UK: LCIA Arbitration: Tribunal's Power To Order Security For The Amount In Dispute

Last Updated: 27 July 2010
Article by Hannah Khawaja

In the current economic climate, parties to commercial disputes are increasingly concerned about the recovery risk involved in pursuing arbitration proceedings, in particular the risk that an opponent may not be able to comply with an arbitral award made against it or that an opponent's future financial security becomes uncertain (such as a risk of insolvency arising after proceedings have been commenced). The likelihood of successfully enforcing an arbitration award is typically a key consideration for parties considering commencing or continuing arbitration proceedings.

The arbitration rules of the London Court of International Arbitration (LCIA Rules) allow claimants to avail themselves of a unique protection in the form of interim relief – to seek payment of security for the amount of a claim or counterclaim. For example, a claimant that has commenced arbitration proceedings against a respondent that looks likely to become insolvent in the near future may make an application to the arbitral tribunal for an order that the respondent secures the amount in dispute (by a bank guarantee or deposit payment), so that the claimant is protected in terms of enforcement if an award is made in its favour.

This provision differs from the more widely available power to order security for costs, which, in general terms, allows a court or tribunal to require the provision of security for the legal costs of defending a claim or counterclaim.

If a claimant successfully obtains an order for a respondent to pay security for the claim (and the order is complied with1), this guarantees that payment will be made in full and promptly following any award made in the claimant's favour. This exceptional provision in the LCIA Rules provides significant comfort to claimants in pursuing arbitration proceedings in circumstances where there is a risk of non-compliance or insolvency on the part of the respondent. It is also a feature that may amount to a "unique selling point" for the LCIA Rules to be chosen in arbitration agreements, especially where it is anticipated that enforcement of an award may prove problematic.

Basis on which payment of security for the claim can be ordered

Article 25 of the LCIA Rules gives the tribunal the power to award interim and conservatory measures. In particular, Article 25.1(a) of the LCIA Rules gives the tribunal the power to order a respondent to a claim or counterclaim to provide security for all or part of the amount in dispute, by way of deposit or bank guarantee or in any other manner and on such terms as the tribunal may determine.

The LCIA Rules do not provide any specific guidance as to the principles upon which security for the claim can be ordered (which is perhaps unsurprising given the widespread lack of any equivalent tool in other arbitration rules or even domestic litigation systems). Nevertheless, there are various tests or guidelines on the availability of interim measures including security, to which a tribunal may refer. By way of example:

  • interim measures are extraordinary measures that are not granted lightly2;
  • the applicant must show that the measures that it seeks are urgent and necessary in order to avoid serious and irreparable harm and are not merely convenient or appropriate3;
  • the harm to the applicant if the measure is not ordered must substantially outweigh the harm to the respondent if the measure is granted4; and
  • there must be a reasonable possibility that the applicant will succeed on the merits of the claim5.

Practical Considerations

In practice, arbitrators may be reluctant to exercise their power to award security for the claim because they may not want to pre-judge the merits of the case (and may well appreciate the very significant tactical incentive that may commonly lie behind such applications). Most applications will only succeed if there is clear evidence that the respondent will be unable to pay any damages awarded against it and if the applicant can convince the tribunal that, in the circumstances, it is just for the tribunal to exercise its discretion to award security. This may require witness evidence from sources with knowledge of the respondent's financial affairs and documents evidencing the respondent's financial condition, such as the annual accounts or other financial statements.

Further, a key consideration for any potential applicant seeking security for the claim is that Article 21(a) of the LCIA Rules specifically states that the terms for providing security may include a cross indemnity from the applicant for any costs or losses incurred by the respondent in providing security, itself secured as the tribunal deems appropriate.

Therefore, while the ability to seek security for the amount in dispute can be a useful tool for claimants or counter-claimants when there is a risk regarding eventual enforcement of an award, parties should also bear in mind that such an application may not be successful (leaving the applicant at risk of having to pay the other party's costs of the application) and, even if it is successful, a cross indemnity may be required.

Conclusion

Parties considering which institutional rules to apply to arbitration clauses in their commercial contracts should keep in mind that the LCIA Rules contain this unique power for a tribunal to order a party to pay security for a claim, particularly if contracting with a counterparty when there is potential concern about its ability to comply with any arbitration award made against it.

Any claimant contemplating commencing a claim under the LCIA Rules who has concerns that the potential respondent may be impecunious or other bases for serious concern as to difficulty in enforcing an arbitration award (or if a claim has already commenced and the financial position of the respondent changes) should consider making an application for security for the costs of the claim, which, if successful, will limit the risks attaching to enforcement.

Footnotes

1.The LCIA Rules do not expressly provide for a remedy in the event an order to pay security for the claim is not complied with, although it is possible that the successful applicant may eventually be able to obtain a default award (although of course the claimant would then need to enforce the default award in the same manner as any final award).

2.See Paushok v The Government of Mongolia, Order on Interim Measures dated 2 September 2008, paragraph 39 (an arbitration under the UNCITRAL Rules)

3.Paushok, paragraph 39

4.Article 17A(1) UNCITRAL Model Law

5.Ibid

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions