Updated ICSID Arbitration Rules: a Closer Look at the New Cost Rules and Security for Costs Provision

As foreshadowed in our June 2022 Legal Update, amended ICSID Arbitration Rules came into effect on 1 July 2022 (the "2022 Rules").

The 2022 Rules are designed to take account of matters and processes that have become commonplace in international arbitration and address certain criticisms of ICSID's self-contained system. Among other improvements, the 2022 Rules significantly expand Rule 28 of the prior 2006 Rules (the "2006 Rules"), which dealt with the cost of proceedings. New Rules 50-53 provide clearer guidance on tribunals' discretion in cost allocation and include an express provision on security for costs. In particular:

1. Rule 52 provides further directions on how and when tribunals should exercise their discretion in cost allocation; and
2. Rule 53 sets out a new rule granting a party the right to request security for costs and lists factors that tribunals shall consider, including the existence of third party funding.

Building on our last high level update of the 2022 Rules, this Legal Update summarises the key changes introduced by Rules 50-53 of the 2022 Rules. 

Cost allocation (Rules 50-52)

The 2006 Rules granted tribunals broad discretion to allocate costs, but they did not provide guidance as to how tribunals were to exercise their discretion. Most of the feedback received by ICSID during the consultation process indicated that it was desirable to have clearer guidance on how and when to allocate costs. This is now directly addressed by Rule 52(1) of the 2022 Rules.

Rule 52(1) circumscribes the discretion of ICSID tribunals when awarding costs by requiring it to consider "all relevant circumstances", including:

1. the outcome of the proceeding (or any part of it);
2. the conduct of the parties during the proceedings (including the extent to which they acted in an expeditious and cost-effective manner and complied with the tribunal's orders/decisions and the 2022 Rules);
3. the complexity of the issues raised; and
4. the reasonableness of the costs claimed. 

The use of the word "shall" reflects the mandatory nature of Rule 52(1). The above list reflects what has been decided by earlier ICSID tribunals (e.g., PNG SDP v. Papua New Guinea, ICSID Case No. ARB/13/33, Award, 5 May 2015), helpfully codifying the ICSID jurisprudence. The 2022 Rules include a new requirement that each party must file a written submission on the allocation of costs (Rule 51), in addition to its statement of costs. According to ICSID's Guidance Note, the written submission on costs should contain the party's arguments on cost allocation, bearing in mind the factors in Rule 52(1), so submissions from both sides will assist the tribunal further in its decision-making.

Furthermore, Rule 50 of the 2022 Rules sets out a clearer, non-exhaustive list of "costs" of the proceedings, which comprise, inter alia:

1. the legal fees and expenses of the parties;
2. the fees and expenses of the tribunal, tribunal assistants approved by the parties and tribunal-appointed experts; and
3. ICSID's administrative charges and direct costs.

The tribunal's cost decision must form part of the award and it must include reasons (Rule 52(4)). Tribunals are also empowered to make an interim decision on costs at any time, either upon a party's request or on their own initiative (Rule 52(3)).

The 2022 Rules also circumscribe the tribunal's discretion in another situation.  If the tribunal renders an award that the claim manifestly lacks legal merit (pursuant to Rule 41(3)), the tribunal shall award the prevailing party its "reasonable costs", unless the tribunal determines that "special circumstances" justify a different allocation of costs (Rule 52(2)).

In our view, these amendments are welcome and much needed. The practice of ICSID tribunals on apportioning costs was neither clear nor consistent and, as one tribunal noted, "there is no uniform practice in treaty arbitration with regard to this matter" (LG&E Energy Corp. et al. v. Argentine Republic, ICSID Case No. ARB/02/1, Award, 25 July 2007). Predictability is a key factor in a dispute resolution mechanism, especially when it comes to the costs and expenses of the proceedings.

Security for Costs (Rule 53)

The 2006 Rules did not include a provision dealing with security for costs applications, which to date have rarely been granted by ICSID tribunals. As a result, these requests were typically made under the rule on provisional measures, even though the application of that rule was questionable and parties frequently argued that it was not broad enough to encapsulate security for costs. This is now expressly dealt with by Rule 53 of the 2022 Rules.

Rule 53 is a standalone provision on security for costs which empowers tribunals to award security in relation to both claims and counterclaims. Rule 53(2) establishes a procedural timetable for such applications and Rules 53(3)-(4) set out the key circumstances which must be considered by the tribunal, including:

1. the party's ability to comply with an adverse decision on costs;
2. the party's willingness to comply with an adverse decision on costs;
3. the effect that providing security for costs may have on the party's ability to pursue its claim or counterclaim;
4. the conduct of the parties; and
5. the existence of third-party funding.

Again, while some of these factors had already been relied on by previous ICSID tribunals (e.g., RSM Production v. Grenada, ICSID Case No. ARB/10/6, Decision, 14 October 2010), parties should find it helpful to have them expressly set out in the 2022 Rules and tribunals now have a useful 'checklist' in relation to which they will expect evidence to be adduced by the requesting party. It is notable that a tribunal shall consider a party's"willingness", and not only its ability, to pay an adverse cost award as well as evidence on the existence of third-party funding. ICSID's Guidance Note on Security for Costs confirms that the existence of third-party funding is not by itself sufficient to justify an order for security for costs. 

If a tribunal grants security for costs, it must set out the relevant terms, including a time limit for compliance, in an order ("Security for Costs Order").  Pursuant to Rule 53(6), if a party fails to comply with a Security for Costs Order, the tribunal may suspend the proceedings and the arbitration may be discontinued if the suspension lasts more than 90 days.

Rule 53(7) also obliges parties promptly to disclose any material change in the circumstances upon which security for costs was ordered and the tribunal's powers to modify or revoke a Security for Costs Order are outlined in Rule 53(8).

States primarily demanded the inclusion of a dedicated provision on security for costs as they often feel that they are faced with unfounded claims that force them to spend enormous amounts of money to defend themselves. The 2022 Rules are designed to give States more confidence in their ability to enforce and collect cost orders, which may also increase confidence in the system as a whole.

Brief Comment

Clearer standards are always welcome. Evidently, the 2022 Rules on cost allocation and security for costs aim at eliminating uncertainties, circumscribing the tribunal's discretion and increasing predictability for users. Rules 50-52 on cost allocation may well encourage parties to act more efficiently and dissuade them from resorting to dilatory tactics by expressly empowering tribunals to take such conduct into account. Rule 53 introduces a new, comprehensive stand-alone provision on security for costs, which is likely to be welcomed by both States and investors. It will be interesting to see if the introduction of this rule results in an increase in the filing of security for costs applications in ICSID arbitrations.