By Peter Reat Gatkuoth
September 14, 2018 (SSNA) — Domestic courts are clothed with jurisdiction to order and issue interim measures/remedies during arbitral proceedings in order to archive the ends of justice and prevent abuse of court process. Such measures include order of security for costs, taking evidences and anti-suit injunctions. The author seeks to critically analyze one of the facilitative roles (among the other roles) of domestic courts in ordering security for costs during arbitral proceedings. It’s the author’s view that in arbitration, the claimant is usually the party responsible to furnish security for costs during arbitral proceedings in order to archive the ends of justice. Still at large, the paper discusses the general principles on the role of domestic courts in arbitration, particularly in Ugandan Law relating to court’s power to order for security for costs, considerations and pertinent issues thereof. The role of domestic Courts in making orders of the security for costs during arbitral proceedings is discussed as per submission below.
In global south, ‘disputes are an inevitable occurrence in many international commercial transactions between parties/contractors or vendors.’ Where these disputes arise and they cannot be resolved by the disputants, the team of arbitrators usually take the role of facilitating the disputants to settle the case. “Arbitration is a practice that typically gives a great deal of flexibility in tailoring the exact process to settle civil disputes or international disputes” (Poundret, 2007). This process take times to gather and call for some evidences, witnesses and other information that are deem important from the domestic court or state authority.
Arbitration whether Ad hoc or institutional, raises complex issues and procedures encompassing complex issues that work simultaneously. However, in arbitration, the claimant/ plaintiff must furnish security for costs. Alternatively, if parties submit a claim for arbitration each of them may apply before a court of competent jurisdiction for security for costs. Security for costs as an interim remedy/measure may be applied for, by a third party if such party is joined to a claim for arbitration on his/her own motion or court order. Court is enjoined to deal with applications for security for costs in an expeditious manner in order to achieve the ends of justice and prevent abuse of court process during arbitral proceeding (Redfern, 2012).
Nature and meaning of Security for Costs
Security for costs refers to sum of money paid /payable in court by the claimant/ plaintiff when there is a belief that she/he is unable to pay the defendant costs if ordered to do so by a court of competent Jurisdiction. Security for costs is an interim remedy/measure intended to protect the respondent/ defendant where there is reasonable belief that the claimant to arbitral proceeding may not satisfy costs awarded against that party (Petrochilos, 2014). Most jurisdictions mandate this requirement to any claimant to pay such sums as may be determined by court in order to avoid abuse of court process and achieve the end of justices. Hence, the arbitral tribunal/court should strike balance between the defendant’s right to request for security for costs and the claimant’s rights to access justice like any other interim measures/remedy, security for costs is discretionary remedy. Sir Donaid, Nicholls in his working paper concedes that: “In exercising its discretion, the court has to balance the threat that an impecunious company which could pressure on a defendant against the wrong should not have born any costs at all”. However, security for costs is controversial subject; it’s a double edged sword, since it may be a tool used to safeguard party’s rights as a means of aborting arbitration process. Security for costs presumes that there should be seriousness to a claim and prevents any evasive behaviors and finally secures the rights of parties (Parratt, 2011).
Considerations for Grant of an order for Security for Costs
The court/ arbitral tribunal is enjoined to deal with application for security for costs in expeditious manner (Altaras, 2003). The author presupposes that if the application for security for costs is at the very start of arbitration, the court should begin by considering whether it’s clothed with jurisdiction to hear and entertain the matter. In alternative, if court decides or rules that they are clothed with jurisdiction, court should then consider whether or not it has the power to order security for costs and in doing so, should ensure that parties are given fair opportunity to present their case. The court should consider the merits of the application having regard to all relevant circumstances of the cases and without any preposition in favor or against the application. In assessing the merits of the application, court is enjoined to balance the right of the respondent/ defendant to pursue its claim and costs of the defense that defeat the claim. The arbitrators on the other hand are mandated to assess the merits of all relative ground set out in the application before the order for security for costs is ordered. The applicant must also prove on balance of probability that the claimant may be unable to furnish or satisfy eventual costs awarded against him (Christopher, 2012).
Grounds for an order of Security for Costs during arbitral Proceedings
Before court order the positing of security for costs during arbitral proceedings, it must be satisfied that there is a serious risk that the claimant will be unable to pay respondents costs if the latter succeed. Conversely, if it appears that a claimant will have the necessary means and such a means will be readily available for the satisfaction of any costs award, the court should refrain from ordering security as a possible protection against changes in the claimant’s finances (Gaillard et al, 2013). Secondly, court should consider that lack and inaccessibility of assets is a necessary but not a sufficient ground for requiring security for costs (Gaillard et al, 2013).
Furthermore, if the solvency of a party was questionable at the inception of the relationship between the parties to arbitral proceedings; the court has reasons to believe that the inability to pay costs is no reasons to order for security for costs because such risk may be a consequential effect of doing business with a party. Alternatively, even if the party’s ability to pay costs was deteriorated, since the inception of the relationship, court is enjoined to consider that this was purely a commercial risk (RedFern, 2012). Thirdly, if circumstances show that deterioration of the party’s financial situation or the lack of assets available was due to eventual causes other than business risks, an order for security for costs is justifiable. In the alternative the party against whom an order for security for costs is sought is in the best position to provide evidence as to the financial situation; if he fails to discharge the burden to produce accounts and documents, the court may draw an inference not to order for security for costs (Redfern, 2012).
The Law relating to award of security for Costs by Domestic Courts during arbitral Proceeding
Section 6 (1) of international Chamber of commerce rule in Uganda (2012) provides that a party to arbitration agreement may apply to court before or during arbitral proceedings for an interim measure of protection and the court may grant such measure/remedy. The rationale and scope of this provision is to guarantee consistence and achieve the ends of justice during arbitral proceedings (arbitration and conciliation Act chapter 4, laws of Uganda). In international Arbitration, timely application and enforcement of interim measures can have a substantial effect on the possibility of enforcement of final award especially when issues relating to the protection of assets or evidence arise before or during the course of arbitration proceedings. A classic example is where there is reasons to believe that the claimant may be unable to satisfy costs awarded against him/her, in that way, the respondent/ defendant may apply for an order of security for costs (Redfern, 2012) The majority of the litigation and Arbitration practitioners contended that interim measures in international arbitration if they are not enforced and implemented during arbitral proceedings, the final award may be meaningless ( arbitration and conciliation Act cap.4, laws of Uganda).
Section 6 (2) of arbitration and conciliation act Chapter 4, laws of Uganda Provides that “where a party applies to court for an injunction or order of interim measure, and the arbitral tribunal has already ruled on any matter relevant to the application, the court shall treat the ruling or any finding of the fact made in course of ruling as conclusive for purposes of the application” (arbitration and conciliation Act cap.4, laws of Uganda). Art.17 (2), UNCITRAL model law, Art.26 (2), (UNCITRAL arbitration Rules), Art 28 of International chamber of commerce rules (2012) have acknowledged court’s powers to order for interim measures which encompass security for costs within the expression, provide the means of preserving assets out of which subsequent award may be satisfied. However, Art. 2, paragraph 3 of the accompanying commentary in CLArb guidelines on Application for interim measures provides that Application for security for costs is discretionally, court has power to decline to grant such measures.
Security for costs and access to Justice.
It might be said that a claimant’s right to a fair hearing should not depend on any conditions that are purely financial (Christopher, 2011). A demand that the claimant should furnish security for costs constitutes an act of human Right violation because it constitute deprivation of the claimants’ right to access to justices. The respondent/ defendant may use it as a ground to defeat the interest of justice and abort arbitration process especially if he acts malafide/bad faith with knowledge that the claimant is suffering from financial problems or it’s a small or new company that cannot respond to the court’s order (Blakaby, 2008). This approach could undermine the arbitration system as a private tool for resolving commercial disputes between multi-national firms. Moreover the tribunal /court’s consideration of the strength of the claim prior to any hearing may lead to an initial opinion against one party without any real examination of the merits which arguably violates its duty to act fairly and impartially towards all parties.
Is it fair for domestic Courts to order for Security for Costs during arbitral proceedings?
Assuming that arbitrators have decided that one or more of the factors and requirements set out under Art 17(2) of the UNCITRAL Model Law and Arbitration and Conciliation Act cap 4 law of Uganda in favor of granting an order for security for costs, before proceeding to make such an order; they should consider the conduct of the party applying for security both before and during the course of the arbitration (International Chamber of commerce rule in Uganda, 2012). For example, if the claimant’s lack of funds to pay costs awarded or contributed to by the conduct of the opposing party such as delay in payment of sums due or failing to perform its contractual obligations, Court may conclude that it would not be fair to require security in those circumstances. Conversely, if the Court conclude that a party has deliberately organized its financial affairs so as to be unable to pay or has deliberately used foreign jurisdictions to avoid enforcement of claims, then it may be fair to require security.
Applications for security for costs should be promptly, that is as soon as the risk or facts giving rise to the application are known or ought to have been known. Arbitrators should consider whether an application has been made at an appropriate time. If the application is made after significant expense has been incurred, they may consider that this unfairly disadvantages the other party and refuse the application unless there is a good reason for the delay. For example, if the need for security arose because a party’s solvency has deteriorated during the course of the arbitration, this may be a reasonable explanation for the delay. Alternatively, if the court considers security is required but there has been a delay, they may order security for future costs only, rather than completely refuse the application.
Role of the Court in appointment of the arbitrators
As a matter of general rule, the courts assistance in appointment of arbitral tribunal is provided for under Section 10 and 11 of the Act (Arbitration and conciliation Act cap.4, laws of Uganda). It is worth noting that the jurisdiction to make appointment to arbitral tribunal is vested exclusively in the High Court of Uganda. Thus the court’s appointment has provided for a default arrangement if efforts by the parties to appoint a tribunal encounter a stalemate. The High Court will be faced with diverse situations where it is required to make such appointments. These include where there is no agreement on appointment between the parties, where there is failure to appoint a sole arbitrator, where there is failure to appoint one of the two arbitrators, where there is failure by the two arbitrators to appoint.
Challenging arbitrator (S) through Court
Section 12 and 13 of the Act (arbitration and conciliation Act cap.4, laws of Uganda) provides for grounds to challenge the Arbitrators. Where the parties fail so to agree, a party may within 15 days of becoming privy to the appointment of the tribunal or circumstances that merit its challenge, write to it stipulating the reasons for the challenge. If the challenged tribunal does not withdraw from office or the other party agrees to the challenge, the tribunal shall decide the matter. If the challenge whether in the manner agreed by the parties or after decision by the tribunal does not succeed, the challenging party determine the matter (arbitration and conciliation act, Cap 4, Laws of Uganda).
The Act provides for various grounds under which an arbitrator may be challenged and these include; if there is reason to justifiably doubt his/her impartiality and independence. The fact that an arbitrator does not possess qualifications agreed to by the parties is also a potent reason for a challenge or “if he is physically or mentally incapable of conducting the proceedings or there are justifiable doubts as to his capacity to do so” (arbitration and conciliation act, cap 4, Laws of Uganda). However, a party who has appointed an arbitrator may only challenge him on basis of reasons that he becomes seized of after such appointment (arbitration and conciliation act, cap 4, laws of Uganda).
Determining the arbitral Tribunal’s Jurisdiction
As per the doctrine of “kompetenzkompetenz” (arbitration and conciliation act chapter 4, Laws of Uganda), the arbitral tribunal has powers and authority to rule on its own jurisdiction. Such a ruling may encompass matters including existence or validity of the arbitration agreement. The fact that a party has appointed or participated in appointing an arbitrator is not a bar to challenging the jurisdiction of the arbitral tribunal. Well as it is desirable that any challenge as regards the jurisdiction of arbitral tribunal to be resolved as early as possible. The act requires that a plea of lack of jurisdiction be raised latest at submission of defense. Where the plea is exceeding of jurisdiction, the same should be raised as soon as the matter alleged to be in excess of authority is raised in the proceedings.
In conclusion, it suffices to quote the Lead Judgment of Justice Deverell, in the case of Epco Builders Limited-v-Adam S. Marjan-Arbitrator & another Civil Appeal No. 248 of 2005, which justifies the role of Domestic Courts during Arbitral Proceedings where he stated: “If it were allowed to become common practice for parties dissatisfied with the procedure adopted by the arbitrator(s) to make constitutional applications during the currency of the arbitration hearing, resulting in lengthy delays in the arbitration process; the use of alternative dispute resolution, whether arbitration or mediation would dwindle with adverse effects on the pressure on the courts.” This does not mean that recourse to a constitutional court during arbitration will never be appropriate. Equally it does not mean that a party wishing to delay an arbitration (and there is usually one side that is not in a hurry) should be able to achieve this too easily by raising a constitutional issue as to fairness of the “trial” when the Arbitration Act 1995 itself has a specific provision in section 19, stipulating that “the parties shall be treated with equality and each party shall be given full opportunity of presenting his case” in order to secure substantial delay. If it were to become common, commercial parties would be discouraged from using alternative dispute Resolution. Therefore, Security for costs is an interim remedy that can only be ordered for, during arbitral proceeding. However, enforcing the claimant to furnish such costs may be hectic and difficult. This calls for domestic courts to design strict rules through amendment and review on award and enforcement of the same process against the claimant in order to archive the ends of justice during arbitral proceedings.
The author of this article hold MA International Law and Human Rights and he is currently pursuing a second Master Degree of Laws (LLM Oil and Gas Laws). Please don’t hesitate to reach him at [email protected]
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