London Maritime Arbitration

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Security for costs

A. Introduction

17.1 In London arbitrations the successful party is generally awarded its costs. An order that one party must provide security for costs (normally in the form of a bank guarantee or P & I Club letter of undertaking) may be granted during the reference to ensure that a successful respondent (or claimant who has successfully defended a counterclaim) will be able to enforce an award of costs with ease. Such an order is typically given to ensure that an insolvent or brass-plate company with no assets within the English jurisdiction is not allowed to pursue a claim in arbitration and yet, if unsuccessful, escape responsibility for the respondents’ costs. An order for security for costs not only protects the respondent but may also be an important tactical weapon, as it can bring an arbitration to a halt where a claimant lacks the funds or other financial support needed to put up the security ordered. If a peremptory order for security for costs is not complied with then the claim may be dismissed or stayed.1

B. Arbitrators’ powers to grant security for costs

17.2 Section 38(3) of the 1996 Act empowers the tribunal to “order a claimant to provide security for the costs of the arbitration.” This power will lie with the tribunal unless the parties agree otherwise and the LMAA Terms expressly confirm the existence of such power.2 The “claimant” is defined to include a counter-claimant3 and the costs of the arbitration include legal or other costs,4 the arbitrators’ fees and the expenses of any arbitral institution.5

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17.3 Section 38(3) empowers the arbitral tribunal to award security for costs. The 1996 Act removed the court’s former power to order security for the costs of an arbitration because the DAC considered that the issue of whether a claimant in an arbitration should provide security for costs should lie with the arbitral tribunal chosen by the parties, not the court.6 The court may, however, make orders for security for the costs of court applications relating to an arbitration, for example for applications for permission to appeal. 17.4 The tribunal’s powers to award security for costs encompass the costs of the parties and probably also the tribunal’s own fees and expenses, which are regarded as part of “the costs of arbitration.”7 This chapter deals principally with security for the parties’ costs. Security for the tribunal’s fees is covered further in .

C. Discretion on security for costs

17.5 Section 38 confers a very wide discretion on arbitrators in making orders for security. Arbitrators must, however, act in accordance with their duty to act “fairly” under section 33 and in accordance with the applicable law, typically English law as the law of the seat. 17.6 In court proceedings a judge’s discretion to make orders for security for costs is guided by well-established principles as developed in the Civil Procedure Rules. An earlier draft of section 38 had provided that the arbitrators’ powers would be exercised “on the same principles as the court”.8 However, this provision was removed because it was not “user-friendly”, in particular for foreign users or lay arbitrators who might have difficulty in locating or understanding the relevant law. Accordingly, it is clear that the tribunal’s discretion need not be exercised in the same way as that of the court. In practice, however, it is likely that parties and arbitrators will have recourse to the principles used in court in relation to security for costs because they are of general application, based on justice and the underlying rationale for security for costs. 17.7 The main restriction on arbitrators’ power to make order for security for costs is that it

shall not be exercised on the ground that the claimant is –

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