In international arbitration, security for claims, also called security for payment,[1] belongs to a category of interim or provisional measures that can be sought prior to the issuance of the final award. If granted by the arbitral tribunal, it consists in “a kind of advance payment designated to guarantee the payment and/or enforcement of the final award where the applicant proves to be right on the merits of the case in dispute.”[2] A security for claims can take various forms, e.g., by way of a deposit in an escrow account or a bank guarantee.
In order to ensure that a future arbitral award will be paid, which often requires time, costs and effort for enforcement proceedings and entails risks, such as the risk of the respondent dissipating assets during the arbitration proceedings or declaring bankruptcy in the event of a negative award, requesting security for payment has obvious appeal: if a party wins the arbitration, a security is in place ensuring that it will in fact obtain payment.
In the following sections, we will first discuss the possibility of requesting security for claims in international arbitration, under different arbitration rules. Then, we will review the findings of the partial award rendered recently in an ad hoc arbitration case, Preble-Rish Haiti v. BMPAD.
Security for Claims in International Arbitration – Overview
It is rather rare for institutional arbitration rules to contain a specific provision regarding the tribunal’s power to order security for claims. This is the case, for example, of Article 25.1(i) of the LCIA Arbitration Rules which provides that the arbitral tribunal shall have the power to “order any respondent party to a claim, counterclaim or cross-claim to provide security for all or part of the amount in dispute, by way of deposit or bank guarantee or in any other manner.” Likewise, Article 48 of the WIPO Arbitration Rules states that the tribunal may issue “any provisional orders or take other measures it deems necessary, including injunctions and measures for the conservation of goods which form part of the subject matter in dispute, such as an order for their deposit with a third person or for the sale perishable goods. The Tribunal may make the granting of such measures subject to appropriate security being furnished by the requesting party.”
When the power to grant security for claims is not explicitly stated in the arbitration rules, it is generally considered to arise out of the arbitral tribunals’ power to grant a broad range of interim or provisional measures.[3]
That said, in international commercial arbitration, requests for security for claims are typically granted only in exceptional circumstances. The party that makes such request must typically demonstrate, along with other requirements for interim relief, such as the requirement of urgency, that it is unlikely that an award rendered in its favour would be enforced against the losing party.[4] For instance, in the interim award rendered in ICC Case No. 8786, the arbitral tribunal rejected the request for security for claims considering that the requesting party had failed to “show on a prima facie basis that an award rendered in its favour would not be enforceable in Turkey.”[5]
In investment arbitration, however, the chances that a requesting party, most commonly the investor, succeeds in demonstrating that a favourable award would not be enforceable are rather slim given that States are unlikely to be found impecunious, contrary to private parties. For instance, in the Dirk Herzig v. Turkmenistan case, in a very short consideration of claimant’s request for security for its claim, the tribunal held that “[t]o the best of the Tribunal’s knowledge, Turkmenistan is correct that an order for security for claim is unprecedented, and for good reason.”[6] The tribunal then denied the request.
Findings in the Preble-Rish Haiti v. BMPAD Case
In this case, the claimant, Preble-Rish Haiti (“PRH”), a limited liability company registered in Haiti, raised several claims amounting to USD 30 million arising from three contracts concluded with the respondent, the Bureau de Monétisation de Programmes d’Aide au Développement (“BMPAD”), an agency of the government of the Republic of Haiti, regarding the supply of diesel fuel, jet fuel and gasoline. In arbitration, PRH sought payment of outstanding invoices, plus interest and compensation for lost profits.
Upon the initiation of ad hoc arbitration with a seat in New York, BMPAD filed a petition before the Supreme Court of the State of New York, seeking a stay of arbitration on the grounds that the arbitration clause contained in the contracts was procedurally deficient and invalid under Haitian law, as well as a request for a temporary restraining order. While the motion to stay was pending, PRH made a request that the Panel of arbitrators (the “Panel”) issue an Interim Partial Award of Security in the sum of USD 30 million.
In its ruling, the Panel first underlined that the “power of arbitrators to direct a party to provide pre-award security is firmly established in case law interpreting the Federal Arbitration Act”.[7] While pointing out that the “overall objective of requiring security is to prevent a final award in the arbitration from being a pyrrhic victory”,[8] the Panel also emphasized that security for claims shall not be granted lightly. Instead, while ruling on the request, arbitrators shall take into consideration several criteria, including, inter alia:[9]
- “the likelihood that the claim will succeed on the merits”, and
- “where there is a risk that the award will not be satisfied because of the financial situation of the award debtor or other reasons.”
Likelihood that the Claim Will Succeed on the Merits
The Panel analysed the obligations of the parties as well as the factual evidence presented at the stage of the arbitration and concluded that claimant had made “sufficient showing that it is likely to prevail on the merits with respect to its claims to justify an award for security” amounting to USD 23 million.[10] However, it made clear that “these determinations of the likelihood of success on the merits are for the purpose of this interim award of security only [and], in further proceedings in this arbitration before the issuance of a Final Award on the merits, BMPAD will continue to have a full opportunity to contest PRH’s claims, to challenge the evidence and witnesses presented by PRH, and to present its own witnesses and evidence, should it change its present stance and choose to take advantage of that opportunity.”[11]
Risk That an Award Will Not be Satisfied
In its Claim Statement, PRH argued that its request was justified since it would be difficult to enforce a final award against respondent in Haiti since “the Haitian courts are controlled”[12] by the government that was itself “in danger of total collapse”.[13] More particularly, PRH pointed out that “[f]or-ransom kidnappings have increased exponentially over the last year, the influence of armed gangs is growing and […] Haiti has endured rounds of protests and civil unrest over the legitimacy of the current government.”[14] It deplored that the current government could be easily replaced by a transitional government that would be likely “unwilling to honor debts incurred by the prior administration.”[15] BMPAD objected to such arguments, qualifying them as “greatly exaggerated” and argued that any award “could be easily enforced against [State] assets anywhere in the world.”[16]
While assessing the request, the Panel noted that, in the past, the respondent had made several comments suggesting that it would “not voluntary comply with an award in this case”[17] and concluded that “there is a substantial risk that any award in favor of PRH in this arbitration [would] not be satisfied and that PRH’s success in obtaining such an award [would] be rendered a pyrrhic victory”.[18]
Based on these findings, the Panel ordered the respondent to post a security amounting to USD 23 million “in an escrow account to be established by the parties and held by a first-class New York bank which shall act as escrow agent”.[19]
In conclusion, while rarely granted, requesting security for claims may be worth considering in black and white cases against respondents who can be proven to be unlikely to comply with an arbitral award.
[1] A. Yesilirmak, “Provisional Measures in International Commercial Arbitration”, Kluwer Law International (2005), p. 213.
[2] A. Yesilirmak, “Provisional Measures in International Commercial Arbitration”, Kluwer Law International (2005), p. 213.
[3] A. Yesilirmak, “Provisional Measures in International Commercial Arbitration”, Kluwer Law International (2005), p. 213.
[4] A. Yesilirmak, “Provisional Measures in International Commercial Arbitration”, Kluwer Law International (2005), p. 213.
[5] ICC Case No. 8786, Interim Award, ICC International Court of Arbitration Bulletin Vol. 11, No. 1, p. 81.
[6] Dirk Herzig as Insolvency Administrator over the Assets of Unionmatex Industrieanlagen GmbH v. Turkmenistan, ICSID Case No. ARB/18/35, Decision on the Respondent’s Request for Security for Costs and the Claimant’s Request for Security for Claim, 27 January 2020, para. 68.
[7] Preble-Rish Haiti SA v. Republic of Haiti, Bureau de Monétisation de Programmes d’Aide au Développement, ad hoc arbitration, Partial Final Award, 6 August 2021, para. 66. See also Banco de Seguros del Estado v. Mutual. Marine Office, Inc., 344 F.3d 255, 262-63 (2d Cir. 2003); Yasuda Fire & Marine Insurance. Co. of Europe v. Continental Casualty Company, 37 F.3d 345, 348 (7th Cir. 1994); or Island Creek Coal Sales Co. v. City of Gainesville, Florida, 729 F.2d 1046, 1049 (6th Cir. 1984).
[8] Preble-Rish Haiti SA v. Republic of Haiti, Bureau de Monétisation de Programmes d’Aide au Développement, ad hoc arbitration, Partial Final Award, 6 August 2021, para. 66.
[9] Preble-Rish Haiti SA v. Republic of Haiti, Bureau de Monétisation de Programmes d’Aide au Développement, ad hoc arbitration, Partial Final Award, 6 August 2021, para. 66.
[10] Preble-Rish Haiti SA v. Republic of Haiti, Bureau de Monétisation de Programmes d’Aide au Développement, ad hoc arbitration, Partial Final Award, 6 August 2021, para. 98.
[11] Preble-Rish Haiti SA v. Republic of Haiti, Bureau de Monétisation de Programmes d’Aide au Développement, ad hoc arbitration, Partial Final Award, 6 August 2021, para. 100.
[12] Preble-Rish Haiti SA v. Republic of Haiti, Bureau de Monétisation de Programmes d’Aide au Développement, ad hoc arbitration, Partial Final Award, 6 August 2021, para. 101.
[13] Preble-Rish Haiti SA v. Republic of Haiti, Bureau de Monétisation de Programmes d’Aide au Développement, ad hoc arbitration, Partial Final Award, 6 August 2021, para. 101.
[14] Preble-Rish Haiti SA v. Republic of Haiti, Bureau de Monétisation de Programmes d’Aide au Développement, ad hoc arbitration, Partial Final Award, 6 August 2021, para. 101.
[15] Preble-Rish Haiti SA v. Republic of Haiti, Bureau de Monétisation de Programmes d’Aide au Développement, ad hoc arbitration, Partial Final Award, 6 August 2021, para. 101.
[16] Preble-Rish Haiti SA v. Republic of Haiti, Bureau de Monétisation de Programmes d’Aide au Développement, ad hoc arbitration, Partial Final Award, 6 August 2021, para. 103.
[17] Preble-Rish Haiti SA v. Republic of Haiti, Bureau de Monétisation de Programmes d’Aide au Développement, ad hoc arbitration, Partial Final Award, 6 August 2021, para. 106.
[18] Preble-Rish Haiti SA v. Republic of Haiti, Bureau de Monétisation de Programmes d’Aide au Développement, ad hoc arbitration, Partial Final Award, 6 August 2021, para. 108.
[19] Preble-Rish Haiti SA v. Republic of Haiti, Bureau de Monétisation de Programmes d’Aide au Développement, ad hoc arbitration, Partial Final Award, 6 August 2021, para. 119.