It was recently reported that an ICSID Tribunal ordered US oil company RSM to post security for costs in what is thought to be the first decision of its kind in RSM Production Corporation v. Saint Lucia, ICSID Case No. ARB/12/10.
RSM was forthcoming about the existence of a third party funding agreement for its own legal fees. The use of third party funding by investors in claims against a sovereign has become more prevalent in recent years as a tool used to level the playing field between investors and sovereign states. However, in this case the Tribunal were concerned that the funder would not comply with a cost order:
“The admitted third party funding further supports the Tribunal’s concern that Claimant will not comply with a costs award rendered it against it, since, in the absence of security or guarentees being offered, it is doubtful whether the third party will assume responsibility for honouring such an award. Against this background, the Tribunal regards it as unjustified to burden Respondent with the risk emanating from the uncertainty as to whether or not the unknown third party will be willing to comply with a potential costs award in Respondent’s favour.”
Legal press have suggested that this will cause concern amongst third party funders and that they may be deterred from funding BIT cases as a result. However, all is not lost from the funded investor’s perspective. If a tribunal does in fact allow a security for costs application, there may be an alternative resolution to the funder or the client having to post security for costs. In this scenario, the client should consider obtaining an adverse cost insurance policy that would pay the opponents’ costs if the case is unsuccessful. As an ATE insurance policy contains voidance rights the policy itself may not be sufficient to satisfy an application for security. As such, the client could approach the ATE insurer to obtain a deed of indemnity.
An investor may be able to satisfy a security for costs order by obtaining a deed of indemnity from an A-rated ATE insurance provider. In the case of Verslot Dredging BV v HDI Gerlin Vericherung AG  EWHC 581 (Comm) the English High Court held that the deed of indemnity from the ATE insurer in question was as good as a bank guarantee from a first-class london bank.
A deed of indemnity can generally only be purchased from an ATE insurer that has insured the adverse cost risk, rather than being purchased as a standalone guarantee. If a deed is required, then the client usually has to pay an additional payment, rather than the cost of the deed being wrapped into the premium. The average cost of a deed of indemnity from an ATE insurer is 10-15% of the amount of security. It’s worthwhile noting that not all ATE insurers are able to provide a deed of indemnity, so this is an important point to consider when selecting an ATE insurance provider if a security application is likely to be made by the other side.
Many clients are now turning to ATE insurance to cover own sides fees rather than engaging a third party funder. The cost of an ATE insurance policy is far cheaper than the cost of funding, where the funders will expect a significant percentage of damages in return for providing cash flow.
If you would like to discuss the possibility of obtaining an ATE insurance policy or a deed of indemnity for a client involved in bi-lateral investment treaty proceedings, please contact Matthew Amey or Carolyn Holmes on 0845 257 6058.