Progas Energy Ltd v The Islamic Republic of Pakistan (Rev 1)

Security for costs under section 70(6) of the Arbitration Act 1996 depends on whether it is just to protect the respondent against the risk that a costs order will not be satisfied. A non-contractual assurance from a litigation funder does not constitute an asset available to the claimant and does not replace proper security.

Security under section 70(7) serves a narrower purpose. It protects enforcement of an award where the challenge prejudices enforcement, ordinarily through a demonstrated risk of dissipation or comparable diminution of assets. The provision must not be used to improve the award-holder’s position, circumvent ordinary enforcement, or impose special conditions merely because the challenger is commercially funded.

The claimants, three companies incorporated in Mauritius, brought section 68 proceedings challenging arbitration awards dismissing their investment-treaty claims against Pakistan and awarding Pakistan its costs. Pakistan applied for security for the costs of the section 68 proceedings under section 70(6) of the Arbitration Act 1996.

Pakistan also sought an order under section 70(7) requiring the claimants to secure the costs awarded by the arbitral tribunal, together with interest, pending determination of the challenge. The claimants were funded by Pensacola Investments Ltd, a subsidiary of Burford Capital Ltd. Burford had issued non-contractual letters indicating that it would ensure payment of any adverse costs order up to £482,029.19.

The issues were whether security for the proceedings should be ordered and whether the tribunal’s costs award should be secured because of the challenge, the claimants’ financial position, or the involvement of a commercial funder.

1. Section 70(6). The court ordered security for costs of £400,000, payable into court or by an appropriate bank or other guarantee. The governing question was whether security was just under the overriding objective in CPR Part 1. The claimants could not rely on their rejected arbitration case to establish that Pakistan had caused their impecuniosity, and there was no sufficient basis for treating the challenge as likely to succeed or as being stifled.
2. The Burford letters did not create a contractual obligation owed to the claimants or Pakistan and were not enforceable undertakings to the court. They therefore did not give the claimants assets which they had or which were readily available for enforcement. The possibility of a later non-party costs order under section 51 of the Senior Courts Act 1981 was not functionally equivalent to advance security. Security exists to provide prompt and reliable protection before costs are incurred.
3. Section 70(7). The application to secure the tribunal’s costs award was dismissed. In a section 68 case, it was unnecessary to show that the challenge was flimsy. However, the applicant still had to show that the challenge prejudiced enforcement of the award or diminished the claimant’s ability to honour it. Ordinarily that required evidence comparable to that needed for a freezing injunction, such as a risk of dissipation.
4. The evidence showed no dissipation. Delay, absence of assets in the United Kingdom or a Regulation State, non-payment of the award, and uncertainty about the claimants’ finances were insufficient. Section 70(7) could not be used as a substitute for enforcement under section 66 or to place the award-holder in a better position merely because the challenge was funded.
5. Commercial funding did not create a special rule. The court would not import into section 70(7) the non-party costs principles applicable under section 51 or CPR 25.14. The formal orders were security for costs of £400,000 under section 70(6), and dismissal of the section 70(7) application.