective proposal for the rules

to be applied After the ICSID Arbitration Rules 2022 came into effect, theInternational Center for Settlement of Investment Disputes published the general

guidance as “Secuaity for Costs - ICSID Convention Arbitration (2022 Rules)”* in

application of this measure in resolving the dispute Furthermore, many authors payattention to the applicability of the involvement of the third-party funding in many

cases, particularly “Security for Costs under the ICSID Regime: Does it Prevent

‘Arbitral Hit-and-Rums* or Does it Unddly Stifle Third-Party Fimded Investors’ Due

Process Rights?’ by Y oung Hye (Martina) Chun, or “Security for Costs applications

in investment arbitrations involving insolvent investors” by Lars Markert.

In terms of Vietnamese researches, the Security for Costs research paper hasnot been conducted by many authors yet, but briefly mentioned in documents with

other related matters, for example “the Third Party Fioding in Arbitration and

Litigation associated with Commercial Disputes’? by D1 Chau Huy Quang,

2 Sarah Brewin, Nathalie Bemasconi-Ostervralder (2018), “IISD Best Practices Seris: Security for Costs”, available at https:/ivrvnw iisd org publications /guide fiisd-best-practices-series-security-costs

` Dr Sam Luttrell (2019), Observations on the Proposed new ICSID Regime for Sectatty for Costs available

at https:/Acsid worldbank orgisites /defaultifiles amwencnunts

public-input/Luttre_Sam_Comments_? 25.19 pdf

*ICSID, “Security for Costs - ICSID Convention Arbitration 2022 Rules”,

hitps /Acsid worldbank org/proce cure s/arbitration/convention/se

curty-for-costs/2022H:~ text= Security % 20for% 20 Costs%

20-% 20IC SID % 20 Convention% 20 Arbitration % 20% 282022 ‡o% 20provide % 20se curity % 20for% 20costs% 20m

'%20certam20cTrcvmnstances.

* Young Hye (Martina) Clam (2021), Sectaity for Costs tuy the ICSID Regime: Does it Prevent ‘Arbitrad

Hit-and Riau’ or Does it Usviuily Stifle Third: Peaty Fouled Iwestors’ Due Process Rights, (21).

° Lars A Makert (2018), Security for Costs applications mn nvestment arbitrations involving msolvent

investors, available at https:/fpapers sm com/sol3 papers finn Mabstract_id=3295803

’ Dr Chau Huy Quang (2022), ‘the Third Party Fimding in Arbitration and Litigation associated with

Conmercia] Disputes”, available at https:/Arvrvs viac tumg-trong-tai-va-to-hmg.toa-an-trong-tranh-chap-thnong-mai-phan-ii-a15¢ hil

vavthu-tuc-trang-teitaitro-cus-ben-tlur-ba-trang-to-published by the Vietnam International Arbitration Center Thus, this topic in

Vietnam remains vague despite Vietnam having recently accessed to manyinvestment treaties.

3 Research scientific and practical values

The research of the concept of Security for Costs has both scientific and

practical value in investor-state arbitration, as outlined below:

When it comes to scientific values, the value of research on Security for Costslies inits contribution to the understanding and development of this legal mechanism

in the context of investor-state disputes By examining the application, effectiveness,and challenges associated with Security for Costs, researchers can provide insightsinto its impact on access to justice, fairness, and predictability in arbitrationproceedings Through empirical analysis and case studies, researchers can identifypatterns, trends, and inconsistencies in tribunals’ decisions regarding Security forCosts This research can shed light on the factors influencing these decisions, such as

the availability and sufficiency of evidence, the interpretation of legal principles, and

the exercise of tribunal discretion By exploring these aspects, scholars can contribute

to the development of clear guidelines, uniform standards, and best practices for the

application of Security for Costs Furthermore, research on Security for Costs can

explore the implications of this mechanism on the rights and interests of both

investors and states It can assess the potential impact on access to justice for

impecunious claimants and the protection of states’ financial interests

Jn terms of the practical values, the value of research on Security for Costslies inits ability to provide guidance and insights to stakeholders involved in investor-state disputes, including investors, states, legal practitioners, and policymakers.Accordingly, it helps claimants and respondents understand the criteria and factorsthat tribunals consider when deciding on Security for Costs applications byidentifying patterns and trends in tribunal decisions, provide insights into the timing,form, and amount of security that are most practical and efficient, reducing

administrative burdens and potential delays Especially, the research puts the high

threshold of informing policy discussions and reforms aimed at enhancing the

faimess, efficiency, and effectiveness of investor-state dispute resolution processes

not only for the international scope but also for Vietnam in executing and drafting the

Treaties process

4 Aims of the study

This research paper aims to define the Security for C osts in ITAs, including theBITs and TIPs In line with the new ICSID provision, Security for Costs is impliedunder the arbitral rules applicable to ISDS, including under the ICSID, UNCITRALand ICC Arbitration Rules, which must be explicitly clarified Based on these basis,the jurisdiction of the Arbitral Tribunal, the rights and obligations of Parties shall beestablished, thus, this thesis additionally includes the applicability and theeffectiveness of the Security for C osts provision in investor-state arbitration disputes.The settlement of this kind of dispute is occasionally related to the third-partyfunding, thus, this thesis seeks the existence of a third-party funder is whether or notrelevant in hearing an application for Security for Costs Last but not least, theresearch would endeavor to fill the gap of the Security for Costs provision, and

propose practical solutions for Vietnam in negotiating any investment treaties

5: Object and range of study

The researching object is the provision of security for cost in investment

treaties in applying to resolve the arbitral disputes, the investor-state arbitration

disputes in which the parties request for the application of Security for Costs While

the primary focus of this thesis is on examining the concept of Security for Costswithin the context of international investment treaties, it is important to acknowledgethat these treaties also make reference to the application of international arbitrationrules Recognizing the intersection between investment treaties and arbitration rules,this thesis undertakes additional research to explore the issue of Security for Costsunder international procedural rules With a view to cover these matters, this thesissets the wide range of researching scope from the worldwide investment treaties,arbitration rules including ICSID, UNCITRAL and ICC Arbitration Rules, andpractical investment arbitration cases settled by ICSID, ICC, UNCITRAL tribunals,

opinions in the Security for C osts of the arbitral tribunal, scholars in researching this

measure.

6 Research methods

The studyis structured to begin with the overview of the theoretical framework

of Security for Costs, investment treaties, and investor-state arbitration, thensynthesizing the relevant provisions of this measure in investment treaties, andarbitration rules, which is in support for the analysis of the jurisdiction, applicability

of the Security for Costs, to finally conclude the effectiveness of the Security forCosts in the practical arbitration disputes In general, to deploy the research in adetailed and comprehensive manner, the author applies methods including but notlimited to the following listing collecting synthesizing summarizing, analyzing,assessing, making comparisons with similar and different contents of the topic

Ts Structure of the thesis

The study of “Security for Costs under investment treaties and in State Arbitration” includes 52 pages, is divided into 03 (three) chapters with itscontents of this specific following structure:

Investor-CHAPTER 1: THEORETICAL FRAMEWORK provides the overview

understandings of the origin of Security for C osts in arbitration

CHAPTER 2: PRACTICES OF SECURITY FOR COSTS UNDERINVESTMENT TREATIES AND INVESTOR-STATE ARBITRATIONprovides the in-depth application of the Security for Costs in the basis, procedural

orders, rights and obligations of the parties, jurisdiction of the arbitral tribunal,

timing, and the consequences in approving to take this measures, then comes up withthe assessment conclusion.

CHAPTER 3: PROPOSALS FOR AMENDMENTS OF SECURITY FORCOSTS AND RECOMMENDATIONS FOR VIETNAM provides therecommendations for effectively applying the measure of Security for Costs Itproposes the amendments of the treaty languages and arbitration rules to be the basis

of arbitration dispute settlement in consideration to promote the powerful tools toVietnam as the state

B CONTENTCHAPTER I: GENERAL LEGAL ISSUES ON SECURITY FOR COSTS

Ll General understandings of Security for Costs

1.11 Origin of Security for Costs

The historical context of the emergence of Security for Costs may be viewed

during the development of both common law and equity Especially under the

English law, the period from the Henry III (1216) to the accession of Edward IV(1461) witnessed the allowance of costs by the Statute of Marlborough (1267), more

generally by the Statute of Gloucester 1278,° and the recognition of the Security for

Costs then was traced to petitions of Richard II in 1400.!° A statute of 1436 required

security to be provided in the Court of Chancery as a condition of commencingproceedings, to discourage claims in Chancery for which there was a remedy at

common law," and the Court of Chancery rapidly assumed wide powers to order

costs and was the first to develop Security for C osts.!2 Originated fron the Statue, the

cases ordering the Security for Costs become widely observed In Rajski and Another

v Computer Memfachze & Design Pty Lid and Ohers, in order to discourage claims

in Chancery for which there was a remedy at Common Law, required Security for

Costs to be provided in the Chancery Court as a condition of commencingproceedings there In Brrfold Corporation v Lenthall, Lord Chancellor Hardwwickrejected the argument that the court ought to resort back to the orginal jurisdiction, inpoint of costs, upon arguments chiefs drawn from cases of costs at commonlaw, andthe old acts such as, the Statute of Marlborough In Andrew v Barnes inEnglishC ourt

of Appeal, it was generally commented to be applicable to the emergence of Securityfor Costs Several petitions in C out of Chancery during the reign of Richard II were

endored that the security had only been provided the expense of a bill, but not until

1436 to later ơn, the applications in equity courts, inits unfettered discretion, applied

* Spephene Colbran (1993), Sectatty for Costs, Longman Cheshire Pry Ltd, Australia,pp 4.

9 Bravm Daniel (2006), Sectatty Costs in Arbitration in England and Wales, The University of Manchester

(United Kmgzdom) Pro Quest Dissertations Publishing, pp 12

20 Spephene Colbran (1993), Secroity for Costs, Longman Cheshire Pty Ltd, Australia,pp.4.

11 Noah D Rubins, All Others Pay Cash: Seciaity for Costs in International Arbitration, 11, (3),pp - 312

12 spephene Colbran (1993), Securit’ for Costs, Longman Cheshire Pty Ltd, Australia ,pp.4

2} spephene Colbran (1993), Seciath’ for Costs, Longman Cheshire Pty Ltd, Australia,pp.6.

to both the damages and expenses of the defsndant !* This nile of Security for Costs

made its way into the common law due to its emergence in equity and after the

legislation had fully ingrained a right to costs The earliest reported case of an order

for Security for Costs appears!’ to be dated 1750.1 In 1882, the Rules of Supreme

Court governed the regulation of Security for Costs, and that stated simply “in ay

case or matter in which Security for Costs is required the security shall be of stichamount, and be given at such times, and in such manner or form, as the Court or a

Judge shall direct” In the mid 19th century, even arising more cases related to the

commercial disputes between the companies that were decided to order Security forCosts

Security for Costs could be order against a claimant but not the defendant,

which goes for the reason that a defendant should always be allowed to defend

himself However, disputes arising between the claimant as a poor natural person,

for example Winthrop v Royal Exchange Assurance Company (1755), is not

sufficient reason to order him to provide security From time immemorial, the general

rule at common law and at equity held that poverty was no bar to a litigant and that

anyone may sue without giving security, except in certain cases.” Security for Costs

was not required in Courts of Chancery in case the plaintiff was foreign, and if therewere co-plaintiff was not foreign, Security for Costs was not ordered, but where aparty assigned his case to someone who was insolvent to sue on his behalf, he still

required to give out the Security for Costs”! Another case is where a liquidator or

trustee in bankruptcy was the sole plaintiff, that was not sufficient reason to ordersecurity, whether he sued in law or in equity, because he was not a nominal plaintiff

4 spephene Cobran (1993), Secioth’ for Costs Longman Cheshire Pty Ltd, Australia,pp.7

15 Dicey and Morris (2000), Te Conflict of Laws, 13th Edition, para 8-80,pp 213

16 Mẹ borucchy v Melionucchy (1750) 2 Ves Sen 24

17 Banque du Rhone SA v Fuerst Day Lavrsan Limited (1968) 2 Liayd's Rep 153, CA.

18 Tomlinson v The Land and Finance Corp Ltd (1884-85) LR 14 QBD 539 CA.

19 Bowring & Company (insurance) Ltd v Corsi Parters Ltd (1994) 2 Lloyd’s Rep 567.

20 Brawn Danie] (2006), Secratty Costs in Arbitration in Engicod aod Wales, The University of Manchester

(Gnited Kingiom) ProQuest Dissertations Publishing,pp 13.

22 Brawn Danie] (2006), Secrathy Costs in Arbitration in England cod Wales, The University of Manchester

(Unsted Kingtiom) Pro Quest Dissertations Publishng, pp 13.

and had the statutory rights to secure the insolvent party’s assets? Security for Costs

was not applied strictly without any flexibility, and the above cases are in

consideration of whether or not the security should be ordered based on the plaintiff’ s

circumstances, or his tittle and purposes in filing the case in Courts Prior to 1934,

the rules of the High Court applied only to causes or matters which by implication

excluded an arbitration 33

The enactment of Arbitration Act 1934 gave the High Court the same powerasit hasin relation to an action or matter in court of making orders upon an arbitration

reference, in respect of a power to order Security for Costs.* The later Arbitration

Act 1950, an arbitrator, unlike the High Court, has no power to order Security for

Costs! however, such a power may be reserved where there is an express provision

to that effect in the submission’ The Arbitration Act 1950 does allow either party to

an arbitration to apply for a Security for Costs order from the Court, but the Court

has a discretion as to whether or not to make an order for Security for Costs 2” The

Security for Costs orders have been made include where the claimant is ordinarily

resident out jurisdiction”® or an insolvent company,” also counter-claimants.”

Furthermore, the Security for Costs was also in consideration as the condition of

appointment of an arbitrator,3Ì and in case the claimant fails to comply with an order

of the Court to furnish Security for C osts the C ourt has statutory jurisdiction to order

a permanent stay of claim in an arbitration 32 In international arbitrations, although

the jurisdiction to order Security for Costs is discretionary, the grant or refusal of an

2 Bravm Danie] (2006), Sectath: Costs in Arbimation in Engicoxd aod Wales, The University of Manchester

(United Kingdom) Pro Quest Dissertations Publishing, pp 13.

3 qephsn CoRran (1993, Security for Costs of Arbimation Proceedings in England New Zealand and

Austratia, Longnun Cheshire Pry Ltd, Australia pp Số.

3 Budson Stumpffabrik Gmb H.v Bentley Engneering Co Ltd (1962) 2 QB 587

25 Asronave SPA v Westland Charters Ltd (1971) 1W L R 1445.

44 Eyadhi Shipbuilding & Engineering Co Ltd v Vinfiel Compania Naviera S.A (1991) 2 Uoyd’s Rep pp.

498, 505

27 Edson Stmumupffabrik Gmb Hv Bentley Engineering Co.Ltd (1962) 2 QB 587.

28 Bjomstad amd The Ouse Shipping Company Limited (1924) 2 K.B 673; ste also Sanxte17 Cohl & Co v.

Eastem Mediteanean Maritime Ltd (The Silver Fir) (1980) I Ưoyd's Rep; Duff Development Company Ltdv.

Goverment ý Kelantan (1925) 41 TLR 375.

29 Bacon Ltd Fegmay investments Ltd (1966) 2 QB 221.3

3° T, sloyan & Sons (Builders) Ltd and Another v Brothers of Christian Instruction (1974) 3 AER 715;

Hitachi Shipbuilding & Engneering Co Ltd v Visfiel Compania Naviera S.A (1981) 2 Uoyd’s Rep 498.

21 Biomstad and The Ouse Company Limited (1924) 2 KB 673.

3? Richco International Ltd v Butemational Industrial Food Co SAL (1989) 2 Lloya’s Rep 106, 109

order for Security for Costs depends on the circumstances of case.33 In Bank Mellat

v Hallimiä Techniki SA the Court of Appeal considered the significance of an

arbitration governed by the ICC rules, arose between an Iranian bank incorporatedin

Tran but registered in England the defendants and a Danish Company, which means

none of the parties carried on business, nor had any other connection with England to

order for Security for Costs The decision recognized the reality of the business

environment within which international arbitration is conducted Such arbitrations

between foreign parties should be conducted with the minimum of complexity, delayand expense - a purpose which would be substantially weakened if the gractice were

to make orders for Security for C osts more or less automatically

In New Zealand, as in England the power of the court to order Security forCosts in arbitration proceedings is the same as the court’s power to order Security forCosts in an action or matter in the court, without prejudice to any such power vested

in the arbitrator or umpire.** Normally, the order for Security for Costs in arbitration

proceedings happened where the plaintiff is resident outside the jurisdiction or is an

insolvent corporation In Rosso v Skivmer, it was recognized that in proceedings

under the Workers’ Compensation for Accidents Act 1990 an arbitration court had

jurisdiction to order a claimant who was resident out of the jurisdiction to give

Security for C osts Unlike New Zealand, Australia has not adopted the legislative and

case law developments in the United Kingdom 35 The uniform legislation does not

confer power on an arbitrator to require Security for Costs, nor does an arbitrator

have inherent jurisdiction to make an order for Security for Costs 3? The Arbitration

Act, 1973 section 18(3) specifically allowed the parties to agree that Security forCosts be provided, or that the arbitrator had power to avard Security for Costs

3 sephen Colbran (1993), Seciatty for Costs of Arbitration Proceedings in England New Zealand and

Australia, Longman Cheshire Pty Ltd, Australia pp 88.

+ seephen Colbran (1993), Seciatty for Costs af Arbitration Proceedings in England Now Zealand oxi

Australia, Long») Cheshire Pry Ltd, Australia,pp.91.

35 Srephen Colbran (1993), Secunity for Costs of Arbitration Proceedings in England New Zealand axa

Australia, Longman Cheshire Pty Ltd, Australia pp 92.

3Ê Mowbray Gollege wv Exhib Design and Construction Pty Ltd (In liquidation) ( 1986)

37 Hoan v Dynabuild Pry Ltd (1975); See also Alliance Petroleum Australia (1N L ) and Others v Australia

Gas Light Co (1983)

Until today, the emergence of Security for C osts in international investment

arbitration can be attributed to several factors First and foremost, the increasing

complexity and scale of investment disputes have resultedin substantial costs for both

parties involved Respondents in investment arbitration cases often face significant

financial burdens, as they are required to mount a robust defense against well-funded

claimants Another factor is the recognition of the potential risks associated withunmeritorious claims and the need to prevent frivolous or speculative cases fromburdening the respondent and the arbitral process Security for Costs serves as adeterrent, discouraging claimants from pursuing weak claims solely for the purpose

of extracting a settlement value Moreover, the concept of Security for Costs alignswith the principles of fairness and equity in investment arbitration It aims to protectrespondents from the unnecessary loss of resources incurred in defending against

financially irresponsible or insolvent claimants By requiring claimants to provide

collateral for potential costs, the scales are rebalanced, ensuring a more level playing

field for both parties The practice of Security for C osts has gained traction due to its

recognition and acceptance by investment arbitral tribunals Tribunals have

acknowledged the importance of this mechanism in safeguarding the integrity and

efficiency of the arbitral process by deterring unm eritorious or financially imprudent

claims Generally, the recent rise of Security for Costs in international investment

arbitration can be attributed to the growing need to address the escalating costs ofdisputes, prevent abuse of the system, promote fairness, and ensure the sustainabilityand effectiveness of the arbitration process

1.1.2 Definition of Security for Costs

Security for Costs could be interpreted differently in national laws andinternational rules In the UK, the Security for Costs is a legal remedy regulated by

part 25D of the Civil Procedure Rules 1998,*° which is sought by defendants and

the claimant may be required to pay money into court to protect the defendant’s legalcosts The other is Order 28, rule 3(1) of the Federal Court Rules in Australia which

provides, in effect, where, in any proceeding it appears to the Court to order the

38 Ministry of Justice , “Civil Procedure Rules 1998”, available at

https hrm justice gov uk/courts/proce dure rules/civilirulesfpart25

applicant to give security as the Court thinks fit for the costs of the respondent of and

incidental to the proceeding In the context of the international rules, the Security for

Costs is widely accepted that “Seciaity for Costs is a type of interim measure which

enables aparty to post sectaity to cover the legal costs associated with the arbitration(these may include, but are not limited to, attorney's fees, tribunal fees, as well asadministrative costs).”, andreached for its purpose that requires the investor bringingthe claim to pay a deposit to cover the state’s expected costs in defending itself against

the claim in the investor-state arbitration 3° Starting from 2018, the Vienna Rules,

specifically Article 33(6) and (7), grant tribunals the power to issue interim measures

in the form of Security for C osts The provisions can be paraphrased as follows

(6) The arbitral tribunal may, at the request of the respondent, order theclaimant to provide Security for Costs, if the respondent shows cause that the

recoverability of apotential claim for costs is, with a sufficient degree of probability,

at risk When deciding on arequest for Security for Costs, the arbitral tribunal shall

give all parties the opportunity to present their views

(7) If aparty fails to comply with an order by the arbitral tribunal for Security

for Costs, the arbitral tibial may, upon request, suspend in whole or in part, or

terminate, the proceedings (Article 34 paragraph 2.4).”

Furthermore, although the ICC Arbitration Rules and UNCITRAL Arbitration Rules

do not explicitly mention these specific remedies in Article 28 (CC ArbitrationRules) and Article 26 (UNCITRAL Arbitration Rules), it is acknowledged andunderstood that they are encompassed within the broader authority granted totribunals to order conservatory of interim measures

“Interim measure” plays an important role in international arbitration, whichprovide a party to arbitration with immediate and temporary protection of rights orproperty during the period of time when a decision on the merits by the arbitral

tribunal remains pending Article 17(2) of the UNCITRAL Model Law on

International Commercial Arbitration lists four functions of interim measures:

39 Sarah Brewin, Nathalie Bemasconi- Osterwalder (2018), “ISD Best Practices Series: Security for Costs”,

available at https //vrvmv iisd argipublications/gnide fiisd-best-practices-series-security-costs,pp 1.

*° United Nations Commission On Intemational Trade Lav (1985), “UNCITRAL Model Lav on.

International Conmuercial Arbitration” with amencmints as adopted at 2006, available at

hitp:/hemnvxmearalorghac draVerncitral_ tezes/arbiration /19$5Model_arbiration html

maintenance of the status quo; protection of the arbitral process itself, preservation

of assets, and preservation of evidence Itis reasonable that Security for C ostsis listed

under the interim measure due to its protection of rights or property function In more

specific detail, Security for Costs serves the function of “preservation of assets”

among the four functions listed in Article 17(2) of the UNCITRAL Model Law on

International Commercial Arbitration The purpose of this function is to ensure thatthe respondent has a means to safeguard its potential recovery of costs and preventthe dissipation or depletion of assets that could be used to satisfy an eventual awardinits favor “Costs” is requested in the context of international arbitration refer to theexpenses incurred by the parties involved in the arbitration proceedings According

to Article 40 of UNCITRAL Arbitration Rules, the costs include the fees to eacharbitrator and to be fixed by the tribunal itself, the reasonable travel and otherexpenses incurred by the arbitrators, the reasonable costs of expert advice and of otherassistance required by the arbitral tribunal, the reasonable travel and other expenses

of witnesses, the legal and other costs incurred by the parties, any fees and expenses

of the appointing authority However, the term “Secraity for Costs” is often treated

as a distinct category or subset within the broader concept of interim measures in the

context of international arbitration Thus, the specific provision considering theSecurity for C osts is now designed to be separated from the interim measure

1.2 Definition of Investment Treaties

In the Global Era, the agreements are born to address trade in goods, trade inservices, investment or any combination of three, with the parties may be developedstates, developing states, developing states, or both, not or in the same region.Invesiment treaties are agreements regarding a State’s treatment of investments made

by individuals or companies from another State.*! The IIA regime consists of 3,300

treaties: 2,871 BITs and 429 other TIPs Ý2 Investment treaties play a significant role

in establishing the framework that regulates the terms and conditions for foreigninvestment in numerous countries Currently, there are approximately 2500 active

*ICSED , “westment Treaties”,

https J/icsid vrorldbank orghode/2027 14: text=hwvestment% 20treaties% 20are % 20agreements% 2Ore garding

% 202% 20 State % E2% S0% 995% 20treatment or % 20be % 20part 200f% 202% 2Ofree % 20trade% 20agreement

*“ UNICTAD (2022), “The Intemational Investment Treaty Regame And Climate Action”, (3),pp.2, availible

athups:/Amctad org/systemlfile slofficial-documentidinep cbint2022d6_en pat

investment treaties, which encompass both standalone investment agreements and

investment provisions within broader trade agreements? Investment Treaty is

including the preamble in often express the intention to foster and encourage

investment, balancing the rights and interests of both the state and the investor, anda

set of rules that each party must stricly follow in case the dispute arisen, in which

parties may agree to order the Security for Costs for their dispute To the extend thatthe purpose of the agreement to protect foreign investment, some 200 arbitrations to

enforce provisions of investment agreements have been filed, and many of these

have resulted in awards in favor of the investors, in a some cases of very substantial

amounts,*> without the arbitration occurred, it has undeniably contributed to the

protection of foreign investment To another extent that the purpose of the agreement

is to promote investment flows, following the signing of a BIT, it is more likely than

not that the host country will marginally increase its share in the outward FDI of the

home country

Investment treaties confer a range of rights upon investors and offer

corresponding remedies to enforce those rights Commonly found substantive rights

for investors in BITs encompass the following**: (a) assurance of receiving adequate

compensation if their investment is expropriated, (b) prohibition of the host country

from implementing currency controls that impede the unrestricted movement of

capital; (c) prohibition of discriminatory treatment against the investor in favor of thehost country’s citizens or other foreign investors; (d) entitlement to fair and equitabletreatment by the host country, (€) provision of complete protection and security forthe investment by the host country, (f) guarantee from the host country that theinvestor will not be subjected to treatment below the minimum standard required bycustomary international law, and (g) agreement from the host country to uphold allcommitments made to the investor

+! OECD, “The Fe of investment Treaties”, available at https:/Avmnvv.oecd

org/awestment/investment-treaties hm

“ United Nations Commission On Intemational Trade Lavr (2022), “The Intemational Investment Treaty

Regime And Climate Action”, @), ppl3, avaiable at hnps:/Amctad

org/systemlfilesiotficial-documentidiaepcbinf202246_en pdf

+ Kenmuth J Vandevelde 2005), Brief History of International hmestment Agreements Thomas Jefferson

School of Law Research Paper,pp 184

** Clwistopher Gibson (2010), “A Look at the Compulsory License in Investment Arbitration: The Case of

Indirect Expropriation”, available at https: //papers sam co/sol3jpapers cfm abstract_ia=1428419

Under the systemic interpretation of Investment Treaty, it goes without saying

that the international law is a legal system, and investment treaties are creatures of it

and governed by it? Asian Agricdliaal Products Ltd v Republic of Sti Lanka is the

first ICISD case where the Tribunal held that a bilateral investment treaty “is not aself-contained closed legal system limited to provide for substantive material rules ofdhrect applicability, but it has to be envisaged within a wider juridical context inwhich rules from other sotrces are integrated through implied incorporationmethods, or by direct reference to certain sigplementary rules, whether of

international law character or of domestic law nature” 4 However, the inclusion of

international law in the evaluation of a claim under an investment treaty is contingentupon the initial process of treaty interpretation in accordance with Article 31 and 32

of the Vienna C onvention on the Law of Treaties 1969 Accordingly, these articlesstate rules of customary international law on treaty interpretation Investment arbitraltribunals have consistently recognized and acknowledged the authority of these rules

as binding principles of interpretation when analyzing investment treaties Such

acceptance stems from the understanding that these rules hold binding force eitherbecause they are explicitly mandated within the bilateral investment treaty as treaty

rules or due to their status as customary international law.*? The significance of treaty

rules is that they perform a central function in describing the operation of theinternational legal order, and in establishing a common set of underlying principleswhich inform it

While the primary focus of this thesis is on examining the concept of Securityfor Costs within the context of international investment treaties, it is important toacknowledge that these treaties also make reference to the application of internationalarbitration rules Recognizing the intersection between investment treaties andarbitration rules, this thesis undertakes additional research to explore the issue of

Security for Costs under international procedural rules By considering the interplay

*' United Nations, Vierma Convention of the Lav of Treaties (VCLT) (1969), available at

hitps se galim org/ik texts fnstraments/engislvconventions/1_1_1969 paf

** Asim Agricultural Products Ltd (AAPL) v Republic of Sri Lanka, ICSID Case No ARB/S7/3, Avrerd,

para 257

4° Sahika bwestments BV (The Netherlands) v Czech Republic , Partial Asvard (UNICTRAL, 2006, Watts C,

Fortier & Behrens), para 296.

between investment treaties and arbitration rules, this study aims to provide acomprehensive understanding of the legal framework surrounding Security for Costs

in international investment disputes

13 Definition of Investor- State Arbitration

Any violations need the suitable remedies to assure each party's rights andduties to others Investor-State Dispute Settlement (ISDS) is a legal mechanismallowing an investor from another country to bring a claim against a state in which ithas made an investment, because relying on the national courts of the host country toenforce obligations in an investment agreement is not always easy or may even be

impossible.“ Arising from the bilateral, multilateral and sectoral basis of the treaties,

an investor-state arbitration becomes the dominant remedy that requires to enforcethe international investment obligations Arbitration, as a type of ADR, offers a

means of resolving conflicts outside the traditional court system In the event of a

dispute between an investor and a host state, the investor has the option to initiate

arbitration proceedings against the state Based on four main guarantees®! of the

agreements, the investor-state disputes are arisen related, including discrimination;

expropriation without proper compensation, unfair and inequitable treatment, and

capital transfer Investor-state arbitration, as a dispute resolution mechanism in BITs,offers several advantages: neutrality, expertise, confidentiality, flexibility,enforceability, and specialized remedies, making it an attractive dispute resolution

mechanism in BITs

Investor-state arbitration is the poster-child of international legalization, a

phenomenon salient in modem international economic relations.” The ICSID, a

center within the WB’s framework, has played a significant role in the swift growthand widespread acceptance of investor-state arbitration as the primary means of

“European Parliamentary Research Service (2014), 'Ttvvestor- State Dispute Settlement (ISDS) Sate of ply

and prospects for reform”, pp.2, available at

hitps:/rvn europar] europa euthinitank/endocumenv/EPRS_BRI(2015)545736

St Europea Commission, DG Trade fact sheet (2013), Smvestuent protection and investor-to-state dispute

settlement in BU agreements pp 4; see also Mc Danagh T (2013), Urfaar, runstainable, and tower the radar: How corporations use global investment rides to vadermine a sustainable fimure,pp 9; Schull S, Virginia Jounal of Intemational Lau (2011), Fnhenncing oiternational irnestment leav’s legitimacy, pp 62.

5? Judith Goldstem et al (2000), Burodtuction: Legalization coud World Politics, the MIT Press pp 385- 386

(“These actions, taken in the course of a single year, were representative of a longer term trend: some international instiniions care becoming increasingly legalized”)

resolving disputes related to foreign investments 53 The establishment of the ICSID

Convention and the subsequent creation of the Centre not only gave rise to aninternational organization dedicated to settling disputes related to internationalinvestments, but it also facilitated the expansion and popularization of a system that

offers protections to foreign investors This system enables individuals or

corporations to directly seek damages from states through a private right of action.Furthermore, the Convention and the Centre played a crucial role in promoting aspecific understanding of the significance of FDI in national economic development

It also contributed to stabilizing a vision of economic cooperation, particularlyfollowing the collapse of the Soviet Union, advancing the idea of an international

“rule of law” through BITs.

14 The rele of Security for Costs in investor-state arbitration

In international arbitration, party representation costs may vary widely

because of a number of reasons “5 including the vastly different conditions under

which lawyers work around the world and the varying ability of lavyers used to adapt

to the often unfamiliar ways of international arbitration In spite of the initial highcost associated with international arbitration, the respondent sued in arbitration by a

claimant who has no money stands to lose in any event,“ this situation differs from

that of a creditor who may encounter a debtor who lacks funds Neglecting to addressthe claim in arbitration increases the likelihood of receiving an unfavorable ruling

Conversely, if the respondent chooses to defend the lawsuit, it will entail significant

expenses In the absence of cost security, the expenses incurred in defending the casemay be irrecoverable When the respondent is involved in an arbitration initiated by

a prospective bankrupt, they are left with no alternative but to either lose and become

* Convention on the Settlement of Investment Disputes benveen States and Nationals of Other States The

five organizations of the World Bank (“WB”) group are: International Fuance Corporation (“IFC”),

Multilateral Investment Guarantee Agexy (MIGA’), hitemational Bank for Reconstruction and

Development (IBRD”), Intemutional Development Association (IDA), and Intenutional Centre for Settlement of Investment Disputes (ICSID”)

+ Aknro Santos (2006), The World Bank's Uses of the “Ride af Lên” Promise in Economic Development, int

the new law ad economic development: acritical appraisal, David M Tribe & Alvaro Santos 283

eds,pp.253-55 Disre A Karner (1986), Arbitration saves !— Costs — Poker and Hide-coxdseek, Jounal of Buternational

Arbitration 1986,3,(1),pp 35

Ý€ y4illermim Conference of the Clustered Institute of Arbitrators (1999), “Security for Costs”,pp 3.

liable for the award or become an unsecured creditor of the bankrupt for costs The

primary policy underlying demands on claimants to provide security to cover costs is

the same in both litigation and arbitration A recent reform proposal from the English

Lord Chancellor's Office shows that “Claimants who take advantage of the courtsystem should demonstrate their willingness (or at least do not demonstrateunwillingness) to comply with the court's decision on costs The system is undermined

if a claimant can use it for his benefit, but escape liability if he does not succeed on

his claim” 5’ Referred to “carfio judicahan solvi” in civil law and also recognized in

English common law, the concept of Security for Costs serves the purpose ofdiscouraging a claimant from pursuing a baseless claim and compelling them tocarefully reconsider their legal position Its primary aim is to safeguard therespondent from incurring unnecessary expenses in successfully defending against a

financially irresponsible or insolvent claimant This mechanism essentially compels

the claimant to furnish collateral to cover the fees and expenses that they wouldeventually be obligated to reimburse the respondent

Security for Costs is acttracting more and more attention in ISDS since state

may wish to seek Security for Costs from an investor because'Ê () Due to the

substantial expenses associated with defending an ISDS claim, the state may seekassurance that taxpayer funds allocated towards the defense of a claim lacking meritcan be adequately protected or reimbursed The average estimated cost to defend a

claim is USD 8 million,” but many cases are greatly exceed that cost (the Philippines

spent USD 58 million to defend two cases brought by a German investor,® and

Australia spent USD 39 million defending a case brought by tobacco company Philip

Morris,*!_.).; Gi) The state might consider ordering Security for Costs as a means to

57 access to justice: Security for Costs proposed nev rules”, a consultation paper 2 (1997)

58 Sarah Brewin (2018), Nathalie Bemasconi- Osterwalder , “SISD Best Practices Series: Security for Costs”,

pp 2, avaiable athitps:/hnmv sd orgbpublications/guide isd best practices series securty-costs

°° Orgmnisation for Economix Co-operation and Developnent (2012), Sivestor-state dispute settlement Public

Consultation: 16 Ma S28 Jy 2012, pp 19

© Olivet, C.,& Pberhardt, P (2012), Profiting from injustice: How low firms, cabitrators and financiers are

JSuelling an imestment arbitration boom Briasels: Transnational Instinde , Corporate Exrope Observatory and the Trnoutional Instinwte , Brussels / Amsterdam, pp 27

@ Horchens, G & Knaus, C (2018), Revealed: $39m cost of defending Australia’s tobacco plain packaging

Janus, weailable at hatps:/hrvew theguardian convbusiness/20 18 /julO2reveale

d-39m-ost-of-defending-australias-tobacco-plan-packaging- avs

screen out speculative or marginal claims The underlying rationale is that an irrvestor

who is insincerely pursuing a weak case solely for the purpose of obtaining a

settlement will be umvilling to provide the necessary Security for C osts and may opt

to abandon the claim instead ; (iii) The state seeks reassurance that the investor will

not declare bankruptcy or flee the jurisdiction without fulfilling an order to cover the

costs imposed upon them Such assurance would help restore a more equitablebalance in favor of the state, asit lacks the ability to initiate an ISDS claim against aninvestor, nor can it declare bankruptcy, divest assets, or abscond in a similar manner

as an investor can, (iv) In instances where a claim is supported by third-partyfunding, the state may have heightened concerns regarding the speculative ormarginal nature of the case Additionally, if an investor relies on external funding,the state may worry that the investor may not possess the financial means to fulfill a

costs order Thisis particularly so where the funder funds the claim but does not fulfill

its duty of costs - a situation described as “arbitral hit and riot” For the foregoing,

Security for Costs provides the effective scheme for the Arbitral Tribunal in settling

the investor- state disputes

© Guaracachi America, Inc and Rurelec PLC v The Phirmational State of Bolivia, UNCITRAL, PCA Case

No 2011-17, Procedural Order no 14,para 3.

CONCLUSION OF CHAPTER 1The chapter on “General Legal Issues on Security for Costs” provides acomprehensive understanding of the origins, definitions, and significance of Securityfor Costs in various legal contexts, particularly in the realm of investor-statearbitration.

The historical development of Security for Costs can be traced back to theemergence of common law and equity, with notable milestones in English law Overtime, statutes and court decisions established the practice of requiring Security forCosts as a means to discourage frivolous claims and protect defendants The rulesgoverning Security for C osts have evolved, and the power to order such security hasbeen extended to both courts and arbitral tribunals Especially, Security for Costs nowcan be observed in more recent investment treaties, where provisions addressing thisissue have been included These provisions typically grant tribunals the authority toorder Security for Costs as an interim measure They recognize the potential riskfaced by respondents in bearing the financial burden of arbitration without adequatesafeguards

The concept of Security for Costs serves several essential purposes Itaddresses the growing complexity and scale of investment disputes, which oftenimpose substantial financial burdens on respondents By requiring claimants toprovide collateral for potential costs, this measure assure being against unmeritorious

or financially irresponsible claims, preventing the burdening of respondents and thearbitral process with frivolous or speculative cases The recent rise of Security forCosts in international investment arbitration can be attributed to the need to addressescalating dispute costs, prevent abuse of the system, promote fairness, and ensurethe sustainability and effectiveness of the arbitration process Its recognition andacceptance highlight its importance in maintaining the integrity of the system anddeterring unmeritorious or financially imprudent claims

Overall, the chapter emphasizes the significance of Security for C osts as a vitaltool in investor-state arbitration It provides a mechanism to address the financialimbalances between claimants and respondents, safeguard the integrity of the arbitralprocess, and promote fairness

CHAPTER 2: PRACTICES OF SECURITY FOR COSTS UNDERINVESTMENT TREATIES AND INVESTOR-STATE ARBITRATION

2.1 Analysis of the Security for Cost Under Investment Treaties

2.1.1 Legal frameworks for the Security for Costs

21.1.1 The international investment treaties

In the past, the economic relations between a national State and a foreign Statewere governed by a broad set of rules that aimed to safeguard foreign individuals,

primarily through diplomatic means rather than specific legal statutes® However,

with the passage of time, and as economic transactions between States expanded, thetime was ripe for States to conclude treaties that would regulate the investments of

their nationals in another State, and both developed countries and developing

countries In fact, the history of international investment does not coincide with thehistory of investment treaties despite having links to general principles of

international lew International investment law comprises a vital part of the public

international law governing FDI,® including thousands of complex sets of MITs, and

BITs The existence of foreign investment treaties became increasingly important due

to the absence of a universally accepted standard in international lew that governsforeign investments It is believed that customary intemational law still did not

adequately regulate international investment,*” which was for the reason that there

was no consensus as to what law governed the treatment of foreign investment a

Additionally, at that time, the principles in place lacked clear definitions and weretherefore susceptible to varying interpretations This progression in history clarifiesthe emergence of international investment treaties to protect national-level relationsthroughout the investment process Both the BITs and MITs have emerged as one of

® choudiumy (2013), Buernational Swestment Law As a Global Public Good, 17, (2), pp 4 (stating that;

“{pjrior to the twentieth cenhay, steoxdards for the protection of foreign awestors and foreign investuents were developed primarily through the process of diplomanic protection.”

“ Bustace Chikere Anibuike (2013), The Place of Treaties in Jiternational bovestment, 19,(1),pp 156

© Jost Robbins (2006), The Emergence of Positive Obligations in Bilateral mestuent Treaties ,13,(2),pp

403,409.

*' Serah M Akhalvani (2021), What Should We Know About the Origins of Siternational bwestuent Law?,

Cambridge University Press,pp 122.

7 Bustace Chikere Aznbub‹e (2013), The Place of Treaties in International brestment,19,(1),pp 159

§8 Stephen M Schivebel (2004), The Byluence of Bilateral bwestuent Treaties on Customary Biternational

Leow, Combridge University Press,pp 27

the most remarkable recent developments in international law In BITs, two countries

often a developed country and a less-developed country extend legally binding

promises to treat each other’s foreign investors favorably © Typically, the BITs were

initiated by the developed, capital-exporting country, with the usual objective being

to secure higher standards of legal protection and guarantees for the investments of

its firms than those offered under the national laws of the capital-importing,

developing country.’” The MITs are the IIAs made between several countries and

containing provisions to protect investments made by individuals and companies ineach other’s territories for the purpose of globalization

In this day and age, there is a notable increase in the number of foreigninvestment treaties, leading to these treaties assuming greater importance within therealm of international investment lew Based on the analysis of UNICITAD, in 2020,

aminimum of 21 new IIAs were concluded by countries, consisting of 6 BITs and 15

TIPs”! Out of these 21 ILAs, 12 were rollover agreements that the United Kingdom

entered into to maintain its existing trade and investment relationships with third

countries after its departure from the European Union”? Furthermore, at least 18 ILAs

that had already been concluded came into effect in 2020, resulting in a total of at

least 2,646 IIA s in force by the end of the year However, during the same period, the

number of terminations of [As ex ceeded the number of newly concluded agreements

Atleast 42 IAs terminations took effect in 2020, including 10 unilateral terminations,

7 replacements (through the entry into force of newer treaties), 24 terminations bymutual consent, and 1 expiration Out of the 42 terminations, 20 were a consequence

of the agreement to terminate all intra-European Union BITs on 29 August 2020.Additionally, India was particularly active in terminating treaties with six BITsterminated, followed by Australia with three, and Italy and Poland with two each

Jason Webb Yackee (2008), “Conceptual difficulties inthe emp sical study of Bilateral Investment Treaties”,

pp 405, available at https :/(papers ssm_conusol3 papers cfm Tabstract_xi=1015088

© Victor Mosoti (2005), Bilateral bnestment Treaties cord the Possibility of a Multilateral Framework on

Jnwestment at the WTO: Are Poor Economies Caught in Between, 26,(1),p.115.

ˆ UNICTAD (2021), “Recent developments m the ITA regime: Accelerating A reform”, Issue 3,pp.2,

availsble at https://nnvestuentpolicy wx tad org/public ations/1253 fecent-deve accelerating-iie-reform

lopments-in-the-iia-regums-`? UNICTAD (2021), “Recent developments the IA regime: Accelerating IA reforms”, Issue 3,pp.2,

available at https://mvestmentp olicy xmctad org/public ations/1253 kecent-deve lopments-in-the-iia-re accelerating-iie-reform

gime-Consequently, the total number of effective IIA terminations reached at least 393,

resulting in a universe of 3,360 IIAs (2,943 BITs and 417 TIPs) by the end of the

year

More recently, states have been concluding ILAs with investment chapters that

explicitly affirm the power of the tribunal to order Security for Costs.”3

- EU-Vietnam Investment Protection Agreement (EVIPA) provides that the

tribunal may order an investor to post Security for Costs “For greater certainty, the

Tribimal may, won request, order the claimant to provide seciwity for all or apart

of the costs if there are reasonable grounds to believe that the claimant risks not

being able to honour a possible decision on costs issued against the claimant.”"*

- The BIT between Iran and Slovakia provides that “a fribtmal may orderSecurity for Costs if it considers that there is a reasonable doubt that claimant would

be not capable of satisfying a costs award or consider it necessary from other

Teasons ” 5.

- The EU’s proposed language for the Transatlantic Trade and Investment

Partnership (TTIP) states that the tribunal may order costs “if there are reasonablegrounds to believe that the claimant risks not being able to honour apossible decision

on costs issued against it.”7

- The Czech model BIT adopted in 2016 provides the greatest amount of

guidance, stating that “the arbitral tribtmal shall especially consider orderingSecurity for Costs when there is a reason to believe: (a) that the investor will beunable to pay, if ordered to do so, a reasonable part of attorney fees and other costs

to the Contracting Party whichis the party to the dispute; or (b) that the investor has

divested assets to avoid the consequences of the arbitral proceedings.”””.

Under the ICSID system, the ICSID Convention is a treaty ratified by 158

® surah Brewin Nathalie Bemasconi-Ostervralider (2018), IISD Best Practices Series: Security for Costs,

pp.3, available at https:/Avvrw isd org/public ations /guide hisd-best-practices-stries-securty-costs

® Article 22 of the EU-Vietnam FTA available at

hetp ://iwestmentpolic yinub xmctad org/Download/ Treaty File 3563

7 agreement between the Slovak Republic and the Islamic Republic of Ian for the Promotion and Reciprocal

Protection of brvestments.

7Í Article 21 of the Europea Union’s proposalfor Chapter II (iwestment) of the Transathntic Trade and

Investment Partnership available at http:/hvinw europar] europa ewnssdata/92123/TTIP_awe stment pdf

7? Czech Model Bilateral Iwestment Treaty 2016 available at

itp /iwestmnentpolic yinub amctad org/Dovnload/ Treaty File/5407

Contracting States "3 of which have implicitly granted the ICSID Tribunal to allow

for the Security for Costs Article 47 of the ICSID Convention provides that, unless

otherwise agreed by the parties to the arbitration, an ICSID “ tribunal may, if it

considers that the circumstances so require, recommend any provisional measureswhich should be taken to preserve the respective rights of either party.” Severaltribunals have interpreted the term “recommend” contained both Article 47 of the

ICSID Convention as a synonym or interchangeable term for the word “order”.”

Tribunals, are, thus, empowered to recommend provisional measures, at any point intime throughout the arbitral proceedings, insofer as the parties have not previously

determined that provisional measures are not applicable in the arbitral proceedings %

A small number of ICSID tribunals have found that Security for Costs is a form ofprovisional measure that falls within the scope of Article 47 of the ICSID

Convention $! Nevertheless, up until now, there has been just one occurrence where

an ICSID tribunal has issued an order requiring a party to provide Security for Costs

211.2 The arbitration rules

Treaties, on a regular basis, do not provide specific articles giving the power

to the Tribunal to render the Security for Costs Under such circumstances, another

specific scheme that is relied on to determine the matter of Security for Costs is thearbitration rules that parties concurred to settle the disputes in the Treaties or in theseperate arbitration agreements Arbitration rules help establish a structured andpredictable framework for resolving disputes by outlining the procedural guidance onmatters throughout the arbitration proceedings, from the first step in initiatingarbitration to the last step in rendering awards, which helps to ensure that the

T8ICSTD ,ICSID Convention, Regulations and Rules, available at hitps:/ficsid worldbank

orginales-regulations/ onvention#~ te t= The % 201C SID% 20 Convertion% 20is% 201% 20tre aty% 2Oratifitd% 20by days

‘% Wafter% 20ratifx ation% 20by% 20the % 20first% 2020% 20 States

% Emilio Agustin Maffezini v Kmgdom of Spain, ICSID Case No ARBI97/7 , Decision on Request for

Provisional Measures para 10.; Tethyan Copper Company Pty Limitedv Islamic Republic of Pakistan, ICSID Case No ARB/12/1, Decision on Claiamunt’s Reque st for Provisional Measwres; Quiborax S.A Non-Metallic Mirals S.A and Allan Fosk Kaphim v Phưzatšomal State of Bolivia, ICSID Case No ARB/06/2, Decision

on Provisional Measures.

© Moria Chữa Ayres Hemandes (2019), “Security for Costs in The ICSID System”,pp 19, avaible at

https séma diva-portal org/smashiget diva? :1321675/FULL TEXT01 pat

31 atlantic Teton Company Limited v People's Revoheiotury Republi of Guinea ICSID Case No ARB/S4/1,

Decision on Provisional Measures; Euro Gas Inc and Behnont Resources Inc v Slovak Republic ,ICSID Case

No ABB/14/14,Award of The Trimwl; Victor Pey Casado and President Allende Foundation v Republic of Chile ,ICSID Case No ARB/982; Supra, RSMv St Lucian 33,para 78.

arbitration process is fair, efficient, and consistent By adopting the specific

arbitration rules to resolve the dispute, rules then become the “procedural law” of

arbitration? binding both parties In analysis, the prominent arbitration rules

commonly chosen to resolve investor-state disputes include:

- ICSID Rules® is widely used for resolving investment disputes bebveen

states and foreign investors They are administered by the International Centre forSettlement of Investment Disputes, which is part of the WB Group The ICSID rulesprovide a comprehensive framework for initiating arbitration, appointing arbitrators,conducting proceedings, and rendering awards,

- UNCITRAL Arbitration Rules* is a widely recognized set of rules for both

commercial and investment arbitration They offer a flexible framework that can beadapted to various types of disputes Many investor-state arbitration cases notadministered by ICSID use the UNCITRAL mules as the basis for the proceedings

- ICC Arbitration RulesŠÝ, although primarily designed for commercial

arbitration, the ICC Rules are occasionally used in investor-state disputes,

particularly when the arbitration is not governed by a specific treaty or when the

parties agree to use these rules voluntarily The ICC rules provide a well-established

framework for arbitration, addressing procedural matters such as the appointment ofarbitrators, evidence presentation, and the conduct of hearings

- SCC Arbitration Rules® is often utilized in investor-state disputes involving

parties from Europe or those with a connection toSweden These rules are known fortheir efficient and transparent procedures The SCC rules cover various aspects of thearbitration process, including the appointment of arbitrators, case management, andthe rendering of awards

& United Nations Conference On Trade And Development, “UNCTAD Series on issues in ternational

investment agreements” ,p 55, https:/Amctad org/systennfiles/offic ia]-document/iteiit30_en pdf

“ternational Centre for Settlement of Investment Disputes ICISID Arbitration Rules (2022), available at

https /ficsid wrorldbank org/sitesidefaultAile s/Arbitration_Rules pdf

“United Nations Commuission On Internutional Trade Law, UNCITRAL

Arbitration Rules (2021), available at https :/Amcatralum org/siteshmcitralim

org/filesfmedia-documentsAmc itral/en/?1-07996_e2pedited-arbitration-e-ebook pdf

`* Intemational Chamber of Conmurce ICC Arbitration Rules, available at https:/fccorbo

org/dispate-resolition/dispute-re solation-service s/arbitrationdnules-proce dure /202 L-«rbitration-rules/

* Stockholm Chamber of Commerce , SCC Arbiration Rules, available at

https Jisccarbitrationinstinute se /enitesource-Hrary inales-and-policies/scc-rules

- International Arbitration Rules of the CPRẼ: CPR is a non-profit

organization that provides arbitration and other dispute resolution services Its

International Arbitration Rules are occasionally used in investor-state disputes The

CPR Arbitration Rules are designed to promote efficiency and cost- effectiveness, and.they emphasize party autonomy and the active involvement of the arbitrators inmanaging the proceedings

According to the above-mentioned rules, except from the ICSID Arbitration

Rules, on 21 March 2022, the Member States of ICSID approved amendments to theICSID Regulations and Rules, which will enter into force on 1 July 2022, explicitlycontaining a new Rule 53 setting out the tribunals’ power to order Security for Costs

in the absence of an express power to order Security for Costs under the previousRules, which shall be specified below On the flip side, it is necessary to view

UNCITRAL Arbitration Rules and ICC Arbitration Rules which are widely applied,

to have the understandings in comparison with the new ICSID Arbitration Rules

a The ICSID Arbitration Rules

Security for C osts in the context of the ICSID system is commonly measured

to happen in a great number of practical cases Previously, the ICSID Arbitration

Rules do not contain a specific provision dealing with Security for Costs The ICSIDhas suggested specific revisions to its regulations and mules, including the ICSIDArbitration Rules, as outlined in its Working Paper dated 2 August 2018 Thesuggestions put forth in the Working Paper are a result of consultations received byICSID from Member States and the general public during a consultation process

initiated in January 2017 $Š The ICSID Secretariat has proposed to introduce a new

provision — Draft Rule 51 —to establish a separate regime for Security for Costs, thenthis Draft Rule has been widely recognized under Article 53 of ICSID ArbitrationRules 2022 This event marked the milestone of the first time the Security for Costshas its own place in the procedural order that Parties shall strictly comply with

In the previous ICSID rung system, Security for Costs is considered a

Intemational Institute for Conflict Prevention & Resolution, CPR Arbitration Rules, available at

hips /idrs.cpradr orgénules habiration.

$3 ruermational Centre for Settlement of rvestment Disputes (2018), Proposals for Amendmant of the ICSID

Rules — Working Paper 3, ICSID Secretariat, available at

https /ficsid worldbank org/er/Documents/Amendments Vol_Three pafHpage=230

provisional measure The framework for provisional measures is based on three

primary sources: Article 47 of the ICSID Convention, Rule 39 of the ICSID

Arbitration Rules, and the established legal precedents found in the published rulings

of ICSID and other investment arbitration tribunals In terms of provisional measures,the practice of requests inICSID proceedings is common among the parties involved,which has led to the well-established development of laws and procedures in theICSID ruling system It is generally accepted that to obtain provisional measuresunder Article 47 and Rule 39, the requesting party must demonstrate that: (a) thearbitral tribunal has prima facie jurisdiction, (b) there is a prima facie basis to theclaim, (© the requested measures are necessary to protect the requesting party’ s rights(or to preserve the status quo and avoid aggravating the dispute), (d) the requested

measures are urgent, and (€) the requested measures are proportional Ÿ° The purpose

of the investigation is to ascertain whether the party making the request is deserving

of protection through the implementation of provisional measures Nevertheless,

obtaining provisional measures in ICSID arbitration is not a straightforward process

ICSID arbitrators typically view the imposition of provisional measures as anexceptional measure that should not be granted casually or without careful

consideration by the Arbitral Tribunal Within this legal framework, the concept of

Security for Costs has evolved as a distinct aspect of ICSID provisional measuresjurisprudence

The proposed new system that ICSID intends to serve as a standaloneprovision specifically addressing Security for Costs Such proposed new rules, asfirst, aim to lower the threshold for Security for Costs As above mentioned, up untilnow, the laws and procedures regarding Security for Costs have evolved as part ofthe provisional measures jurisprudence under Article 47 and Rule 39 It is important

to highlight that it has been the case law, rather than the explicit provisions of the

$9 Dy Sam Luttrell (2019), Observations on the Proposed new ICSID Regime for Security for Costs pp 3,

avaibble at hnps-/icsid worldbank org/site

sidefaubfiles/mendments/public-input/Luttrel_Sum_Comments_2 25.19 pdf

® Emilio Agustin Muffezmu v Kingdom of Spain, ICSID Case No ARB/Đ7/7, Decision on Request for

Provisional Measures (28 October 1999), pp 10; see also Pm Consortamn Ltd v Republic of Bulgaria, ICSID Case No ARBI03/24, Order of 6 September 2005, pp 38; Phoenix Action Ltd v Czech Republic,

ICSID Case No ARBIO6/5, Decision on Provisional Measures (6 April 2007), pp 33; CEMEX Caracas

Investments BV and CEMEX Caracas II investments BV v Bolivarian Republic of Venemuela, ICSID Case

No ARBJ08/15, Decision on the Claimants’ Request for Provisional Measures (3 March 2010),pp 41.

ICSID Convention or the ICSID Rules, that has influenced the development of laws

and practices in this particular domain According to this new regulation, tribunals

and committees will possess significant discretion in their approach to this significant

matter The proposed changes are expected to be considerably more advantageous for

parties that seek Security for Costs (typically, States) compared to the legal

precedents established under the current regime Secondly, according to Article 53(6)

of the ICSID Arbitration Rules, there will be a clear basis for Security for Costs to begranted in suspending proceedings, and after consulting with the parties, order thediscontinuance of the proceedings Thirdly, Article 53(3) of the ICSID ArbitrationRules provides the explicit discretion to order the Security for Costs, including (1)party’s ability to comply with an adverse decision on costs; (2) party’s willingness tocomply with an adverse decision on costs, (3) the effect that providing Security forCosts may have on that party’s ability to pursue its claim or counterclaim, and (4) theconduct of the parties Additionally, Article 53(4) supplements this discretion by

adding the Tribunal’s consideration regarding the existence of third-party funding

By supplementing the standalone provision of the Security for Costs, it speaks in

favor of the state as the respondent in disputes to willingly submit the claims against

the claimant

b The UNCITRIAL Arbitration Rules and ICC Arbitration Rules

The practice within UNCITRAL (and investor-state dispute settlementpractice in general) has demonstrated that arbitral tribunals in investor-statearbitration have imposed stringent requirements when considering Security for Costsorders However, in fact, there is no specific provision of Security for Costs to apply

in consideration with the ICSID Arbitration Rules 2022 The latest amendments toArticle 17 of the UNCITRAL Model Law have highlighted the lack of realinternational consensus on interim measures in general and Security for Costs in

particular In the case of Guarachi v Bolivia’, the respondent argued for the need for

Security for Costs based on the presence of third-party funding on the investor’s side

and evidence indicating that the investor lacked substential assets However, the

% Guaracachi America, Inc and Rurelec PLC v The Phritutional State of Bolivia, UNCITRAL PCA Case

No 2011-17

arbitral tribunal dismissed Bolivia’s arguments, considering them inadequate to

establish that the investor would be unable to meet the costs of an adverse award The

tribunal emphasized that an order for Security for Costs is an exceedingly rare and

exceptional measure ®? Likewise, in the case of SAS Bolivia’, the investor involved

was a shell company based in Bermuda without any assets or economic operations.Inresponse, Bolivia submitted a request for Security for Costs amounting to USD 2.5million Itis possible that relaxing the criteria for issuing Security for Costs under theUNCITRAL framework could lead to an increased likelihood of arbitrators grantingsuch requests However, any reform should take into account the valid justificationsthat have underpinned the cautious approach seen in international practice thus far

It looks the same in regard to the ICC Arbitration Rules, specifically Article23(1) solely provides that “Unless the parties have agreed otherwise, as soon as the

file has been transmitted to it, the Arbitral Tribmal may, at the request of a party,

order any interim or conservatory measure it deems appropriate” Not the standalone

provision in comparison with the ICSID Arbitration Rules 2022, the Security for

Costsis determined as the conservatory measure decided by the power of the Arbitral

Tribunal Nevertheless, in reality, such directives under Article 23(1) are infrequent

and are only deemed necessary in exceptional circumstances Besides, Article 30 of

ICC Arbitration Rules necessitates claimants to provide significant amounts of

money to pursue their claims, which in and of itself could serve as a sufficientprecaution against baseless or harassing claims As a means of enforcement, in caseswhere a party neglects to fulfill its portion of the advance payment, the ICC Court ofArbitration has the authority to consider their claims (or counterclaims, in the case of

a defendant) as withdrawn This outcome bears certain similarities to a Security forCosts order, at least in certain aspects Likewise, none of the prominent arbitrationinstitutions’ regulations except the ICSID Arbitration Rules 2022 explicitly anddirectly tackle the matter of requiring Security for Costs

2.1.2 Entitlement for Security of Costs

212.1 Conditions for Sectaity for Costs order

n Guaracachi Amerxa, Inc and Rurelec PLC v The Phrimational State of Bolivia, UNCITRAL, PCA Case

No 2011-17, Procedural Order No 14 ,para 6

® south American Silver Limited v Bolivia, PCA Case No 2013-15

The first known Security for C osts case came in 1999 in the case of Maffecini

v Spain, in which Spain as the Respondent submitted a request for provisional

measures, urging the tribunal to mandate the Claimant to post security for theRespondent’s costs by having asserted that the claimant’s claims are worthless and

would eventually be sanctioned by shifting of the costs Nevertheless, the tribunal

held that Security for Costs could not be ordered, and reasoned that provisionalmeasures are used to preserve a party’s right, but that the state had no right toreimbursement of costs only if (2) the investor lost and (ii) the tribunal ordered costsagainst the investor, it was too hypothetical to be considered a “right” Certain

tribunals’S have endorsed this rationale, while others have determined that interim

measures can safeguard potential entitlements, such as the sight to seek

reimbursement for costs.°% Another example case is the request submitted before the

Pey Casado v Chile” tribunal The tribunal found, in contrast with the Maffecini

tribunal, that even conditional rights may be protected by way of provisional

measures.°S Despite achieving a favorable outcome, the significance of this outcome

was diminished due to the subsequent findings: (1) the absence of explicit language

in Article 47 of the Convention suggests a presumption against requiring Security for

Costs, (2) when states join the ICSID Convention, they assume the risk that the

claimant may lack financial resources, and (3) there is no obligation for the claimant

to demonstrate its creditworthiness ° However, the tribunal did not entirely rule out

the possibility of ordering security if there is evidence of the Claimant’s insolvency

The request was unsuccessful because the respondent failed to present any evidence

of such a risk

` Bmilio Agustin Maffeziniv The Kingdom of Spain, ICSID Case No ARBI97/7

9% Lao Holdings NV v Lao People’s Democratic Republic, ICSID Case No ARB(AF)/12/6), Proceciral

Order No 11, Kme 28, 2018; Valle Verde Sociedad Faunciera SL v Bolivarian Republic of Venazuela, ICSID Case No ARB/12/19

9 Ligithouse Corporation Pty Ltd and Lighthouse Corporation Ltd, IBC v Democratic Republic of

Tamor-Leste, ICSID Case No ARB/15/2, Asvard, December 22,2017; BuroGas Inc and Belmont Resowces Inc v Slovak Republic, ICSID Case No ARB/14/14, Rachel S Grynberg, Stephen M Grynberg, Miriam Z.

Grynberg and RSM Production Company v Grenada, ICSID Case No ARB/10/5, Trmul’s decision on

respondent's application for Security for Costs, October 14, 2010

97 <Sresident Allende” Foundation, Victor Pey Casado and Coral Pey Grebe v Republic of Chile PCA Case

No 2017-30)

$8 Dey Casado v Chile , Decision on provisionalmeasures of 25 September 2001,paras 80-81

Š pey Casado v Chile, Decision on provisionalmeasures of 25 September 2001,paras 86.

In RSM Production Corporation et al v Granada’, the tribunal deviated

from prior tribunals and concluded that the right to be reimbursed for costs can be

safeguarded The tribunal doubted however that “an absence of assets alone would

provide a sufficient basis for such an order”! The tribunal maintained its authority

to mandate the provision of security, even though the right in question, which requires

protection, relies on various speculative factors such as the respondent’s success The

purpose of this measure is to safeguard the integrity of the proceedings Accordingly,

the ruling provides a timely clarification on those matters, although it offers limitedinsights into the criteria for ordering security, as the circumstances of the case wereunique: firstly, the claimant had a track record of non-compliance with previousrulings and a failure to make upfront payment, and, secondly, there was evidenceindicating that the claimant received financial support from a third party wheninitiating the claim

To request Security for Costs, in general, the requirements for the indication

of provisional measures should be met, including the existence of prima facie

jurisdiction, the right to be protected is at least plausible; and relates to the dispute;

the measure is necessary and urgent These conditions pose the “threshold of

necessity” to evaluate whether the interim measures should be taken In assessing

necessity, Broimi SRL v Albania!” tribunals weigh the interests of both parties and

order the measure only if the harm spared the petitioner “exceeds greatly the damagecaused to the party affected by if” The threshold of necessity has remained uncleardue to the inadequate presence of authoritative guidance However, in analysis,

several conclusions can be derived": (1) Security for Costs would be ordered, if the

claimant has a track record of failure to comply with previous awards, making an

advance payment, etc.!9, (2) a guarantee will be necessary in case the claimant is

199 RM Production Corporation and others v Grenada (ICSID Case No ARB/10/6)

101 RSM Prochuction Corporation et al v Granada, Decision on Security for Costs of 14 October 2010, para.

4.19.

19 Burmi SRL and Engh Games SH Av Republic of Albania ,ICSID Case No ARB/11/18.

103 ba Uchiamova and Oleg Temmixov (2015), “Security for Costs mn ICSID Arbitration”, available at

Tưtps-Jirbiratiorblog khnverarbitration.com/2015/02/10/security-for-costs-in-ixsid-arbirations

19 RSM Prochction Corporation et al v Granada, Decision on Security for Costs of 14 October 2010, para.

82

stripping itself of assets to avoid an award of costsl95, (3) A security may be required

if there are reasons to believe that the enforcement of an adverse award would be

obstructed —if the state where most of the claimant’s assets are located is not a party

to the ICSID Convention or has failed to implement legislation facilitating

enforcement; (4) It has also been noted that security is appropriate “where abuse or

serious misconduct has been evidenced.” Although it is not clear how this is

compatible with the requirement that at this stage the tribunal cannot prejudge themerits, there may be cases in which it is prima facie obvious that the claim isfabricated, for example, the claimant cannot present any original documents to prove

the existence of investment!’, or if there is an indication of a post hoc corporate

restructuring designed to obtain access to international arbitration; (5) The existence

of third-party funding is a circumstance which needs to be put into the equation and

may well tilt the scales in the respondent’s favor

According to the above-mentioned treaties, the Tribunal is empowered with

legitimate jurisdiction to adopt Security for Costs orders Each treaty provides

specific requirements that the Tribunal may consider, for example, the Czech model

BIT adopted in 2016 states that

“[t}he arbitral tribimal shall especially consider ordering Security for Costswhen there is areason to believe: (a) that the investor will be unable to pay, if ordered

to do so, areasonable part of attorney fees and other costs to the Contracting Partywhich is the party to the dispute: or (b) that the investor has divested assets to avoidthe consequences of the arbitral proceedings”

While some treaties are not that specific, but generally states that “a tibialmay order Security for Costs if it considers that there is a reasonable doubt thatclaimant would be not capable of satisfying costs”, for example the BIT between Iranand Slovakia Notably, treaty language from EVIPA, Slovakia-Iran BIT, and otherscited above, emphasizes an investor's inability to pay costs as a key consideration,which the respondent is required to point out and is put under the consideration of the

197 RSM Production Corporation et al v Granada, Decision on Security for Costs of 14 October 2010,para.

Tribunal While numerous tribunals have determined that the iavestor”s financial

status holds minimal significance in deciding whether to approve a request for

Security for Costs, for example, South American Silver Limited v Bolivia tribunals

have held that “the lack of assets, the impossibility to show available economicresources, or the existence of economic risk or difficulties that affect the finances ofacompany are not per se reasons or justifications sufficient to warrant Security for

Costs." Significantly, these rulings have been made in cases where no concrete

evidence was provided regarding the claimant’s vulnerable financial position Therequests were based solely on the claimant being characterized as aninvestment entitythat potentially lacks substantial assets Importantly, the tribunal in Pey Casado hasaccepted that it may order the provision of security in the event that the claimant is

insolvent Another tribunal has referred to a possible threshold of “insufficient or

unavailable assets” "°, From a policy perspective, it can be argued that the imposition

of security requirements serves as an additional measure to deter frivolous claims

Empirical evidence suggests that only states with strong cases go through the effort

of seeking security, as the orders, despite being binding, are not enforceable

2122 Investor's obligations for cost warranty within and without the

involvement of third-party fimaing

The investar’s obligations for Security for C osts order may vary depending on

whether third-party funding is involved Under no third-party funding circumstances,

the claimant must comply with the decision of the Tribunal in the Security for Costs

order unless it brings the counterclaim on the unsuitability of such order and provesothenvise By non-complying with this decision, the Claimant may bear theunfavorable conditions for the claims that it raised However, if the Claimant fallsinto the insolvent circumstances and incapability of following the order, Tribunalshave considered the relevance of third-party funding to a request for Security for

Costs In recent years, there has been a significant rise in the utilization of third-party

funding as a strategy to alleviate the financial burden associated with initiating an

108 south American Silver Limited v Bolivia, UNCITRAL, PCA Case No 2013-15, Procechwal Order no 10,

Jamury 11,2016, pare 63

109 Dey Casado v Chile, Decision on provisional measwzes of 25 September 2001,paras 88

119 RSM Prochction Corporation et al v Granada, Decision on Security for Costs of 14 October 2010, para.

$25