SECURITY FOR COSTS

by Brian Fender FRIBA FRICS FCIArb MAE

One of the more significant changes brought in by the Arbitration Act is the transfer to the arbitrator of the duty of dealing with applications for security for costs. Under the principles of party autonomy it also gives a considerable degree of power to the parties to decide how they want their arbitration run. So, the parties can, by agreement between themselves, decide that he shall not have these powers; although if they do so, no one has them. Assuming that they have not done this he has powers as set out in Section 38. The relevant part is sub-section 38(3) which says

(3) The tribunal may order a claimant to provide security for the costs of the arbitration. This power shall not be exercised on the ground that the claimant is - (a) an individual ordinarily resident outside the United Kingdom, or (b) a corporation or association incorporated or formed under the law of a country outside the United Kingdom, or whose central management and control is exercised outside the United Kingdom.There are often good reasons for making applications for security although in the past they have also been used as a delaying tactic in the hope of pushing a financially embarrassed claimant into bankruptcy. The arbitrator has to weigh the issues very carefully; and satisfy himself that there is proper reason for ordering security. It is important that he gets the balance right if the commercial world is to continue to have faith in the arbitration process.

So what are the principles that should guide him?

There are two things to consider: Firstly, the General Principles of Arbitration enunciated at Section 1 of the Act, namely:

1. The provisions of this Part are founded on the following principles, and shall be construed accordingly (a) the object of arbitration is to obtain the fair resolution of disputes by an impartial tribunal without unnecessary delay or expense; (b) the parties should be free to agree how their disputes are resolved, subject only to such safeguards as are necessary in the public interest; (c) in matters governed by this Part the court should not intervene except as provided by this Part.Secondly, the principles upon which orders for security are normally given. These are not set out in the Act, and the arbitrator appears to be unfettered in his jurisdiction, for words in earlier drafts requiring him to exercise these powers on "the same principles as the Court", have not been included in the published Act. Nevertheless he would be well advised to have regard to those principles. These are contained in:

Order 23 of the Rules of the Supreme Court which gives the court power to order a plaintiff to provide security if

(i) the plaintiff is ordinarily out of the jurisdiction; ( which rather insular power is specifically denied to arbitrators by Section 38(3) of the Arbitration Act 1996 ); or

(ii) the plaintiff is a "nominal" plaintiff suing on behalf of another person and there is reason to believe he will be unable to pay the costs of the defendant;

(iii) the plaintiff has changed his address with a view to evading the consequences of the litigation.

Section 726(1) of the Companies Act 1985 is the provision that arbitrators will have to consider most frequently. This says:

"Where in England and Wales a limited company is plaintiff in an action or other legal proceedings, the Court having jurisdiction in the matter may, if it appears by credible testimony that there is a reason to believe that the company will be unable to pay the defendant's costs if successful in his defence, require sufficient security for those costs, and may stay all proceedings until the security is given."

It should be noted that this provision refers only to limited liability companies. It is aimed at those whose assets are limited. A plaintiff, who is trading as a limited liability company can put a Defendant to considerable cost which he, the Plaintiff, with little or nothing by way of assets in his company can avoid paying, if he loses, simply by winding the company up. The power given in Section 726 is designed to prevent this abuse. So, whilst the arbitrator's discretion under the Arbitration Act is wide, he should only exercise this power if it is shown by credible testimony that there is a significant risk that this will happen. It will be up to the Respondent to show that this is so; but it is not only necessary to show that the company has insufficient assets, but also to satisfy the court, or in our case the arbitrator, that the company does not have the earning capacity to meet the costs of the action. It would be wrong to make an order for security if the company in question had a turnover and potential for profit well in excess of the anticipated costs.

There is, or should be, no problem if the person effectively running the company has sufficient assets in his own name even if there are only nominal assets in the company. In such cases an order for security is clearly reasonable, for the effective Claimant, if he believes in his claim, can give the security personally. It is more difficult when the effective Claimant cannot do this and the reason for his company's impecuniosity is claimed to be simply because the Respondent owes him money. This is unlikely to be apparent on the face of it if the Respondent is alleging that he has a valid counterclaim that justifies non payment.

So how can the arbitrator decide?

Case law does not help a lot. In Sir Lindsay Parkinson & Co Ltd v Triplan Ltd (1973) (reported elsewhere in this issue) Lord Denning referred to seven points that have to be considered, but the arbitrator will be unable to decide on most of them without hearing the case. It is then too late. Even his third one - about an admission that money is owing - is unlikely to occur except in conjunction with a counterclaim. This presents the same difficulty. But number 7 - about late applications - should be noted.

It would clearly be unconscionable to let the claimant spend a substantial sum on advancing his case only to burden him with an order for security which he might not be able to meet after he had laid out that money.

The question of offers at point (4) raises other difficulties. It is considered undesirable, indeed unwise, to disclose the amount of any offer to either judge or arbitrator lest this influence the sum awarded. Offers to settle are often pitched higher than is thought to be justified by the offerer, merely to write out the risk of being saddled with the costs as well. Or again, offers are often accepted at a lower figure than is thought to be due, for the same reason. There are tactical reasons for doing either. If the arbitrator knows the amount, he may be inclined to view that sum as the offerer's estimate of the true value of the claim, when in reality it is nothing of the sort, and to let that belief colour his judgement. It is generally thought better that the arbitrator make his award, not knowing how much has been offered, for the parties will then know that they have only their own judgement to blame for the outcome of the costs lottery. It is therefore probable that parties wishing to make offers will continue to make them as sealed offers to be opened after the final award. This practice should not be discouraged for it is soundly based, but it does mean that the arbitrator will get no assistance from the offer in deciding whether or not to make an order for security for costs. On the other hand there is nothing to prevent a claimant disclosing an offer to settle that he has made himself if he thinks that by so doing he may be able to save himself from being saddled with an order for security that he cannot meet.

So the upshot is that in most cases it comes back to the simple issue of whether the Claimant can be expected to meet the Respondent's costs if he loses, or not. There will be cases where the arbitrator is satisfied that he cannot. In those cases he can and should order security.

As in the Courts, if a limited liability Claimant cannot provide security when ordered, he will be unable to pursue his claim. (There may even be cases where this applies to a private individual, but these will be much less common ). However there is a ray of hope in Section 1 of the Act for this requires the arbitrator to seek the fair resolution of the dispute without unnecessary delay or expense, and may give scope for imaginative management, in line with the spirit of the Woolf Report. In borderline cases the arbitrator may be able to investigate with the parties the possibility of restricting costs by separating preliminary issues which appear to be nub of the case and which will, if decided in the Claimant's favour, eliminate or reduce the amount of security he has to provide. There may also be cases where it seems appropriate to set a limit on the amount of security that he will order; this could apply where it appears that a Respondent is attempting to crush the Claimant with the threat of elaborate legal and expert representation that the arbitrator does not believe to be justified. Indeed, some disputes are sufficiently trivial to lead the arbitrator to believe that legal representation is not justified at all. Although Section 36 of the Act gives the parties the right to legal representation, which cannot be denied, this may be seen as an unnecessary luxury in terms of the amount of security that an arbitrator should order.

Arbitrators are going to have to acquire a sense of balance in these matters that, if wisely applied, will help reinforce the notion that arbitration is an appropriate and effective way of settling disputes. We have it in our hands to see that this remains the view of the commercial world.

Power of Judge to Intervene in Ongoing Arbitration

Her Honour Judge Jean Graham Hall LLM (London) FCIArb

A recent case, reported in The Times (8.10.96) with the above headline, should bring cheer and comfort to our colleagues who harbour the fear that courts interfere only too readily with the powers of arbitrators. Mr Justice Morrison held that a High Court Judge could intervene in the interlocutory stages of an arbitration by remitting a matter to the arbitrators, although he refused to do so on an application of Flatamentos Maritmos SA (a) for the removal of the arbitrator of their arbitration against Effjohn International BV and (b) an order setting aside his decision as to directions or alternatively remitting the matter for a fresh decision. Mr Justice Morrison stated that the power to intervene would be used only in rare cases, because courts respected the autonomy of arbitrators.

This case gives some indication of the future attitude of the courts when called upon to exercise jurisdiction under section 24(1) of the Arbitration Act 1996. By that section, a party to arbitral proceedings may apply to the court to remove an arbitrator on the grounds that, inter alia, s/he has refused or failed to properly conduct the proceedings.

Under current legislation, the court has jurisdiction to remove an arbitrator who has 'misconducted himself in the proceedings'. Mustill and Boyd, (Commercial Arbitration. Second Edition. Butterworths. 1989. p.530) point out that this undoubtedly covers all instances of what would ordinarily be understood as misconduct in the course of the reference: 'It also embraces situations in which although the arbitrator has not necessarily acted unfairly, he has allowed himself to get into a position where unreasonableness be suspected or foreseen.' The learned authors comment that the fact that the court is given a wide power to remove the arbitrator in cases of misconduct does not mean that the power will be freely exercised.

The Arbitration Act 1996, in its preamble, purports to restate and improve the law relating to an arbitration agreement, and section (1)(6) sets out the matters in which the court should not interfere except as provided by the Act. In making decisions and giving judgments on applications under section 24 it would be unthinkable that the Court would construe its duty otherwise than in accordance with case law precedent even although this was decided under a previous Act which spelt out similar authority.

The power of a Judge to intervene in ongoing leglislation and the exercise of that power will, according to the rules of the construction of statutes, remain as it is at the present time.