In this post, MARIJA SOBAT, questions the principle of ‘pay-your-own-way’ applied to allocation of costs in summary proceedings under ICSID Rules.
Rule 41 (5) came to life with the 2006 amendments to the ICSID Arbitration Rules. It is beyond the scope of this post to delve in great detail into the Rule itself. It suffices here to say that the provision was introduced to allow a party to raise an objection in limine litis that a claim is “manifestly without legal merit” and to ask a tribunal to summarily dismiss such patently frivolous claim by a reasoned award. The rationale behind this Rule was, among other things, to shorten duration of the proceedings and reduce the costs where a party is bringing a patently frivolous claim. It is interesting to see how ICSID tribunals, which confirmed frivolity of the claim, had decided on allocation of costs (Trans-Global v Jordan, Global Trading v Ukraine, RSM Production v Grenada) and what impact these decisions may have on the future application of the Rule. In this post I will explain how the proper allocation of costs in summary proceedings could influence on reducing the number of manifestly frivolous claims brought before the ICSID tribunals.
According to Article 61 (2) of the ICSID Convention and Rule 28 of the ICSID Arbitration Rules, in the absence of the parties’ prior agreement, ICSID tribunals have discretion to decide about allocation of costs of the proceedings between parties. In the vast majority of cases, the ICSID tribunals followed “pay-your-own-way” approach. The exception to the rule, ie, allocation of the costs to the loser of the proceedings, occurred in those cases where the tribunals established that a claim was manifestly without legal merit or observed bad faith from a party.
For instance, in AES v Hungary, the Tribunal stated that since “no frivolous claim was filed in the proceedings and that no bad faith was observed from the parties […] each party shall bear its own costs and expenses and share equally in the costs and charges of the Tribunal and the ICSID Secretariat.” In CDC v Seychelles, the circumstances of the case led the ICSID annulment committee to award all the costs of ICSID proceedings, as well as the claimant’s claimed costs to the respondent. The Tribunal was driven to such decision by the conclusion that the Republic’s case “was fundamentally lacking in merits.” In Phoenix v Czech Republic, the Tribunal after stating that “initiation and pursuit of this arbitration is an abuse of the international investment protection regime under the BIT, and consequently, the ICSID Convention”, awarded the costs to the defendant. Similarly, in Saba Fakes v Turkey, the Tribunal ordered the Claimant to pay not just its own legal costs and expenses but the legal costs and expenses of the Respondent as well as arbitration costs. The Tribunal stated that: “[a] party pursuing the claim which is clearly outside the scope of the Center’s jurisdiction should not be encouraged and should bear the risk to paying the full costs of such frivolous proceedings.” In Europe Cement v. Turkey, the Tribunal awarded to Respondent full costs together with the Respondent’s share of the cost in the arbitration after concluding that “the claim to jurisdiction is based on an assertion of ownership which the evidence suggests was fraudulent.”
Therefore, there is an apparent trend among the tribunals in ordinary proceedings to condition application of the “pay-your-own-way” approach by finding a manifestly frivolous claim, fraudulent behavior, abuse of process or bad faith, or initiation of “frivolous proceedings.”
By analogy, the same should apply in summary proceedings initiated under Rule 41 (5), and the tribunals who find a claim “manifestly without legal merit” should order a party who brought frivolous proceedings to bear all the costs and expenses of such proceedings. However, the practice of the Tribunals which had already dealt with the 41 (5) objection was not completely coherent.
On the one hand, the Trans Global Tribunal and the RSM Production Tribunal applied the “costs should follow the event” approach. Furthermore, the Trans-Global Tribunal was of the opinion that “[t]he introduction of Article 41(5) may have been prompted (in part) by the perception held by certain states that a respondent could not expect to recover its costs from the claimant even where the respondent’s case prevailed completely at the end of lengthy and expensive legal proceedings.” However, the practice of allocating the costs of the proceedings to a party which brought a manifestly frivolous claim before an arbitral tribunal, as seen before, was not unknown in ICSID forum even before Rule 41 (5) was introduced. The Global Trading Tribunal, on the other hand, took a different approach and stated that: “[g]iven the newness of the Rule 41(5) procedure and given the reasonable nature of the arguments concisely presented to it by both parties, that the appropriate outcome is for the costs of the procedure to lie where they fall.”(emphasis added)
What are the possible consequences of the Global Trading decision on the application of the Rule? Counsels dealing with manifestly frivolous claims have 2 possibilities. One would be to raise 41 (5) objection, minimize the costs of the proceedings but risk to share costs with a party which brought manifestly frivolous claim. The other would be not to raise 41 (5) objection, enter in the ordinary proceedings, which will necessarily be longer and more expensive than the summary proceedings, but expect to recover all the costs from the Claimant if the claim proves to be patently unfounded.
It bears noting that in Saba Fakes case, the costs of the proceedings were $2 million and in Europe Cement $4 million (therefore acceding by far costs of Trans-Global or RSM Production proceedings). In both cases the claims failed as manifestly without legal merit at the end of the ordinary proceedings and both cases were registered with the ICSID after the enactment of Rule 41 (5). With this in mind, one may argue that counsels in these cases opted for the second possibility discussed above. Moreover, 41 (5) objection was raised in only 4 cases until the date. It is true that the Rule should be invoked in only exceptional cases, but Saba Fakes or Europe Cement were certainly of a nature that would justify application of Rule 41 (5).
It remains to be seen how the future Tribunals dealing with 41 (5) objection will assess the issue of costs. The correct way to increase the efficiency of the proceedings and prevent further frivolous claims is to penalize the party that is obviously misusing the arbitral tribunal by bringing a manifestly frivolous claim by ordering such party to pay all the costs of frivolous proceedings that it had initiated. It should make no difference whether the proceedings are initiated as ordinary or summary. This approach will hopefully prevent future parties of bringing legally untenable actions before the ICSID tribunals.