This article has been authored by Aashi Sharma and Pranav Gupta,  2nd Year students at Rajiv Gandhi National University of Law, Punjab

Introduction

The recent cases of Lava International Ltd. and Tomorrow Sales Agency have reignited the confusions regarding the concept of Security for Costs (“SfC”) in India.Gary B. Born defines SfC as “an interim measure designed to protect a respondent against the risk of non-payment of a future costs award, particularly where there is reason to doubt the claimant’s ability or willingness to comply with such an award.”

The authors in this manuscript shall wade through the confusions raised in the above cases. For that, firstly, we try to conceptually understand the concept of SfC by distinguishing it from the other situated similar concepts, while also emphasizing on the legal provisions governing them. Secondly, we analyze the concept of SfC in light of the leading international investment and commercial arbitration practices. Lastly, the authors propose a two-tier solution to the problem of SfC in India building on the international practices with certain domestic modifications.

Security for Costs: Concept and Law

Understanding Security for Costs:

The concept of SfC is fundamentally different from that of ‘securing the amount in dispute’, as the latter is a measure to ensure the enforceability of the arbitral award by securing the party with whole or some part of the amount claimed or granted. Section 9(1)(ii)(b) and section 17(1)(ii)(b) of The Arbitration and Conciliation Act, 1996 (“Arbitration Act”) regulates the regime for ‘securing the amount in dispute’ as an interim measure. The Hon’ble Supreme Court in the cases of Arcelor Mittal and Nimbus Communications clarified that section 9 permits securing the ‘amount in dispute’ on a case by case basis. Further, SfC is also distinct from ‘Recovery of Costs’, as ‘costs’ are recovered post the declaration of award and is addressed by section 31A of The Arbitration Act. 

Security for Costs and Section 9: A Legal Void

While, the Arbitration Act deals with the similarly situated aspects of SfC as shown above, it remains silent on a provision for SfC, a gap that remains unaddressed even by the 2015 Amendment and The Draft Arbitration and Conciliation (Amendment) Bill, 2024. A landmark ruling with respect to SfC was delivered in the J.S. Ocean Liner case, by ordering to deposit US$ 47,952 as an amount for recovery of legal costs. The court relied on section 12(6) of the English Arbitration Act 1950, akin to section 9(1)(ii)(b) of the Arbitration Act, to award SfC as an interim measure in this case. However, this harmonious interpretation was later rejected in the cases of Intertoll Co. and Thar Camps, by observing that under sub-clause (b) of section 9(1)(ii), only ‘amount in dispute’ can be secured and not the SfC. Hence, the Arbitration Act needs a reform with respect to the provision concerning SfC.

International Precedents concerning Security for Costs

Investment Arbitration Insights:

The International Centre for Settlement of Investment Disputes (“ICSID”) Tribunal (“Tribunal”), being the world’s primary institution, administers the majority of all international investment cases. Till the 2022 Amendment to The ICSID Arbitration Rules (“ICSID Rules”), even the ICSID Rules were silent on this concept of SfC, however, now Rule 53 of the same Rules contains the express provision for awarding SfC by the Tribunal. As the newly introduced Rule 53 is in its nascent stage with no extensive judicial precedents on it yet, the authors analyze the cases prior to the 2022 Amendment to understand the mechanism for granting SfC.

Prior to the 2022 Amendment, SfC was granted as a provisional measure under Article 47 of The ICSID Convention and Rule 39 of the ICSID Rules as observed in the cases of RSM v. Grenada and Riverside Coffee. However, in the Ipek case, the Tribunal permitted the granting of SfC only in ‘exceptional circumstances’. The high threshold was reaffirmed in Eskosol v. Italy, where even the bankruptcy didn’t sustain an order for SfC. Further, in EuroGas case, financial difficulty and Third-Party Funding (“TPF”) arrangement were considered as common practices, unable to meet the threshold of ‘exceptional circumstances’.

Finally, in the RSM v. Saint Lucia case, the high threshold was met as the Claimant was ordered to pay USD 750,000 as SfC on account of its proven history of non-compliance along with the financial constraints, and TPF involvement. In the same case, The Tribunal established a three-prong test for awarding SfC emphasizing on the principles of ‘Exceptional Circumstances, Necessity, and Urgency’, with the same being followed in the further cases of Dirk Herzig and Garcia Armas. Further, the Tribunal added a fourth criterion of ‘Proportionality’ to the above three-prong test in the landmark case of Kazmin v. Latvia.

The Permanent Court of Arbitration (“PCA”) is another prominent institution, with nearly half its cases involving Investment-State arbitrations. The PCA resorts to Article 26 of the UNCITRAL Arbitration Rules to award SfC as seen in the Nord Stream 2 case. In Tennant Energy v. Canada and South American Silver, the PCA applied the same test, devised in the Armas case to grant SfC. Similar approaches have been adopted by the local tribunals, including Swiss Federal Tribunal and Lebanese Arbitration Center.

Commercial Arbitration Procedure:

The UNCITRAL Model Law on International Commercial Arbitration, being a foundational framework, empowers the tribunal to order SfC under Article 17(2)(c), after being amended in 2006. The ambiguous drafting of the provision fell prey to a much-anticipated debate, with critics arguing it fails to clearly address the issue of SfC. It led to a proposal for amending Article 17(2)(c) by adding words “or securing” after “assets” to signify security of some sort. Despite this, the Model Law continues to influence the rules of major arbitral institutions like the London Court for International Arbitration Rules (“LCIA Rules”) and the Singapore International Arbitration Centre Rules (“SIAC Rules”).

Article 25.2 under the LCIA rules grants the arbitral tribunal power to order SfC as mirrored by Article 38(3) of the English Arbitration Act, 1996, which is the governing law of arbitrations seated in England and Wales. In the cases of Fernhill Mining Ltd. and Re Unisoft Group (No. 2), the judges devised a three-pronged test for granting SfC: Firstly, there must be “reasons to believe” that the claimant will be unable to pay the defendant’s costs if unsuccessful in the claim. Secondly, there must be a balancing of the interest of the defendant and the claimant by protecting the defendant against impecunious claims while not preventing the claimant from proceeding with a meritorious claim. Thirdly, the conduct of the party seeking a SfC must not suggest an attempt to stifle a meritorious claim.

Rule 48 of the SIAC Rules 2025 empowers the arbitral tribunal to order for SfC. Notably, both the LCIA and SIAC Rules distinguishes between SfC and ‘security for the amount in dispute’, with LCIA Article 25.1(i) and Article 25.2 addressing each separately, in the similar way as SIAC Rule 48 and 49 do.

CONCLUSION: A Possible Solution to the Security for Costs Puzzle

As the authors earlier observed, the Arbitration Act doesn’t possess any express provision for awarding SfC, leading courts to resort to section 9 of the Act, an approach later debunked by the Delhi High Court. However, this contentious issue gained prominence again with the landmark judgement of Tomorrow Sales Agency. The case remains a landmark, being the first Indian case to expressly deal with the issue of SfC, with the earlier cases touching the issue only in civil or implied contexts. The case led to the conclusion that SfC couldn’t be ordered against a third-party funder, who is not impleaded as a party to the present arbitration, though the Single Judge Bench upheld the court’s power to grant such relief under Section 9. However, the judgment leaves ambiguity regarding the particular sub-clause under which SfC may be granted, which the author tries to address by providing a two-prong solution.

As an ad-hoc solution, the authors prescribe the usage of sub-clause (e) of section 9(1)(ii) of The Arbitration Act, which provides the power to grant any ‘other interim measure of protection as may appear to the court to be just and convenient’. The above usage would be consistent with firstly with the Tomorrow Sales Agency case, as it implies the power to order such a measure under section 9 of The Act, and secondly with the modern interpretation of section 9, where courts emphasised its exercise ex debito justitiae to uphold the efficiency of arbitration.

As a permanent solution, the authors suggest the addition of an express provision to the Arbitration Act. The same can be added by drawing inspiration from the LCIA Rules and the SIAC Rules’ separate provisions for ‘SfC’ and ‘securing the amount in dispute’, further building on the specifics of the concept laid down in Rule 53 of ICSID Rules, with particular emphasis on the above mentioned Indian precedents. An illustrative draft for the provision adopting the above considerations is provided below:

“Section XZ: Award of Security for Costs

• Upon the request of a party, the Arbitral Tribunal may order any other party to provide Security for Costs to the other party.

• In determining the Security for Costs award, the tribunal shall consider all the relevant circumstances, including:

• that party’s ability or willingness to comply with an adverse decision on costs;
• the effect that such an order may have on that party’s ability to pursue its claims or counterclaim;
• the conduct of the parties;
• any other consideration which the tribunal considers just and necessary.

Provided that the tribunal while considering an application for Security for Costs must not prejudge the dispute on the merits.

• The Tribunal shall consider all evidence adduced in relation to the circumstances in paragraph (2), including the existence of third-party funding.

Provided that the mere existence of a third-party funding arrangement would not by itself lead to an order for Security for Costs.

• The Tribunal may at any time modify or revoke its order on Security for Costs, on its own initiative or upon a party’s request.”