An ICSID tribunal further restricts the scope of security for costs applications
Vercara LLC (formerly Security Services LLC, formerly Neustar, Inc) v. Republic of Colombia, ICSID Case No. ARB/20/7, Decision on security for costs, September 27, 2023
Summary
The decision concerns security for costs. While there have been several arbitral decisions on security for costs, the vast majority refusing to issue such order, this decision underlines an increasingly strict of the conditions and criteria attached to a security for costs application.
Background of the dispute
The ICSID dispute concerns expropriation, FET, and full protection and security claims related to the treatment of Neustar’s investments in .CO Internet, a Colombian company. .CO Internet is a Neustar subsidiary benefiting from a concession contract for the promotion, administration, technical operation, and maintenance of the .co internet domain. The substantial investments of the respective companies led to a growth in domain names of more than 8000% . Notably, these investments were made because the companies were entitled to extend the concession for another 10 years. When .CO Internet expressed its intention to extend the concession, the Colombian government launched a public tender, ignoring the extension process. Neustar and .CO Internet alleged that this breached their rights under the United States–Colombia Trade Promotion Agreement. Neustar (the “claimant”) submitted a request for arbitration against the government of Colombia (the “respondent”). Prior to a decision on the merits, the respondent sought the enforcement of a preliminary measure and submitted an application for security for costs.
Claims of the parties
The respondent requested an order from the tribunal that the claimant post security for costs in the amount of USD 3.5 million. Further, it requested that the tribunal strike out a witness statement. The claimant requested that the tribunal dismiss the relief sought by the respondent and the respondent bear all associated costs.
Regarding security for costs, the respondent argued that the claimant’s actions and omissions, notably due to the contended opaque behaviour (para 23(iv)) and unclear dealings (para 26), warrant the tribunal to order a security for costs. The claimant argued that the respondent does not have a right to make a claim for reimbursement (para 48), and the case does not denote any exceptional circumstances, notably due to its ability to pay any potential adverse cost awards (para 51).
Tribunal’s analysis
The tribunal structured its analysis around the two successive claims. It first analyzed the application for security for costs and then turned briefly to the application to strike out evidence.
Tribunal’s approach to security for costs
Regarding the application for security for costs, the tribunal started by stating that there is no dispute between the parties about its authority, based on Article 47 of the ICSID Convention, to order security for costs (para 79).
The tribunal agreed on the need to protect the right to claim reimbursement to the benefit of both the claimant and respondent (para 82); it nevertheless stressed that such protection is subject to a chronological element. This is because the protection of the right to claim reimbursement can only be established if the tribunal has rendered a decision or if it is duly demonstrated that said right had been compromised or lost (para 82). In other words, such protection would have to be sought before the plaintiff bears the majority of the costs (para 83).
While the tribunal is not contradicting a line of established jurisprudence appreciating the protection of the reimbursement of procedural costs as an inherent right of the parties (a characteristic of the principle of procedural integrity), the decision imposed a certain notable chronological and/or procedural limit on it. It remains to be seen whether such a limit threatens or reinforces the principle of due process.
The tribunal continued its preliminary development by emphasizing that the parties agree on the criteria that would oblige it to order such a preliminary measure. Thus, the tribunal structured its analysis based on various constituent elements, namely (a) the exceptional circumstances of the dispute, (b) the necessity and proportionality of the measure, and (c) its timely/urgent nature.
Tribunal’s restrictive approach to exceptional circumstances
Firstly, the tribunal noted, not without a certain degree of exhaustiveness (para 85), the elements used to determine the exceptional nature of the factual circumstances, including, without prejudice, the possibility of paying any potential adverse award on costs or the claimant’s unwillingness to comply with costs orders.
While the tribunal emphasized that there is always an inherent risk that the applicant will not pay an adverse cost award (para 85 and para 88), this risk would only justify a security for costs order in the presence of clear evidence (para 88 and para 90). In so doing, the tribunal restricted the characterization of exceptional circumstances and, in line with the established jurisprudence, subjected their analysis to a very high threshold; a security for costs order would be justified in the event of “extreme circumstances, for example, where abuse or serious misconduct has been evidenced” or any conduct that “threatens the integrity of the proceedings.”
In the present case, the tribunal did not consider that the lack of transparency, due in particular to the lateness of the evidence of the internal corporate restructuring operations, justified a security for costs order, as such lateness cannot be characterized as a refusal to comply with the tribunal’s decision (para 89). The threshold for such lateness and its impact on the principle of due process will have to be clarified in the future.
Tribunal’s ambiguous approach to jurisdiction
It is important to note that the tribunal accepted the respondent’s argument concerning the major disagreement between the parties on the characterization of the transfer of claim. As such, the tribunal explicitly pointed out that a transfer of claim could constitute an element making it possible to justify exceptional circumstances in the event that the said transfer is abnormal in such a way that it impacts the claimant’s ability to pay any potential adverse award on costs (para 89).
It is nonetheless important to note that this decision was rendered without prejudice to a subsequent determination of the parties. As such, the tribunal did not determine whether or not it has any jurisdiction over the claimant or any other corporate entity due to the transfer of claim. The importance given to the consent to substitute the parties, which cannot be assessed at this stage of the proceedings, will have to be clarified in the future.
Extrapolating the tribunal’s decision, a transfer of claim does not equate to an obstruction to the enforcement of an adverse award nor a stripping off of assets in order to avoid an award on costs, which in turn does not allow for any characterization of the necessity criteria.
Tribunal’s restrictive approach to necessity and proportionality
The tribunal emphasized that late submission of evidence is not sufficient to characterize “unclear dealings” or unwillingness to disclose financial information (paras 89 and 93). Thus, the necessary character that is attached to a security for costs order would only be justified when it is shown that such a decision would make it possible to avoid any “harm or prejudice being inflicted upon the applicant” (paras 92 and 93).
Moreover, the tribunal implicitly emphasized that the proportionality element is characterized by a balance between the effectiveness of the right to reimbursement and the effect of a security for costs order on the claimant (para 94); a security for costs order must not impose an unnecessary burden on the claimant so as to impede its ability to pursue its claim or counterclaim.
Tribunal’s “by-the-backdoor” approach to timeliness and urgency
Thirdly, the tribunal accepted that the elements of “timeliness” and “urgency” are subsidiary in nature (para 98), as these elements alone cannot justify a security for costs order. Although no primacy is explicitly granted between the requirements arising from “timeliness and urgency” or those arising only from “timeliness” (para 95), the tribunal seems implicitly to prefer the chronological element (timeliness) to the urgency element.
The respondent’s doubts were at the centre of the tribunal’s analysis. This amounts to a logical fallacy as said doubts are unascertainable by nature. The tribunal gave primacy to the requirements arising from timeliness and emphasized that the latter must be reflected in the proceedings (para 97). While no threshold was specified, the tribunal indicated that timeliness could be chronologically characterized (“timeliness and urgency”) if a request is submitted after an essential element, in this case the corporate spin out of the claimant. The primacy of the requirements derived from “timeliness” over the requirements derived from “urgency” will have to be clarified in the future.
Conclusion
With this decision, the tribunal rejected the respondent’s application for security for costs. As such, the tribunal further restricted the characterization of the constituent elements of security for costs, namely the exceptional circumstances. This decision confirms that security for costs is an “extraordinary remedy which ought not to be granted lightly” and “remains a very rare and exceptional measure.” The conciseness and language (paras 86 and 94) of the tribunal’s decision are indicative of ambiguity and caution, which makes it necessary to reflect on the implications of the decision. For example, the threshold for the necessity test, the characterization of proportionality, and the importance (weight) given to each element are addressed only briefly, without any substantial argumentation. These points will have to be clarified in the future.
Tribunal’s composition
Julian D. M. Lew, K.C. (British national), president of the tribunal, Yves Derains (French national), respondent-appointed arbitrator, Kaj Hobér (Swedish national), claimant-appointed arbitrator
Author
Théo Tibère is an LL.M. student from the University of Amsterdam and is associated with the University Paris Panthéon-Assas.