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ICSID tribunal rejects Grenada's application for security for costs
Practical Law UK Legal Update Case Report 9-503-9427 (Approx. 5 pages)
ICSID tribunal rejects Grenada's application for security for costs
by Emily Fox, Herbert Smith LLP
| Published on 17 Nov 2010 • International |
In RSM Production Corporation v Grenada (ICSID Case No ARB/10/6), an ICSID tribunal rejected Grenada's application for security for costs.
Speedread
An ICSID tribunal has denied Grenada's application for security for costs on the basis that it had failed to demonstrate that the claimant, RSM, had insufficient assets to pay a possible costs award.
The decision confirms the authority of ICSID tribunals to grant provisional measures in the form of security for costs. However, the case also follows previous decisions in which tribunals have held that such a measure would only be justified in extreme circumstances, where the applicant demonstrates more than a mere likely inability to satisfy a possible costs award. (RSM Production Corporation and others v Government of Grenada (ICSID Case No ARB/10/6) (14 October 2010).)
Background
Article 47 of the ICSID Convention provides:
"Except as the parties otherwise agree, the Tribunal may, if it considers that the circumstances so require, recommend any provisional measures which should be taken to preserve the respective rights of either party."
Rule 39(1) of the ICSID Arbitration Rules entitles the parties to an arbitration to apply to the tribunal for provisional measures. It provides:
"At any time after the institution of the proceeding, a party may request that provisional measures for the preservation of its rights be recommended by the Tribunal. The request shall specify the rights to be preserved, the measures the recommendation of which is requested, and the circumstances that require such measures."
It is generally accepted that a party seeking provisional measures must first identify the right that needs to be protected. In Maffezini v Kingdom of Spain (ICSID Case No ARB/97/7) Procedural Order No 2, the tribunal held that this right must relate to the subject matter of the dispute. More recent decisions have recognised that procedural rights (and not only substantive rights) may also be protected by way of provisional measures.
For further background on provisional measures generally, see Practice notes, Interim, provisional and conservatory measures in international arbitration and Procedure in ICSID arbitration: Provisional measures.
Facts
On 4 July 1996, RSM entered into an oil and gas exploration contract with Grenada under which, within 90 days, RSM was required to apply for, and Grenada was required to grant, a petroleum exploration licence. The contract contained an agreement to submit disputes to ICSID arbitration. A contractual dispute arose between the parties in 2004, and RSM initiated ICSID proceedings against Grenada (Contract Proceedings).
On 13 March 2009, the tribunal rendered its final award, finding that Grenada had not breached its contractual obligations, and rejecting RSM's claim for breach of contract. (For further discussion, see Legal update, ICSID tribunal accepts jurisdiction, rejects investor's breach of contract claim.)
Four months later, RSM applied for an annulment of the final award on the grounds that the tribunal had manifestly exceeded its powers, that there was a serious departure from a fundamental rule of procedure and that the final award failed to state the reasons on which it was based.
On 29 March 2010, the annulment proceedings were stayed as a result of RSM's failure to pay the advance on costs requested by ICSID.
In parallel to the annulment proceedings, on 15 January 2010, RSM (and the three owners of the company named as co-claimants) initiated new ICSID proceedings against Grenada, alleging breach of the 1986 bilateral investment treaty (BIT) between the US and Grenada (BIT Proceedings).
Grenada filed an application for security for costs in the BIT Proceedings, requesting that the tribunal order RSM to post US$500,000 to protect Grenada's rights should RSM fail to comply with a costs award in Grenada's favour in the arbitration.
Grenada alleged that:
- The tribunal had authority to make an order for security for costs under Article 47 of the Convention and Rule 39 of the Arbitration Rules.
- The BIT Proceedings were vexatious, as they were an attempt by RSM to re-litigate the factual and legal issues that had been decided in the Contract Proceedings.
- RSM's refusal to pay the advance on costs in the annulment proceedings may have deprived Grenada of a remedy for the costs it incurred in those proceedings.
- There was reason to believe that RSM would not comply voluntarily with a costs award.
- The question was not whether RSM had the financial means to satisfy a possible costs award, but whether it would actually do so.
- RSM had ample means to post the security requested by Grenada.
RSM challenged Grenada's assertions and argued that:
- There was no legal authority or factual basis to support the application for security for costs.
- The amount of the advance on costs had already been fixed by the tribunal and apportioned equally between the parties, and the tribunal did not have the power to modify the apportionment of costs before the award, or to order a party to post security for a potential costs award. Further, it had already paid its share of the advance in these proceedings, whereas Grenada had not yet done so.
- The application was only made so that Grenada could express its views in relation to the earlier proceedings.
- It was possible that a third party was paying Grenada's costs in the current proceedings, and as such, Grenada's application was not justified.
Decision
The tribunal considered that it had to answer three questions to decide whether to grant Grenada's application:
- Whether the tribunal had jurisdiction to make an order for security for costs.
- Whether the circumstances justified granting the application.
- Whether the amount sought was appropriate.
Jurisdiction to make an order for security for costs
The tribunal noted that provisional measures could only be granted to preserve a right at issue in the arbitration. However, contrary to what had been decided in the Maffezini case, it did not consider that there was a requirement for the provisional measure requested to concern the subject matter of the dispute.
As such, having reviewed prior ICSID decisions in relation to applications for security for costs, the tribunal concluded that, under Article 47 and Rule 39(1), an ICSID tribunal would have jurisdiction to grant a provisional measure in the form of security for costs.
Whether the circumstances justified granting the application
Nonetheless, the tribunal recalled that an order for security for costs was an extraordinary remedy, which should only be granted in the most extreme cases. Such an order would not be appropriate if the party from whom security was sought had sufficient assets available to meet an order for costs.
Moreover, the tribunal noted that in ICSID proceedings, the investor is often an investment vehicle created for the purposes of the investment and has few assets of its own. As a result, an absence of assets alone would not necessarily be sufficient to justify granting such a measure.
The tribunal did not consider that it was appropriate to formulate a rule of general application as to what evidence would be sufficient to justify such an order, but it held that in the circumstances, Grenada had failed to meet its burden to demonstrate RSM's lack of funds or unwillingness to pay a costs award. In fact, Grenada had confirmed that RSM had ample means.
In relation to RSM's unwillingness to comply with a costs award, the tribunal noted that it was wholly within RSM's rights not to pursue the annulment proceedings and that their failure to pay the advance on costs in those proceedings was not evidence that it would refuse to comply with any costs award in the BIT Proceedings.
The tribunal's decision was further supported by the fact that Grenada could seek to have any costs award enforced against RSM in the US where it was incorporated. Finally, the fact that there were four claimants who were jointly and severally liable minimised the risk of non-payment.
Having concluded that the circumstances of this particular case did not justify granting an order for security for costs, the tribunal did not address the third question it had identified, which concerned the appropriateness of the amount sought by Grenada.
Comment
The decision confirms the position that previous tribunals have adopted in Atlantic Triton Company Ltd v People's Revolutionary Republic of Guinea (ICSID Case No ARB/84/1), Victor Pey Casado and President Allende Foundation v Republic of Chile (ICSID Case No ARB/98/2) and Libananco Holdings Co Ltd v Turkey (ICSID Case No ARB/06/8) (see Legal update, ICSID arbitration proceeds despite interception of privileged communications), according to which ICSID tribunals have jurisdiction to order provisional measures in the form of security for costs under Article 47 of the Convention and Rule 39(1). The case also follows previous decisions in which tribunals have found that such a measure would only be granted in the most extreme cases, and that an absence of assets in itself would not be sufficient to justify granting the order.
In this case, it is clear that RSM's "ample means" were a determining factor in the tribunal's decision. As a result, the case unfortunately provides little guidance on the degree of impecuniosity that would be sufficient to justify granting an order for security for costs, or the evidence required to demonstrate an unwillingness to comply with a costs award.