Disrupt the Gambler's Nirvana: Security for Costs in Investment Arbitration Supported by Third-Party Funding
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Journal of International Dispute Settlement, 2021, 00, 1–21
doi: 10.1093/jnlids/idab019
Current Developments
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Disrupt the Gambler’s Nirvana: Security for
Costs in Investment Arbitration Supported by
Third-Party Funding
Xuan Shao *
A BS TR A C T
Third-party funding is a recent yet rapidly growing phenomenon in investment arbitra-
tion. While it enables investors lacking funds to pursue remedies against States, it
exposes States to greater risk of inability to recover arbitration costs. Against this back-
ground, this article examines the legal principles on security for costs and, contrary to
the view of several tribunals and commentators, it argues that in cases involving third-
party funding and the funding agreement does not cover potential adverse costs, there
is a presumption in favour of ordering security for costs. However, as revealed in recent
decisions in Herzig, the current legal framework on security for costs, which is predi-
cated on the bilateral investor–State relationship, is ill-suited to regulate the tripartite
relationship involving third-party funders. Unfortunately, the discussions on Investor–
State dispute settlement reform and the current proposal by the International Centre
for Settlement of Investment Disputes (ICSID) on the ICSID Rules amendment have
largely overlooked this problem. Thus, this article urges policy-makers to develop new
rules to regulate the tripartite relationship involving third-party funders.
1. I NTR OD U C TI ON
Third-party funding (TPF) generally refers to the arrangement in which a non-party
entity provides financial resources to a disputing party, in return for a remuneration
dependent on the outcome of the dispute.1 It is a recent phenomenon in court litiga-
tion and arbitration and has expanded rapidly in the aftermath of the 2008 financial
crisis.2 Being commercially driven, TPF helps to enable access to justice, while in the
* Oxford University—Faculty of Law, UK. Email: xuan.shao@queens.ox.ac.uk
1 See Report of the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration,
The ICCA Reports No 4 (April 2018) (‘The ICCA Reports No 4’), 18; A/CN.9/WG.III/WP.157, para 5;
Collin R Flake, ‘Third Party Funding in Domestic Arbitration: Champerty or Social Utility?’ (2015) 70(2)
Dispute Resolution Journal 109, 109; Ondrej Svoboda and Jan Kunstyr, ‘Third Party to Pick Up the Bill?
Cost Issues relating to Third Party Funding in Investment Arbitration’ (2016) 7 Czech Yearbook of Public
and Private International Law 427, 428; Nadia Darwazeh and Adrien Leleu, ‘Disclosure and Security for
Costs or How to Address Imbalances Created by Third-Party Funding’ (2016) 33(2) Journal of
International Arbitration 125, 127.
2 See the ICCA Reports No 4, ibid, 18.
C The Author(s) 2021. Published by Oxford University Press. This is an Open Access article distributed under the terms of
V
the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted reuse,
distribution, and reproduction in any medium, provided the original work is properly cited.
12 Journal of International Dispute Settlement
meantime, it brings a number of challenges regarding the integrity of judicial and ar-
bitral proceedings.3
In investment arbitration, the increasing use of TPF has given rise to problems
including conflict of interests, confidentiality risks, structural imbalance between
investors and States, and discouragement of settlement.4 More importantly for pre-
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sent purposes, as a result of third-party funders’ support, investors that otherwise
cannot afford to launch claims are nonetheless capable of pursuing their claims in in-
vestment arbitration. While this enhances access to justice for investors, especially
for small and medium-sized enterprises (SMEs), it increases host States’ exposure to
frivolous claims and greater litigation costs.5 Furthermore, TPF aggravates the likeli-
hood of non-compliance with costs awards by investors, which is already a serious
problem in investment arbitration.6 Whilst enabling impecunious or insolvent invest-
ors to claim against host States, third-party funders usually are not liable for the costs
in case the respondent State prevails and a costs award is rendered against the claim-
ant. This increases the risk that a respondent State will be unable to recover its arbi-
tration costs.
Under most of the arbitration rules governing investment arbitration, tribunals
have the authority to impose security for costs (SfC) to address the risk of potential
non-compliance with costs awards. However, in reality, SfC has been ordered only in
rare circumstances.7 This is explicable by the demanding requirement for such an
order.8 According to several arbitral decisions, to order SfC, a tribunal must be satis-
fied that a significant risk of the respondent’s inability to recover costs exists, and
that such an order will not impede the claimant’s right to prosecute the case. With
the aforementioned risk posed by TPF, one significant question is whether, and to
what extent, a claimant’s reliance on TPF justifies an order of SfC.
The recent decisions in Herzig v Turkmenistan exposed the controversies associ-
ated with SfC in arbitration involving TPF under the spotlight. In that case, the tribu-
nal faced an impecunious claimant supported by a third-party funder, and the
funding agreement did not cover potential adverse costs.9 In this context, the major-
ity of the tribunal initially ordered SfC at the request of the respondent, in light of
3 See Sahana Ramesh, ‘Third-Party Funding in International Arbitration: Ownership of the Claim,
Consequences for Costs Orders, and Regulation’ (2020) 36 Arbitration International 275.
4 See the discussions at the UNCITRAL WG III: A/CN.9/935, para 89; A/CN.9/930/Rev.1, paras 57, 64
and 69.
5 See Daniel L Chen, ‘Can Markets Stimulate Rights? On the Alienability of Legal Claims’ (2015) 46 (1)
RAND Journal of Economics (2015, No 1) 23, 42.
6 In a survey conducted by the ICSID Secretariat published in 2018, 12 out of 34 costs awards in favour of
respondent States were not complied with. See ICSID Secretariat, ‘Survey for ICSID Member States on
Compliance with ICSID Awards’ (2018).
7 See eg Martina Polasek and Celeste E Salinas Quero, ‘Security for Costs: Overview of ICSID Case Law’
in Sherlin Tung, Fabricio Fortese and Crina Baltag (eds), Finances in International Arbitration: Liber
Amicorum Patricia Shaughnessy (Kluwer 2020) 401; Stavros Brekoulakis and Catherine Rogers, ‘Third-
Party Financing in ISDS: A Framework for Understanding Practice and Policy’ Academic Forum on
ISDS Concept Paper 2019/13, Version 2: October 2019, 17.
8 Polasek and Salinas Quero, ibid.
9 Dirk Herzig as Insolvency Administrator over the Assets of Unionmatex Industrieanlagen GmbH v
Turkmenistan, ICSID Case No ARB/18/35, Decision on Security for Costs (27 January 2020) (‘Herzig
January Decision’) paras 1, 2, 22.Disrupt the Gambler’s Nirvana 3
the risk that the claimant will be unable to pay the costs.10 After a couple of months,
the claimant proved incapable of complying with the order. Thus, to avoid denial of
justice to the claimant, the majority of the tribunal decided to rescind its initial
order.11 An ironic outcome was thus produced: SfC was initially ordered because it
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was very likely that the claimant would be unable to pay the costs, but the order was
subsequently rescinded because it became a certainty that the claimant would be un-
able to pay. The decision of rescission was strongly criticized by the minority arbitra-
tor, because it gives a green light to the unfair financing policy of the third-party
funder—it allows the funder to reap benefits from the proceeds under a favourable
award in case the claimant wins while being exempt from the risk of bearing the costs
in case the claimant loses. This situation has been aptly described as a ‘gambler’s
Nirvana’,12 which is sustained at the cost of the respondent’s inability to recover the
costs.
Conflicting views on the relevance of TPF in decisions on SfC also appeared in
other arbitral decisions. Due to the lack of clarity of this area of law, as well as States’
increasing awareness of the need to regulate this matter, SfC, and particularly the
relevance of TPF in SfC decisions, is an important topic currently being discussed
both at the United Nations Commission on International Trade Law (UNCITRAL)
Working Group (WG) III and in the International Centre for Settlement of
Investment Disputes (ICSID) Arbitration Rules amendment. However, a consensus
has yet to emerge.
Against this background, this article examines the rules on SfC in cases involving
TPF. It argues that the current legal framework on SfC cannot adequately protect
respondents from the risk of non-compliance of costs awards in cases involving TPF,
and that the discussions on Investor–State dispute settlement (ISDS) reform have
largely overlooked the real challenge posed by TPF. Section 2 of this article sketches
the divergent views expressed in arbitral jurisprudence and in ISDS reform on SfC in
cases involving TPF. It shows that the debate currently revolves around the balanc-
ing exercise between the risk that the claimant would be unable or unwilling to pay
the costs and the risk that a SfC order may impede the claimant’s right to claim; and
TPF is treated by the majority, as well as the latest ICSID proposal on the amend-
ment, as evidence on the circumstances of disputing parties. Section 3 sets out the
current legal framework on SfC, and section 4 applies it to cases involving TPF.
According to the principles elaborated in Section 3, Section 4 argues that although
the reliance on TPF does not necessarily lead to an order of SfC, its presence estab-
lishes a presumption in favour of such an order. However, as explained in Section 5,
the paradoxical and unfair outcome in the Herzig case is inevitable under the current
law and this problem will continue unless another approach is adopted. The crux of
the problem is that with the participation of TPF, three parties are involved and
10 ibid, paras 57–67.
11 Dirk Herzig as Insolvency Administrator over the Assets of Unionmatex Industrieanlagen GmbH v
Turkmenistan, ICSID Case No ARB/18/35, Decision and Procedural Order No 5 (9 June 2020) (‘Herzig
June Decision’), paras 22–23.
12 RSM Production Corporation v Saint Lucia, ICSID Case No ARB/12/10, Decision on Saint Lucia’s
Request for Security for Costs dated August 13 (13 August 2014), Assenting reasons of Gavan Griffith,
para 13.4 Journal of International Dispute Settlement
interested in arbitral proceedings whereas the current law regulates only two of them.
Unfortunately, this problem has largely been overlooked in the ongoing debate on
ISDS reform. The current ICSID proposal continues to address the risk of non-
compliance of costs awards within the previous bilateral framework, treating the reli-
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ance on TPF as a mere evidence pertaining to the circumstances of disputing parties
instead of a standalone factor when deciding on SfC. Thus, this article urges policy
makers to develop new rules to regulate the tripartite relationship involving third-
party funders. A proposal on reform is made in the end.
2. S F C IN A RB I TRA T IO N F U N D ED B Y T HI R D P A RTI E S: D I VE RG EN C E
AN D C ON F L IC TS
In recent years, with an increasing number of respondent States requesting SfC, a
body of precedents has been developed. Although a broad consensus on the legal
principles governing SfC starts to emerge, controversies arising out of the conflicting
interests of stakeholders persist. The involvement of TPF in investment arbitration,
which provokes several contentious questions in itself, further compounds the con-
troversy. As shown in this section, in arbitral jurisprudence, opinions are divided as
regards whether a SfC order is warranted in cases where the claimant is supported by
a third-party funder who is not liable for a potential costs award. In 2020, the con-
flicting decisions in Herzig brought the controversies surrounding this issue to the
fore. Presently, SfC in cases involving TPF is being discussed at the UNCITRAL
WG III and in relation to the ICSID Rules amendment. The division of opinions
among States mirrors the divergence in arbitral jurisprudence.
In existing arbitral decisions, the majority of arbitral tribunals maintained that a
claimant’s financial difficulty and reliance on TPF do not suffice to warrant a SfC
order, whereas relatively fewer arbitrators considered that the existence of TPF pro-
duces a presumption in favour of such an order, and that a claimant’s lack of funds
plus reliance on TPF warrant the requirement of SfC.13 According to the majority, it
is not part of the ISDS system that an investor can pursue its claims only upon the
establishment of its sufficient financial standing to meet a possible costs award.14 It
has been cautioned that an order of SfC may impede potentially legitimate claims.15
Therefore, according to these tribunals, ‘something more’, eg the claimant’s consist-
ent history of non-compliance with adverse awards16 or unusual and abusive conduct
by the claimant,17 is required to justify a SfC order.
13 See Polasek and Salinas Quero (n 7) 392–99.
14 Rachel S. Grynberg, Stephen M. Grynberg, Miriam Z. Grynberg and RSM Production Corporation v
Government of Grenada, ICSID Case No ARB/10/6, Tribunal’s Decision on Respondent’s Application for
Security for Costs (14 October 2010) para 5.19; EuroGas Inc. and Belmont Resources Inc. v Slovak
Republic, ICSID Case No ARB/14/14, Procedural Order No 3 Decision on the Parties’ Request for
Provisional Measures (23 June 2015) para 120; Lighthouse Corporation Pty Ltd and Lighthouse
Corporation Ltd, IBC v Democratic Republic of Timor-Leste, ICSID Case No ARB/15/2, Provisional Order
No 2 (13 February 2016) para 60; South American Silver v Bolivia, PCA Case No 2013-15, Provisional
Measure No 10 (11 January 2016), para 63.
15 South American Silver v Bolivia, ibid, para 77.
16 RSM v Saint Lucia (n 12), Tribunal’s Analysis, paras 81–82.
17 Lighthouse Corporation v Timor-Leste (n 14), para 61.Disrupt the Gambler’s Nirvana 5
On the other hand, some maintained that SfC should be ordered where the claim-
ant lacks funding and is able to launch its claim only with the support of third-party
funders. In Garcı́a Armas v Venezuela, the tribunal found that the claimants’ reliance
on TPF could be a sign of lack of funds and increases the risk of inability to pay the
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costs; and the fact that the funding agreement did not cover adverse costs exacer-
bated this risk.18 Thereby, according to the tribunal, the claimants should bear the
burden to demonstrate their capability to comply with a potential adverse award.19
Ultimately, upon the claimants’ failure to discharge this burden, the tribunal rendered
a SfC order in order to preserve the respondent’s right to collect the costs.20 In RSM
v Saint Lucia, arbitrator Gavan Griffith also maintained that: ‘unless there are particu-
lar reasons militating to the contrary, exceptional circumstances may be found to jus-
tify security of costs orders arising under BIT claims as against a third party funder,
related or unrelated, which does not proffer adequate security for adverse cost
orders.’21 These arbitrators attached greater weight to the existence of TPF in deci-
sions on SfC, compared with the majority of tribunals mentioned above.
In 2020, the divergent views and conflicting interests surrounding SfC were trans-
lated into a dramatic reversal of decision and conflicting opinions rendered in Herzig
v Turkmenistan, putting the debate under the spotlight. In that case, the claimant was
the insolvency administrator for a bankrupt company, Unionmatex Industrieanlagen
GmbH, and was supported by a third-party funder, La Française, in his claims against
Turkmenistan.22 Faced with this situation, Turkmenistan, who has repetitively suf-
fered from the failure to enforce costs awards in its favour, requested that the tribu-
nal order the claimant to post SfC, as Turkmenistan believed that otherwise the
claimant will be unable to pay the costs if he were unsuccessful in his claim.23 In a
decision dated 27 January 2020 (‘the January Decision’), the majority of the tribunal
found that the claimant’s lack of funds and reliance on TPF, together with the fact
that the third-party funder was not liable for a potential adverse costs award, would
prejudice the respondent’s right without a SfC order.24 To the contrary, the minority
arbitrator found that these circumstances cannot justify such an order, because, inter
alia, it may prejudice the claimant’s right to bring his claim before the tribunal, and
the involvement of TPF does not change this.25
The division of opinions became even more striking in an unusual turn in Herzig.
In its decision dated 9 June 2020 (‘the June Decision’), the majority of the tribunal
found that the claimant faced ‘insurmountable obstacles’ to obtain funds for security
and that the arbitration cannot continue if the tribunal insists on the requirement in
its prior order. According to the majority, to require SfC in such a situation would
cause a ‘denial of access to justice’ to the investor.26 Thus, they decided to rescind
18 Manuel Garcı́a Armas et al. v Bolivarian Republic of Venezuela, PCA Case No 2016-08, Procedural Order
No 9 (20 June 2018), para 243.
19 ibid, para 247.
20 ibid, paras 249–51.
21 RSM v Saint Lucia (n 12), Assenting reasons of Gavan Griffith, para 16.
22 Herzig January Decision (n 9), paras 1–2.
23 ibid, paras 29, 32–33, 35.
24 ibid, paras 57–67.
25 ibid, paras 79–81.
26 Herzig June Decision (n 11), para 22.6 Journal of International Dispute Settlement
the previous SfC order.27 On the other hand, the minority arbitrator opined that the
claimant’s right of access to justice does not take precedence over the principle of
equality of arms, which encompasses the possibility of the winning party to recover
its arbitration costs if granted with a favourable costs award.28 Contrary to the major-
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ity, the minority arbitrator insisted that, in light of the claimant’s inability to post
SfC, the proper route was to suspend the proceedings until the previous decision is
complied with,29 despite the majority’s view that this ‘would have the same effect as
a termination’.30
Against this background of divergence and uncertainty, and also due to the
increasing awareness of States about the risk of investors’ non-compliance with costs
awards, SfC has become an important topic on the agenda of ISDS reform. In par-
ticular, the issue of SfC in cases involving TPF is currently under discussion both at
the UNCITRAL WG III and in the ICSID Rules amendment. However, a consensus
has yet to emerge, and the divergent views among States mirror the conflicting arbi-
tral decisions.
In the UNCITRAL WG III discussions, different views were expressed regarding
the relevance of TPF in decisions on SfC. Some States maintained that TPF should
be an element for a tribunal to consider, while its mere existence should be insuffi-
cient to justify ordering SfC.31 In particular, it was noted that the existence of TPF
does not necessarily mean that the claimant is impecunious, as TPF could be used to
manage the costs and risks associated with ISDS.32 However, others contended that
the existence of TPF should be sufficient to justify ordering SfC.33
More extensive discussions appeared in the context of the ICSID Rules amend-
ment, where a new rule on SfC has been proposed. In the rule initially proposed by
ICSID, TPF was not included as a relevant circumstance in deciding whether to
order SfC.34 As explained in ICSID Working Paper #2, this is because a party may
rely on TPF for reasons other than lack of funds and the relevance of TPF can still
be considered when assessing a party’s ability to comply with an adverse costs
award.35 Nonetheless, several States underscored the importance of TPF, and sug-
gested that it should be mentioned as a factor to consider in deciding on SfC.36
In the proposed rule presented in subsequent ICSID working papers, TPF was ex-
pressly mentioned. However, the proposed rule provides that TPF may be consid-
ered as part of the evidence regarding circumstances of disputing parties that are
27 ibid, paras 20–23.
28 ibid, para 26.
29 ibid, para 24.
30 ibid, para 23.
31 A/CN.9/WG.III/WP/192, para 14; A/CN.9/1004, para 94.
32 A/CN.9/1004, para 94.
33 A/CN.9/WG.III/WP.176, para 62; A/CN.9/WG.III/WP/192, para 14; A/CN.9/1004, para 94.
34 ICSID Proposals for Amendment of the ICSID Rules, Working Paper #2 (March 2019) Vol 1 (‘Working
Paper #2’), Rule 51.
35 ibid, 235, para 363.
36 See comments on Working Paper #2: Indonesia (10 June 2019); Uruguay (31 May 2019); see also IISD
(12 April 2019).Disrupt the Gambler’s Nirvana 7
relevant to decisions on SfC.37 These relevant circumstances encompass the claim-
ant’s ability and willingness to pay the costs, and the effect of a SfC order on the
claimant’s ability to pursue its claim.38 Thus, under this proposed rule, TPF is not a
self-standing factor,39 and its existence ‘by itself is not sufficient to justify an order
for SfC’.40
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Still, not every State was satisfied about this approach. Some States contended
that the reliance on TPF should be an independent factor, instead of a mere evidence
of the listed circumstances of disputing parties, when deciding on SfC.41 Some States
went even further, insisting that SfC should be ordered whenever a party relies on
TPF.42 For the latter group of States, this is necessary to ensure that host States will
be able to recover their costs in case they prevail in their defence.43 However, States
opposing this view cautioned that an automatic order for SfC in cases involving TPF
would unreasonably impede access to justice, particularly for SMEs.44
To sum up, in arbitral jurisprudence and in ISDS reform discussions, there is a
major disagreement on the extent to which TPF is relevant in SfC decisions. The dis-
agreement centres on two questions. The first question is what can be evidenced by a
claimant’s reliance on TPF. As revealed above, the majority of decision-makers treat
the reliance on TPF as an evidence pertaining to the claimant’s financial capability to
pay an adverse costs award. But not everyone agrees that the risk of the claimant’s in-
ability to pay as evidenced by the reliance on TPF is severe enough to warrant a SfC
order. The second question is in cases where the claimant relying on TPF is proved to
be impecunious or insolvent, whether SfC should be ordered despite the risk of
impeding the claimant’s ability to pursue its claim. The second question turns on the
balancing exercise between investors’ right to claim and host States’ right to recover
the costs.
Perhaps paradoxically, while the claimant’s lack of funds and potential inability to
pay the costs are a factor supporting a SfC order, the lack of funds could at the same
time suggest that such an order may impede the claimant’s ability to pursue its claim,
which has been a major reason for rejecting requests for SfC. In relation to the
ICSID’s proposed rule on SfC, Korea observed that ‘the requirement to consider any
negative effects that providing SfC may have on a party’s ability to pursue its claim
cannot be reconciled with the requirement to consider a party’s ability to comply
with an adverse decision on costs’.45 This problem was distinctively exposed in the
37 See ICSID Proposals for Amendment of the ICSID Rules, Working Paper #3 (August 2019) Vol 1
(‘Working Paper #3’), Rule 52(4); ICSID Proposals for Amendment of the ICSID Rules, Working Paper
#4 (February 2020) Vol 1 (‘Working Paper #2’), Rule 53(4).
38 See Working Paper #3, ibid, Rule 52(4); Working Paper #4, ibid, Rule 53(4).
39 Working Paper #3, ibid, 334, para 134.
40 ibid.
41 Comments on Working Paper #3: Argentina (29 November 2019), Chile (December 2019), Colombia,
Paraguay; Chile’s comments on Working Paper #4 Chile (July 2020), Rule 53.
42 See Comments on Working Paper #4: China, Indonesia; Uruguay’s comments on Working Paper #2;
IISD’s comments on Working Paper #2 (12 April 2019) 8.
43 See Indonesia’s comments on Working Paper #2 (10 June 2019).
44 Working Paper #3, 334.
45 Korea’s comments on Working Paper #2, Rule 51; Korean’s comments on Working Paper #3, Rule 52;
Korean’s comments on Working Paper #4, Rule 53.8 Journal of International Dispute Settlement
apparent contradiction between the majority decision in January and the majority de-
cision in June in the Herzig case. In that case, the disagreement between the majority
and the minority in the June Decision ultimately turned on the question whether
greater importance should be attached to the respondent’s right to recover costs or
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to the claimant’s right to pursue its claim. The ICSID proposal does not dictate the
relative importance of these two elements when compared with each other. States
also hold conflicting views.46
Against the background of inconsistent decisions and divergent views, it has been
observed that the area of SfC is still marked by inconsistency and unpredictability.47
However, as explained below, arbitral jurisprudence on the legal principles governing
SfC is more consistent than it appears. Indeed, the legal framework that emerged in
arbitral decisions is capable of providing a relatively clear guidance in cases where the
claimant relies on TPF. This will be explained in Sections 3 and 4. The real problem,
however, is the inadequacy of the current legal framework, which, as shown in
Herzig, may result in perverse outcomes.
3. TH E C URR E NT LE GA L F RA M EW O RK ON S F C
Despite the disagreements in arbitral decisions elaborated in Section 2, as shown
below, these disagreements largely turn on fact instead of legal principles. This sec-
tion will set out the legal framework on SfC as emerged in arbitral jurisprudence,
and Section 4 will apply this legal framework to cases involving TPF. As explained in
this section, arbitral tribunals are empowered to order SfC as provisional measures
under major arbitration rules, and a two-step analysis is required when determining
whether to render such an order: first, a tribunal must be satisfied that, in the circum-
stances of the case, it is both necessary and urgent to order SfC to preserve the
respondent’s right to reimbursement of costs; second, an arbitral tribunal must ensure
that a SfC order will not incur unfair outcomes—in particular, it should not make
the claimant incapable of claiming against the respondent due to the latter’s wrongful
act. In practice, since respondents often have difficulty proving claimants’ financial
situation, and claimants often allege that their potential inability to satisfy a SfC order
is caused by respondents, the two-part test sets a high bar to reach. Thus, SfC can
only be ordered in ‘exceptional circumstances’.
Most arbitration rules empower tribunals to order SfC as provisional measures.
In ICSID arbitration, this power stems from Article 47 of the ICSID
Convention.48 Under the UNCITRAL Rules, this power derives from Article
26.49 Claimants often invoke the decision in Maffezini v Spain, arguing that provi-
sional measures only protect ‘existing rights’, precluding a party’s right to enforce
a potential costs award, which may or may not be rendered in its favour.50
46 ibid; Luxembourg’s comments on Working Paper #2 (10 June 2019), Rule 51.
47 See Svoboda and Kunstyr (n 1) 429.
48 See RSM v Saint Lucia (n 12), Tribunal’s Analysis, para 72.
49 See Guaracachi America, Inc. and Rurelec PLC v The Plurinational State of Bolivia, UNCITRAL, PCA Case
No 2011-17, Provisional Order No 14 (11 March 2013), para 6; Garcı́a Armas v Venezuela (n 18), para
186.
50 Emilio Maffezini v Kingdom of Spain, ICSID Case No ARB/97/7, Procedural Order No 2 (28 October
1999) paras 13–14.Disrupt the Gambler’s Nirvana 9
However, the hypothetical character of the right at issue is inherent to the regime
of provisional measures, which preserves disputing parties’ rights pending a final
decision on the merits.51 Accordingly, most tribunals held that the right to recover
one’s costs under a potential favourable award, the enforcement of which is essen-
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tial for the integrity of arbitral proceedings, can be protected by provisional meas-
ures.52 This is also in line with the general approach in commercial arbitration,
where tribunals are sometimes expressly empowered to order SfC under the rele-
vant rules.53
Once a tribunal is satisfied that it has the power to order SfC, it has to determine
whether the circumstances of the case justify such an order. Tribunals enjoy a degree
of discretion on this matter. Although Article 47 of the ICSID Convention does not
define the ‘circumstances’ warranting a provisional measure, a consensus has
emerged that the measure must be both ‘necessary’ and ‘urgent’.54 Thus, it is not
enough that certain measure is needed to preserve the ‘rights’, but the requesting
party must demonstrate that there exists an imminent risk that irreparable harm
might be caused to the rights, which necessitates a provisional measure pending a
final decision.55 In cases concerning SfC, the ‘necessity and urgency’ test sets a high
threshold to meet.
As a general principle, the requesting party bears the burden of proof to establish
the fact supporting its claim. In practice, respondents often seek to prove the claim-
ant’s inability or unwillingness to pay adverse costs relying on the claimant’s impecu-
niosity or deliberate shielding of assets.56 However, without concrete evidence of
bad faith, it could be particularly challenging to collect evidence on the claimant’s im-
pecuniosity and inability to pay arbitration costs.57 In fact, in the existing cases where
the respondent requested SfC, a major reason why tribunals declined the request
was the respondent’s failure to establish the claimant’s inability or unwillingness to
51 See RSM v Saint Lucia (n 12), Tribunal’s Analysis, para 72; Caline Mouawad and Elizabeth Silbert, ‘A
Guide to Interim Measures in Investor-State Arbitration’ (2013) 29(3) Arbitration International 381,
399–400; Sai Anukaran, ‘Security for Costs in International Commercial Arbitration: Mandate, Exercise
of Mandate, Standards and Third Party Funding’ (2018) 84(1) Arbitration: The International Journal of
Arbitration, Mediation and Dispute Management 77, 82.
52 ibid, paras 65, 69; Eskosol S.p.A. in Liquidazione v Italian Republic (ICSID Case No ARB15/50),
Procedural Order No 3 (12 April 2017) para 33.
53 See eg Arbitration Act 1996 (UK), s 38(3); Arbitration Act 1974 (Australia), s 23K; Arbitration Act
(New Zealand), Appendix 1, s 17; International Arbitration Act 2012 (Singapore), ss 12(1)(a) and
12(4); Arbitration Ordinance 2011 (Hong Kong), s 56(1)(a); LCIA Rules (2020), art 25(1)(i); SIAC
Rules (2016), rule 27(j); HKIAC Rules (2018), art 24; CEPANI Rules (2020), art 28(1).
54 Occidental Petroleum Corporation and Occidental Exploration and Production Company v The Republic of
Ecuador, ICSID Case No ARB/06/11, Decision on Provisional Measures (17 August 2007), para 61;
Biwater Gauff (Tanzania) Ltd. v United Republic of Tanzania, ICSID Case No ARB/05/22, Procedural
Order No 1 (31 March 2006), paras 67–68; Plama Consortium Limited v Republic of Bulgaria, ICSID Case
No ARB/03/24, Order on Provisional Measures (6 September 2005), para 38; Polasek and Salinas
Quero (n 7) 390; Christoph H Schreuer, and others (eds), The ICSID Convention: A Commentary (CUP
2010) 775–77.
55 Azurix Corp v Argentina, ICSID Case No ARB/01/12, Decision on Provisional Measures (6 August
2003), para 33; Biwater Gauff v Tanzania, ibid, para 86; Occidental v Ecuador, ibid, paras 87–91.
56 See Polasek and Salinas Quero (n 7) 390.
57 ibid 399.10 Journal of International Dispute Settlement
pay.58 That said, in some cases, it was considered that the reliance on TPF shifts the
burden of proof to the claimant.59 This concerns the establishment of facts, the dis-
agreement on which does not undermine the general agreement on the legal prin-
ciple. The relevance of TPF in this regard will be discussed in Section 4.
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After being satisfied that it is necessary and urgent to preserve the requesting party’s
right, the tribunal must further decide whether, in the circumstances of the case, an
order of SfC would produce an unfair outcome, in particular, whether it would unfairly
impede the claimant’s right to claim.60 As discussed above, some tribunals considered
that investors enjoy the right to access to justice and that it is not part of the ISDS sys-
tem that an investor’s claim should be heard only upon the establishment of its suffi-
cient financial standing to pay adverse costs.61 Following this reasoning, even where
the claimant is impecunious and will be unable to pay a costs award, SfC still should
not be ordered if it may impede the claimant’s access to justice. On the other hand, it
can equally be argued that the ISDS system does not require that investors shall have
‘access to justice’ despite its lack of funding and that respondents should bear the risk
of inability to recover their costs. As opined by the minority arbitrator in the June
Decision in Herzig, nothing in the BIT or other applicable rules indicates that the right
to ‘access to justice’ takes precedence over the principle of equality of arms, and that
arbitration claims should proceed even if there is no chance for the respondent to re-
cover its costs in case it prevails in the case.62 In a word, the dispute between these
two camps centres on the balancing exercise between the respondent’s right to collect
costs and the claimant’s access to justice. To address this question, one must first
understand the concept of ‘access to justice’ in investment arbitration.
Given the different legal basis of investment arbitral tribunals’ jurisdiction from
that of domestic courts, the notion of ‘access to justice’ under constitutional laws and
international human rights law cannot be transposed to investment arbitration with-
out adjustment. In particular, an investor’ right to claim against a host State before
an investment arbitral tribunal stems from the host State’ consent to arbitration. In
fact, States can impose a variety of conditions on investors’ access to arbitration,
including to deny investors’ access under the denial of benefit clause or to require
investors to comply with domestic laws. Accordingly, investors do not a priori enjoy
the right to access to arbitration. Although it has been held that the right to access to
justice in domestic courts has acquired a jus cogens status,63 the same cannot be
58 See eg Victor Pey Casado and President Allende Foundation v Republic of Chile, ICSID Case No ARB/98/2,
Decision on Provisional Measures (25 September 2001), para 89; EuroGas v Slovak Republic, (n 14), para
5.21; Lighthouse Corporation v Timor-Leste (n 14), paras 60–62; South American Silver v Bolivia (n 14)
paras 64–68; Eskosol v Italy (n 52), paras 37–38; RSM v Grenada (n 14), paras 5.21–5.24.
59 Garcı́a Armas v Venezuela (n 18), paras 246–47.
60 See Polasek and Salinas Quero (n 7), 400–01; Alan Redfern and Sam O’Leary, ‘Why It Is Time for
International Arbitration to Embrace Security for Costs’ (2016) 32 Arbitration International 397, 411–
12. In arbitral decisions, this issue was sometimes framed as a matter of proportionality, or whether the
harm might be resulted without the measure outweighs the harm might be resulted by the measure.
61 EuroGas v Slovak Republic (n 14), para 120; RSM v Grenada (n 14), para 5.19; see also Pey Casado v Chile
(n 58), para 86.
62 Herzig January Decision (n 9), para 28.
63 See Prosecutor v El Sayed, Case No CH/PRES/2010/01, Order Assigning Matter to Pre-Trial Judge (15
April 2010), President of the Special Tribunal of Lebanon, para 29; Case of Goiburú, et al v Paraguay,
Judgment of 22 September 2006, Inter-American Court of Human Rights, Series C, No 153, para 131.Disrupt the Gambler’s Nirvana 11
assumed in investment arbitration. Therefore, while the generic notion of ‘access to
justice’ has some rhetorical force in arbitral proceedings, as rightly pointed out by
the minority arbitrator in the Herzig June Decision, it does not necessarily prevail
over the procedural rights of respondent States. The weighing of investors’ access to
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arbitration against States’ interest in enforcing a potential favourable costs award can-
not produce a straightforward answer that applies to diverse cases across the broad.
As shown above, States also hold conflicting views in this respect.64 Thus, since the
lex lata does not provide clear guidance on this question, adjudicators enjoy some
discretion to make decisions in the particular circumstances of the case.
That being said, where the State measure challenged by the claimant is allegedly
the cause of the claimant’s lack of funding, which is often the case in investment arbi-
tration, the principle that ‘no one can benefit from his own wrong’ is more helpful to
resolve this controversy.65 Compared with the generic notion of ‘access to justice’,
this principle fits better with the object and purpose of investment treaties as well as
the consensual basis of investment arbitral tribunals’ jurisdiction. Where the claimant
can make a prima facie case that its inability to pay adverse costs is caused by the
wrongful conduct of the host State, to discontinue the arbitration upon the claim-
ant’s failure to post SfC—and thus to allow the respondent to avoid facing arbitral
claims—risks rewarding the respondent State for its violation of the treaty obliga-
tions. Ordering SfC in such a situation would not only violate the principle of ‘no
one can benefit from his own wrong’, but is squarely against the raison d’être of the
arbitration clause and defeats the object and purpose of the investment treaty. Thus,
the need to avoid such an unfair result trumps the necessity and urgency to preserve
the respondent’s right to recover costs. Several arbitral decisions have endorsed this
line of reasoning.66 Compared with investment arbitration, the success rate of appli-
cations for SfC appears to be higher in commercial arbitration.67 This can be partly
explained by the fact that in investment arbitration, it is more often that the impecu-
niosity of the claimant is allegedly caused by the wrongful act of the respondent.
However, a problem may arise regarding the risk of prejudging the merits. In the
January Decision in Herzig, the tribunal dismissed the claimant’s argument that it is
unreasonable for Turkmenistan to obtain SfC when Turkmenistan allegedly caused
the company’s insolvency.68 The tribunal dismissed this argument, as ‘[t]his is plainly
a merits issue, subject to later assessment, and one on which the Tribunal expresses
no view at this stage.’69 However, a preliminary evaluation of the parties’ allegations
of the merits does not necessarily require the tribunal to prejudge the outcome of
64 See text to footnotes 18–47.
65 See Factory at Chorzów (Jurisdiction), Judgment of 26 July 1927, PCIJ Series A, No 09, 31.
66 Herzig January Decision (n 9), para 79; RSM v Saint Lucia (n 12), Assenting reasons of Gavan Griffith,
para 2; Eskosol v Italy (n 52) 37–38.
67 For instance, in an ICC publication in 2014 on decisions on security for costs in ICC arbitrations, it was
noted that 3 among the 9 or 10 applications were successful. See Chris Parker and others, ‘A Global
Perspective on Availability of Security for Costs and Claim in International Arbitration Mirage or Oasis?’
(1 February 2017) (accessed 4 January 2021).
68 Herzig January Decision (n 9), para 66.
69 ibid.12 Journal of International Dispute Settlement
the dispute. As already mentioned, the hypothetical nature of the right at issue is an
inherent character of the regime of provisional measures.70 The ordering of a prelim-
inary measure is premised on the existence of the ‘rights’ to be preserved pending a
final decision on the merits. This does not mean that the adjudicator has prejudged
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the merits whenever it orders a preliminary measure. Instead, the adjudicator only
decides whether there is a risk that irreparable damages will be caused to the dis-
puted rights during the proceedings.71 To avoid charges of prejudging the case, arbi-
trators need to limiting themselves to a prima facie assessment, bearing in mind that
this assessment would have no bearing on the decision on the merits.72
Following the same logic, the legal analysis involved in deciding whether there is a
prima facie case that the claimant’s inability to obtain security is caused by the respond-
ent’s wrongful act does not necessitate prejudging the merits. An adjudicator only needs
to determine whether there is a risk that the claimant’s ability to pursue remedies against
the respondent will be prejudiced by the respondent’s wrong before the claimant is
afforded with the opportunity to present its case. Whether the claimant’s impecuniosity is
attributed to the respondent’s wrongful act needs to be evaluated de novo after proceed-
ings on the merits. Indeed, a prima facie assessment of whether the respondent’s act has
caused the claimant’s insolvency is no more a prejudgment of the merits than a prima
facie assessment of whether the respondent would prevail in its claim and have a costs
order rendered in its favour.73 For granting interim measures, Article 26(3)(b) of the
UNCITRAL Rules even expressly requires the tribunal to determine whether ‘[t]here is a
reasonable possibility that the requesting party will succeed on the merits of the claim’.74
In light of the above, when deciding whether to order SfC, arbitral tribunals need to
undertake a two-step inquiry: first, whether an order of SfC is ‘necessary and urgent’;
second, whether such an order would result in an unfair consequence such as making
the claimant unable to claim against the respondent because of the latter’s wrongful
act. Due to the practical difficulty for respondents to prove the claimant’s inability or
unwillingness to pay the costs, and also because claimants often claim that their impe-
cuniosity is caused by the respondent’s wrongful act, SfC could only be granted in ‘ex-
ceptional circumstances.’75 Indeed, instances where the tribunal actually ordered SfC
are genuinely rare. To the knowledge of the author, there are only four published deci-
sions granting SfC (among which the order in Herzig has been rescinded).76
70 Mouawad and Silbert (n 51) 399–400; Anukaran (n 51) 82.
71 See eg Fisheries Jurisdiction (Germany v Iceland), Provisional Measures, Order of 17 August 1972,
Declaration of Vice-President Ammoun and Judges Forster and Jiménez de Aréchag, ICJ Reports 1972,
36.
72 Tribunals often emphasize in provisional measure orders that that order is without prejudice to all the
substantive issues in dispute and should not be considered as an indication of the arbitrators’ position on
the merits. See eg RSM v Saint Lucia (n 12), Tribunal’s Analysis, para 88; Biwater Gauff v Tanzania (n
54) para 114.
73 Lars Market, ‘Security for Costs Applications in Investment Arbitrations involving Insolvent Investors’
(2018) 11(2) Contemporary Asian Arbitration Journal 217, 234.
74 UNCITRAL Arbitration Rules (2013), art 26(3)(b).
75 See eg EuroGas v Slovak Republic (n 14), para 123; RSM v Saint Lucia (n 12), Tribunal’s Analysis, paras
75, 82.
76 RSM v Saint Lucia (n 12), Tribunal’s Analysis, para 90; Garcı́a Armas v Venezuela (n 18) para 261; Eugene
Kazmin v Republic of Latvia, ICSID Case No ARB/17/5, Provisional Order No 6 (13 April 2020), para
68; Herzig June Decision (n 11) paras 22–23.Disrupt the Gambler’s Nirvana 13
Despite the apparent inconsistency in arbitral decisions, these decisions actually
reflect an agreement on this legal framework. In most decisions, the request failed
in the first step of the inquiry because of the respondent’s failure to prove the
claimant’s inability or unwillingness to pay adverse costs.77 In cases where SfC was
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ordered, the second limb of the test was actually complied with. These decisions
cannot be seen as prioritizing a respondent’s right to recover costs at the cost of
allowing the respondent to benefit from its own wrong. In Garcı́a Armas v
Venezuela, although the tribunal ordered SfC due to the claimants’ failure to prove
their solvency, it relied on the fact that the claimants claimed themselves to be
solvent.78 The tribunal thus considered that a SfC order would not affect the con-
tinuation of the proceedings.79 Indeed, the claimants subsequently complied with
the order.80 In Eugene Kazmin v Latvia, the claimant also denied that it was impe-
cunious,81 and the tribunal’s decision to grant SfC was not the claimant’s possible
impecuniosity but its unusual business conduct which ‘cannot otherwise be
explained except by a desire to avoid paying debts and diverting assets from cred-
itors’.82 In RSM v Saint Lucia, although the claimant admitted that it did not have
sufficient funds, it did not claim that its impecuniosity resulted from the respond-
ent’s act,83 and the claimant’s history of incompliance with adverse orders and
awards tilted the balance against it.84 Thus, in RSM, the ultimate discontinuance of
the proceedings was not due to the respondent’s wrongful act, but due to the
claimant’s own wrong. In Herzig, although the tribunal initially ordered SfC, it sub-
sequently rescinded the order when the claimant proved to be incapable of meeting
the requirement.85 The consequence of denying the claimant’s right to claim did
not arise.
Thus, the latest ICSID-proposed rule in ICSID Rules amendment, albeit very
broad in its formulation, is consistent with the existing jurisprudence. The proposed
rule provides four relevant circumstances that tribunals should consider when decid-
ing whether to order SfC:
a. that party’s ability to comply with an adverse decision on costs;
b. that party’s willingness to comply with an adverse decision on costs;
c. the effect that providing security for costs may have on that party’s ability to pursue its claim or
counterclaim; and
d. the conduct of the parties.86
77 See eg Pey Casado v Chile (n 58), para 89; EuroGas v Slovak Republic (n 14), para 5.21; Lighthouse
Corporation v Timor-Leste (n 14), paras 60–62; South American Silver v Bolivia (n 14), paras 64–68;
Eskosol v Italy (n 52), paras 37–38; RSM v Grenada (n 14), paras 5.21–5.24.
78 Garcı́a Armas v Venezuela (n 18), para 232.
79 ibid.
80 Garcı́a Armas v Venezuela (n 18), Decision on jurisdiction, paras 135–36.
81 Eugene Kazmin v Latvia (n 76), para 61.
82 ibid, para 59.
83 RSM v Saint Lucia (n 12), Tribunal’s Analysis, paras 38–45.
84 ibid, para 86.
85 Herzig June Decision (n 11), paras 22–23.
86 Working Paper #4, Rule 53(3); Working Paper #3, Rule 52(3).14 Journal of International Dispute Settlement
Paragraphs (a), (b) and (d) concern the urgency and necessity to preserve the
requesting party’s right to recover costs, whereas paragraph (c) concerns the fairness
of ordering SfC. Although the proposed rule does not dictate a hierarchy among
these factors, paragraph (c) prevails where the claimant’s potential inability to pro-
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vide security is caused by the alleged wrongful act of the respondent.
4. TP F UN D ER TH E CU RR EN T L E GA L F RA M EW OR K ON S F C
Applying the two-part test in cases where the claimant is funded by a third party, tri-
bunals asked to order SfC must determine: first, whether the presence of TPF makes
such an order necessary and urgent; secondly, whether such an order may impede the
claimant’s ability to pursue its claim. As explained below, under the current legal
framework, although the reliance on TPF does not necessarily lead to a SfC order,
its presence establishes a presumption in favour of it.
The first limb of the two-part test, necessity and urgency, can be satisfied where
the claimant is impecunious and pursues the claim with the support of a third-party
funder (which is not liable for adverse costs), because such a situation produces an
imminent risk that without security, the respondent will be unable to recover its
costs even if it wins the case. In Muhammet Çap & Sehil v. Turkmenistan, the tribunal
stated that it was ‘sympathetic to Respondent’s concern that if it is successful in this
arbitration and a costs order is made in its favour, Claimants will be unable to meet
these costs and the third-party funder will have disappeared as it is not a party to this
arbitration’.87 In RSM v Saint Lucia, the tribunal observed that without SfC ‘it is
doubtful whether the third party will assume responsibility for honoring such an
award’, and that it is ‘unjustified to burden Respondent with the risk emanating from
the uncertainty as to whether or not the unknown third party will be willing to com-
ply with a potential costs award in respondent’s favor’.88
As mentioned in Section 3, in most cases where the respondent’s request failed
the ‘necessity and urgency’ test, it was because the respondent failed to prove the
claimant’s inability or unwillingness to pay the costs.89 However, in light of the risks
discussed above, where the claimant relies on TPF and the funder is not liable for ad-
verse costs, it is submitted that the claimant, instead of the respondent, should bear
the burden of proof to demonstrate that it can meet the financial requirements in a
costs award.
In Garcı́a Armas, the claimants relied on TPF and the funding agreement did not
cover potential adverse costs.90 In this context, although the tribunal cknowledged
that the recourse on TPF was not necessarily due to the claimants’ lack of funds,91 it
sided with the respondent and inferred from the claimants’ reliance on TPF and the
terms of the funding agreement that there was a risk that the respondent’s costs
87 Muhammet Çap & Sehil In_aat Endustri ve Ticaret Ltd. Sti. v Turkmenistan, ICSID No ARB/12/2,
Procedural Order No 3 (12 June 2015), para 12.
88 RSM v Saint Lucia (n 12), Tribunal’s Analysis, para 83.
89 See eg Pey Casado v Chile (n 58), para 89; EuroGas v Slovak Republic (n 14), para 5.21; Lighthouse
Corporation v Timor-Leste (n 14), paras 60–62; South American Silver v Bolivia (n 14), paras 64–68;
Eskosol v Italy (n 52), paras 37–38; RSM v Grenada (n 14), paras 5.21–5.24.
90 Garcı́a Armas v Venezuela (n 18), para 244.
91 ibid, para 243.Disrupt the Gambler’s Nirvana 15
would not be reimbursed.92 According to the tribunal, since it was practically impos-
sible for the respondent to prove directly and entirely that the claimants were unable
to pay the costs,93 it was for the claimants to demonstrate that they have sufficient
funds to pay.94 After giving parties the opportunity to prove the (in)ability of the
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claimants to pay the costs, the tribunal found that the claimants failed discharge their
burden and that the risk of the respondent’s inability to recover its costs was suffi-
cient to justify the ordering of security.95 Similarly, in RSM v. Saint Lucia, arbitrator
Gavan Griffith maintained that whenever TPF is involved, ‘the onus is cast on the
claimant to disclose all relevant factors and to make a case why SfC order should not
be made’.96
It is submitted that this is an appropriate approach. As famously held by the ICJ
in Corfu Channel, it is a general principle that where the party making the claim has
objective difficulty in obtaining direct proof of the fact, ‘a more liberal recourse to
inferences of fact and circumstantial evidence’ could be adopted.97 Accordingly, in
light of the practical difficulty a respondent may face in collecting evidence on a
claimant’s financial situation, inferences and indirect evidence should be accepted.
Although lack of funds is not the only reason why an investor may resort to TPF, it
is undeniable that many investors short for funds are nonetheless capable of prose-
cuting their claims only with the support of third-party funders,98 and the funder’s
being exempt from the liability for adverse costs exposes the respondent to a severe
risk of the inability to recover its costs. In this context, given that the claimant is in a
better position to prove its ability to pay, it is fair to make inferences in favour of the
respondent. If the claimant fails to discharge this burden, the ‘necessary and urgent’
test for a SfC order is met.
Nonetheless, another requirement, ie the order cannot deprive the claimant of
the opportunity to claim against the respondent for the respondent’s own wrongful
act, is harder to satisfy. This is a major reason why some tribunals found a claimants
financial difficulties and reliance on third-party founding insufficient to constitute ‘ex-
ceptional circumstances’ justifying a SfC order. For instance, in South American Silver
v Bolivia, the tribunal maintained that:
If the existence of these third-parties alone, without considering other factors,
becomes determinative on granting or rejecting a request for security for costs,
respondents could request and obtain the security on a systematic basis,
increasing the risk of blocking potentially legitimate claims.99
92 ibid, paras 244–45.
93 ibid, para 248.
94 ibid, paras 246–48.
95 ibid, paras 247–49.
96 RSM v Saint Lucia (n 12), Assenting Reasons of Gavan Griffith (para 18).
97 Corfu Channel (United Kingdom of Great Britain and Northern Ireland v Albania), Judgment of 9 April
1949, ICJ Reports 1949, 18; see also Caroline E Foster, ‘Burden of Proof in International Courts and
Tribunals’ (2010) 29 Australian Yearbook of International Law 27, 59. (As pointed out by Foster, ‘where
the result of applying a presumption is that a legal claim is considered to be proved, then there has argu-
ably been a reversal in the burden of proof’.)
98 See introduction of this article.
99 South American Silver v Bolivia (n 14), para 77.16 Journal of International Dispute Settlement
However, whether the interest in allowing the claimant to pursue its claim justifies
a rejection of the request for security depends on the actual risk of ‘blocking poten-
tially legitimate claims’ in the particular circumstances. In Garcı́a Armas, although the
claimants relied on TPF and failed to prove their ability to pay potential adverse
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costs, the tribunal noted that the claimants claimed themselves to be solvent and cap-
able of paying.100 Accordingly, there was no reason to believe that to require SfC
would impede the claimants’ ability to claim. Indeed, the fact that the claimants in
Garcı́a Armas subsequently provided security illustrates that the concern expressed
in South American Silver may not arise in all cases. One should not assume that to
order SfC based on the reliance on TPF would necessarily block potentially legitim-
ate claims. Instead, it is for the claimant relying on TPF to prove that this would be
the case.
Based on the foregoing, in cases where the claimant relies on TPF, the claimant
should bear the burden to demonstrate either it has sufficient funds to cover the
costs, or due to the wrongful act of the respondent, it is so impecunious that an order
of SfC would impede its ability to prosecute the case. Thus, although the broadly for-
mulated rule in the latest ICSID proposal is consistent with this approach, the actual
impact of TPF is greater than it appears. It is true that the reliance on TPF may or
may not evidence the claimant’s inability to pay the costs, and that it does not neces-
sarily lead to a SfC order. Nonetheless, the reliance on TPF causes a presumption in
favour of ordering SfC, unless the claimant can produce evidence to rebut this
presumption.
5. C A US E OF TH E D IL E MM A I N H E R ZI G: R EG UL A TI NG A
T RI P A RTI TE R EL A TI ON SH I P W IT H A BI LA T ER A L L EG A L
F RA M EW O RK
As introduced at the beginning, the decisions on SfC in Herzig were paradoxical: SfC
was initially ordered due to the risk of the claimant’s inability to pay, but the order
was subsequently rescinded due to the certainty of the claimant’s inability to pay. As
explained below, this outcome, albeit a perverse and unjust one, is understandable
and, to some extent, formalistically correct under the legal framework elaborated
above. The crux of the problem lies with the flaw in the current law when regulating
cases involving TPF: in such cases, three parties are involved and interested in the ar-
bitral proceedings, whereas the law is premised on a bilateral paradigm of investor–
State relationship.
In Herzig, the claimant was representing a bankrupt company and relied on the
support of a third-party funder who was not liable for a potential adverse costs
award.101 The ‘necessity and urgency’ requirement was met, as otherwise it was very
likely that the respondent would be unable to recover its costs if it wins. The major
controversy resides in the question whether the need to avoid depriving the claimant
of the opportunity to claim prevails over the ‘necessity and urgency’ to preserve the
respondent’s right.
100 Garcı́a Armas v Venezuela (n 18), para 232.
101 Herzig January Decision (n 9), para 57.You can also read
