Question 1a. On the basis of the applicable law and other applicable rules, please provide an opinion on the parties’ respective arguments and the likely outcome of the Respondent’s request for security for costs.
Question 1b. If, in light of your critical evaluation of the situation, there are any additional considerations that could or should be raised by the tribunal or by one of the parties - in arbitral proceedings or in subsequent challenge or enforcement proceedings - please provide an analysis of such circumstances.
Question 2. Please explain the nature, significance and main features of the legal principle according to which an arbitral
tribunal is entitled to rule on its own jurisdiction.
Security for Costs
Arbitration refers to the process through which disputing parties submit their positions and evidence thereto to a neutral party to make a determination on the said dispute. In this process, it is the parties themselves who chose an independent and neutral person to resolve their dispute.
Submission to arbitration must be contained in the contract agreement as an anticipatory method of resolving any conflict that might arise in the course of contract performance. Submission to arbitration is contained in what is commonly referred to as the arbitral clause. The clause sets among other things; the number of arbitrators, method of appointment, its jurisdiction, costs and the place. The appointment is therefore done with agreement between the parties. Where a party disputes the appointment of an arbitration panel, he or she is free to apply to court to challenge such appointment.
Security for costs of the arbitral process in normally requested from the claimant. Such request is only justifiable if there are pressing reasons and grounds to believe that the claimant is likely to be insolvent and is likely not to honour payment especially if the claimant loses the arbitral process, payment for costs of the arbitration proceedings and the payment of attorney fees might cause escalation of the already existing conflict. Traditionally, in certain jurisdictions, there was a reluctance to submit to an arbitral tribunal the authority to enforce and order the payment of requests for security of costs. However, it is now a settled practice that in most circumstances, the respondent is at liberty to freely request for the security of costs from the claimant.
A request for security of costs is based on the grounds of insolvency for instance. The respondent has the onus to prove that the claimant might not be in a position to honour security for costs at the tail end of the arbitration process. In certain exceptional circumstances, security for costs can also be submitted by the claimant. The claim, if submitted by the claimant is not in any way considered as abusive. The ICC tribunal in Geneva had considered this situation of the claimant asking for security of costs. It held that the application could not be termed as abusive. Diverse legal systems do not usually recognize the right to deny any party from submitting a claim because that particular party is incapable of obtaining security for costs from the other party. Except in circumstances where the claim for security of costs appears to be wrong, the security for costs is likely to be entertained altogether.
Security for costs is an example of an interim measure before the merits of the case are dealt with conclusively by the arbitration panel. Its main purpose is to protect the right of the party making such request from suffering grievous harm that is incapable of being cured by the final arbitral award. There are two distinctive measures that are possibly given when a request for interim measures is submitted before an arbitral tribunal; passive measures intended to preserve the status quo and active measures on the other hand whose main purpose is to compel a certain party to the arbitration proceeding to do an act, such as to stop, continue, execute or deliver the request in a particular manner.
Interim Measures in Arbitration Cases
A consensus in the treatment of interim measures in arbitration cases took UNCITRAL quite a considerable amount of time. The model law on treatment of interim applications have not been incorporated into the national law of most party states. The model law is however and is already in use on countries to act as a guideline for the decisions they make regarding interim and preliminary order. It is however important to note that Australia for instance, has amended its Civil Procedure rules dealing with arbitration to adopt most of the provisions of the model law as regards interim measures, but it does not extend to giving arbitral tribunals the authority to issue preliminary orders ex-parte.
Under article 17 of the Model law, the conditions for granting interim measures have been defined. The interim measures are the generally accepted standards when it comes to award of interim measures. They include;
The harm complained about is not capable of adequately being remedied by the award of any amount of damages;
A reasonable and imminent possibility that the party requesting is likely to succeed on the merits of the present claim.
The conditions are however applicable only where the arbitral tribunal deems it fit that they can be applied to evade the miscarriage of justice.
Under article 17B and C, THE Model Law provides that any application for interim orders can only be made together with that request for an interim measure and it is usually restricted to giving directions to a party to refrain from frustrating the purpose and intention of the interim measure that has been requested. The arbitral tribunal is required to do the following upon receipt of the application for the preliminary order:
Notify all parties to the proceeding that a request for interim measure has been lodged
Allow application for preliminary order
Give the preliminary order and any other communications between any party and the tribunal regarding such application
A preliminary order however given shall expire after twenty days upon which it becomes unenforceable but retains the binding effect on the parties. An arbitral tribunal has a right to issue preliminary orders. In the case of Brink’s-MAT ltd v Elcome, the English court of Appeal held that it is the duty of the applicant to make a full and clear disclosure of all the material facts, facts the applicant gathered after making proper enquiries and before submitting the application. The material facts refer to those facts that assist the judge to know how to deal with the application; the material nature of such application is upon the judge to make a determination and not the assessment done individually by the applicant or his legal advisors.
It has been described that security for costs is an interim application that either party is free to submit for a determination by an arbitral tribunal. The burden of proof on the inability of the party against which a security for costs application is made is borne by the applicant. The applicant has to prove his or her application with proper evidence to allow the arbitral tribunal to make a determination before considering the merits of the arbitration dispute. Massive brought up the issue of security for costs procedurally against the applicant on grounds of the applicants character to dishonour arbitral pronouncements and that the applicant’s financial accounts appear to be very dismal such that they might be capable of complying with the orders of the tribunal as to the settling of legal costs accruing from the arbitral procedure.
Conditions for Granting Interim Measures
Massive has provided an estimation of legal costs up to the time the arbitral procedure is concluded. It is however wary that if the tribunal in its wisdom and with due process as to the applicable law and the procedure, rejects all the claimants contentions and deliver a ruling with costs to the defendant’s favour, the claimant is unlikely to comply with such decree. This argument is informed by the previous failure by the claimant to honour an earlier order by a different tribunal to pay its suppliers. It also based its argument on the dwindling nature of financial status of the claimant based on the declared account which portrayed it as being in a financial crisis. Further to support their contention, Massive argued that Guyana, the place of residence of the claimant is so remote that enforcing a court order would be close to impossible.
The claimant has objected to the application for costs arguing that the tribunal lacks jurisdiction and authority to deal with the preliminary matter. It has based its objection on article 26 (2) (c) of the UNCITRAL rules that only refers to assets out of which a subsequent award may be satisfied and as such, security for costs is not allowed under the UNCITRAL rules. And that security for costs under international law is only provided under exceptional circumstances which the respondent failed to prove as the burden of proof is on them.
As already discussed before, the arbitral tribunal has the jurisdiction and power to determine any preliminary issue raised by either party to an arbitral dispute. Such preliminary issues have to be given priority and settled before the merits of the dispute are litigated before the arbitral tribunal. Security of costs is classified as one of the preliminary issues that an arbitral tribunal si expected to dispense with before a determination of the main contentious issues that necessitated the arbitration process is done. It is the sole responsibility of the tribunal to determine and rule on the availability of exceptional circumstances as advanced by the respondent so as to ascertain that the grounds on which the security for costs are sought are exceptional to warrant the award of the same.
The model law has allowed the arbitral tribunals to hear and determine preliminary disputes raised by any party to an arbitration dispute and to dispense with any preliminary issue before delving in the merits of the arbitration dispute. Though most party states have not domesticated the provisions of the model law on arbitration into their national laws, international arbitration practice has over time applied the rules either way and most tribunals have in the past dispensed with the issue of security for costs as a preliminary issue before determination on the merits of the arbitral dispute. The tribunal therefore has the jurisdiction to hear and determine the issue of security for costs through an inter partes hearing except where the situation does not allow for an inter- partes hearing and reasonable steps have been taken by the parties to have an inter partes hearing unsuccessfully.
Model Law Provisions for Interim Orders
The respondent is therefore entitled to a ruling on their advantage that the claimant should be compelled to provide security for costs. The respondent’s arguments are valid and strong, it points on the character of the claimant when it comes to honouring the rulings of arbitral tribunals on issues related to payment of decrees to other parties. The place of residence of the claimant being a remote area where enforcement of an award would be difficult, it is only fair that the urgent issue of attorney fees should be dispensed with first. It is highly predictable that the claimant will most likely fail to honour a decree awarded against them and it will take the intervention of a court of law to have the decree obeyed. That process however would take a considerable amount of time such that the security for costs would be greatly delayed to the detriments of the attorneys.
Orders for security costs differ from other most common interim orders in that it is capable of being implemented directly without resort to the state through courts for assistance. This is because the standard enforcement tool is to stay the proceeding until such a time when the security for costs determination has been totally complied with or in other circumstance to dismiss the claim brought forth by the claimant in arbitration rather that to seize or attach the assets of the claimant to offset the costs of litigation.
Though attempts have been made to ensure harmonization of the rules that guide the arbitration procedure in most jurisdictions, the attempts have not achieved so much. However, the ICC rules of arbitration remain the guiding rules in international arbitration. Other than the consideration for security costs in an arbitration procedure, the whole process of arbitration is somewhat complex and involves different considerations by all the parties involved in the process so as to ensure that the disputes that have been submitted to arbitration are well found and the procedure is followed.
The conduct of arbitration is closely monitored by the ICC Court, a court established to supervise and determine cases of arbitration internationally. The court has a supervisory role on all arbitral proceedings. So all the arbitral tribunals have to be guided by the ICC rules on arbitration and they have to consider and abide by those rules for the arbitration process to be successful.article 27 of the ICC Rules provide that the ICC court has the mandate to supervise and approve all forms of awards and that the court has the authority to draw their attention on the points of substance. The tribunals should therefore adhere to the rules to ensure that their awards are not contrary to ICC Rules on arbitration.
The arbitral tribunal should consider the preparation of terms of reference at the onset of the arbitral proceedings. The terms of reference have to be in place whether the tribunal is adhoc or institutional. Article 18 of the ICC rules provides for the particulars that must be included in the statement of terms of reference. They include;
- The description of all the parties, their full names and addresses
- The addresses of any party to which communication that could arise in the course of the arbitral proceedings could be sent
- A concise summary of the claims of each party including the reliefs sought by them
- A list of issues for determination where it considers it appropriate to do so
- The descriptions of the arbitrators, with their full names and addresses
- The place where the arbitration proceedings are to take place
- A description of the rules to be applied and the procedure to be followed
Expiry of a Preliminary Order
While the inclusion of terms of reference has been questioned over time, the parties to the arbitration process do recognize the importance of the same in the international stage especially where a dispute arises as to the manner in which the arbitration process was conducted. During the preparation of the terms of reference, the parties have to be present; their presence is likely to assist in resolving some of the minor issues such as the applicable language to be used or the substantive law to govern the arbitration process. The ICC Court relies on the terms of reference when scrutinizing awards and therefore, their inclusion is necessary to assist the court in the same.
A special consideration is also on time and cost of the arbitration process. The cost of arbitration has to be of great concern to the parties to the arbitration process. Icc rules encourages an arbitration process that is cost effective and reasonable. The tribunal should therefore be considerate in their demand for remuneration during arbitral tribunal constitution. The right of the parties is of great essence in arbitration and therefore, time should be of essence. For instance in 1988, the ICC developed rules to ensure that an arbitration procedure is cheap and the rights of parties are determined as fast as is possible in the circumstances. The 1998 rules were to achieve the following;
- Reduce the time that is availed for the constitution of the arbitral tribunal and the transmission of the file to the arbitrators by the ICC Court
- Enable all the parties to agree to make short the already set time limits in the rules so that they can conduct fast-track arbitrations.
The rules also mandate the arbitral tribunals to submit in addition to the terms of reference a time table that they intend to rely on and follow during the arbitration procedure.The timetable commits the tribunal to act morally in the conduct of the arbitration process though they are free to amend the timetable to accommodate any changes encountered in the course of the arbitration proceedings. Still on the issue of time limits, the tribunal is expected to indicate to the secretariat of the ICC upon close of the arbitration proceedings the period when they expect to submit a draft of the arbitral award to the court for scrutiny. This requirement also puts pressure on the tribunal to expedite the process. Time is therefore an important consideration is the conduct of the process of arbitration to which all parties have to adhere to. Where an arbitrator acts in a manner that is not geared towards timely and expeditious resolution of an arbitration dispute, the ICC has the mandate and power to replace that arbitrator forthwith.
While most arbitration rules state that the arbitrator’s fees are to be determined and fixed by the arbitrators themselves or be dependent and charged on an hourly rate, the ICC Rules give the ICC Court the power to fix the arbitrator’s fees.It states further that the fees shall be fixed by the ICC Court upon the conclusion of the arbitration proceedings. The fees however fixed shall be based on the already published scale depending on the amount in dispute. The court however still has the discretion in the application of the already published fees. Both parties and the tribunal should however agree on a fee that is affordable, the mode and time of payment when the same is to be effected. Where parties fail to agree on matters arbitrator’s fees and in case a dispute arises the rules of court are likely to be applied to amicably resolve the dispute.
Duty of Applicant to Disclose Material Facts
Another consideration that has to be put forth in arbitral proceeding is the arbitral clause. The contract should be interpreted to ascertain that for example there is an arbitral clause in the contract. The clause should be drafted in a way that is not ambiguous so as not to invite the interpretation of the courts on arbitral clauses. The clause should state clearly the range of disputes that can be solved by an arbitration tribunal; provide for the procedure of appointment of the tribunal, an agreement on the number and qualifications of the arbitration tribunal. The clause is what informs the institution and conduct of arbitration proceedings. Where a party disregards the clause during a dispute and instead moves to court to enforce their rights the other party is free to contest such reference to court and urge the court to stay the proceedings for the parties to explore and exhaust the arbitration process as contained in the contract between the parties. The tribunal should therefore ascertain that the arbitral tribunal is straight forward and the contract whose specific performance is sought is not against public policy or intended to commit a felony.
Availability of evidence as well as its admissibility also has to be considered in the arbitration process. The party claiming that the other party to the contract has not performed conclusively it’s part of the bargain or is in breach has to support his assertions with evidence that is admissible and relate to the facts in issue. The arbitral tribunal has the power of a court of law and is empowered to call and hear witness testimony regarding the issues in dispute. The rules of evidence are therefore applicable in arbitration proceedings. The tribunal in determining the rights of the parties have to ensure that it follows due process and is guided by rules of natural justice and the applicable law on which the claim is premised.
The impartiality of the tribunal sitting to determine a dispute should also be given consideration. While the parties are mandated to appoint the arbitrators, the persons so appointed should not exhibit any interest in the dispute between the parties. A person is said to have a conflict of interest in the dispute if and when such party has a relationship either monetary or family/blood with either party to the dispute or where one is certain to directly draw a proprietary benefit from the outcome of the present case. The common practice requires that persons selected to arbitrate between parties to a dispute are neutral as possible so that the outcome or the decree of the arbitral proceedings has that force of law such that it can be enforced without being challenged by either party or nullified by a court of law including the ICC Court. Independence and neutrality of the arbitration tribunal is one of the important considerations that parties must ensure for the arbitration procedure and outcome to have a binding effect on the parties to the dispute.
Arbitration was incorporated as an alternative method of dispute resolution though formal to reduce amounts and frequency of commercial litigation in courts. The arbitration principle was used for the first time in Britain in 1772, and much later in 1813, resolution of disputes through arbitration was extended to be applied to disputes regarding immovable property. The Arbitration and Conciliation Act 1996 gives parties to a contract the right to determine among other things the place of arbitration, the number of arbitrators, their mode of appointment and the matters that they choose to submit to arbitration.
Application of Security for Costs
The principle of competence- competence gives the arbitral tribunal the power to rule in its own jurisdiction. The principle is supported by the severability principle which is to the effect that that an arbitration clause is distinct and separate from the contract whose enforcement is sought. This means that the arbitration clause can be valid even if the contract is considered and ruled to be void. The clause and to a larger extent, the jurisdiction would survive such declaration on the validity or lack of it of the contract in question. Such jurisdiction is however not absolute and is subject to challenge and question by a court.
The challenge to the jurisdiction of an arbitral tribunal normally arises in circumstances where the validity of an arbitral agreement is premised and the whole process which the tribunal purports to operate and base its action. The question as to the jurisdiction of an arbitral tribunal is important as it determines whether the arbitration process can proceed or not.
The Arbitration and Conciliation Act, incorporates the principle of competence-competence, giving the tribunal to decide on its own jurisdiction without reference to the courts and that the courts are barred from determining the issue of availability of a tribunal’s competence or lack of it before the tribunal makes its own ruling. In the case of Union of India v M/s. East Coast Boat Builders & Engineers Ltd, it was stated that the legislature failed to create room for appeal in cases where the arbitral tribunal insisted on having a jurisdiction even where a plea to lack of the same was submitted. In Nav Sansad Vihar Coop. Group Housing Society Limited v. Ram Sharma and Associates, it was held that if a plea submitted on the lack of jurisdiction of an arbitral tribunal, the conduct of the arbitral proceedings are to continue up to conclusion.
Where the contract containing the arbitral clause is declared void especially where the arbitration agreement is not made in a separate agreement, but is inserted or embedded as a clause in the contract document, the contract is likely to come to an end but the arbitration clause would remain. The principle of severability is therefore applied in such cases. This was the holding in the case of Jawaharlal Burman v. Union of India.
There is however a possibility for the arbitral tribunal to lose the competence to rule on its own jurisdiction for instance where a party makes a formal request to the court to take steps to determine the composition where for example the two arbitrators fail to appoint a third arbitrator within the given time limits. The decision arrived at by the court shall be final in the circumstances. In Konkan Railway Corporation Limited v Rani Construction Pvt Limited, it was stated that the constitution of an arbitral tribunal by the court can nevertheless be challenged by any party before the arbitral tribunal as being in contravention of the act. This was later overturned and the court ruling in SBP and Co. v Patel Engineering Limited, that the tribunal has no right to determine their own jurisdiction especially where they have been appointed through a court process. The appointment is final and can only be appealed against in a court of higher jurisdiction.
Applicant's Burden of Proof
Whereas arbitrators possess the right and authority to rule on their jurisdiction or lack of it, they cannot however do so as a result of their own initiative. It is the responsibility of either of the parties and especially the respondent to raise the issue as a preliminary or interim measure for the tribunal to make a determination. Such plea ought to be submitted within reasonable time and it should precede the filing of a defence.
In conclusion therefore, the issue and principle of competence-competence should however not be absolute. Courts should have the right and power to determine the jurisdiction of an arbitral tribunal and the said tribunal should not be given the sole responsibility to decide their own case. Where the Act requires that a challenge of the jurisdiction of an arbitral tribunal to be submitted to court only after the tribunal itself has concluded its determination might operate to cause undue delay especially where the purpose of the arbitral proceedings was intended to seek specific performance of a contract between the parties to the dispute.
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List of Cases
Union of India v M/s. East Coast Boat Builders & Engineers Ltd 76 (1998) DLT 958
Nav Sansad Vihar Coop. Group Housing Society Limited v. Ram Sharma and Associates MANU/DE/0704/2000
Jawaharlal Burman v. Union of India AIR 1962 SC 378
In Konkan Railway Corporation Limited v Rani Construction Pvt Limited (2002)2 SCC 388
SBP and Co. v Patel Engineering Limited (2005)8 SCC 618
List of Statutes and Conventions
United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules 1966
International Chamber of Commerce (ICC) Rules on Arbitration 2014
Arbitration and Conciliation Act 1996