Unlike other sectors, the financial sector has been reluctant to embrace international arbitration for resolving finance disputes. The ICC Commission on Arbitration and ADR created the Task Force on Financial Institutions to study the concerns of financial institutions. The study’s findings were published in a report in December 2016. This article builds on the findings of said report and provides an update on the status of international arbitration in the financial sector.
By Thomas Werlen / Jascha Trubowitz (Reference: CapLaw-2018-31)
1) Awareness of international arbitration within the financial sector
The financial sector has always lagged behind other sectors, such as construction, energy and insurance, in choosing international arbitration to resolve finance disputes. A 2013 Survey by Queen Mary University of London found that the sectors construction and energy prefer to use international arbitration in 56% resp. 68% of disputes, while the financial sector’s preference stood at 23% (by contrast preference for litigation stood at 82%).
The ICC Commission on Arbitration and ADR (the Commission) established a task force, the Task Force on Financial Institutions and International Arbitration (the Task Force), to determine why the financial sector has been reluctant to use international arbitration. After a two-year study, which included interviews with about 50 financial institutions and information from 13 arbitral institutions, the Task Force released a report in December 2016 (the Report). The key discovery of the Report was that financial institutions are not inherently opposed to international arbitration. In fact, they do use international arbitration to resolve finance disputes but not on a consistent basis or on a large scale (p. 2 of the Report). As identified in the Report, it appears that financial institutions have common misconceptions about the arbitration process and lack an overall awareness of the benefits of international arbitration.
The interviews with the financial institutions revealed that many of these have had a general lack of awareness about international arbitration, which can be attributed to the financial institutions having had little or no exposure to international arbitration (p. 8 of the Report): 70% of the interviewees were not aware of whether their financial institution had been involved in any international arbitration proceedings within the last five years. 24% of the interviewees had used international arbitration in at most five percent of their disputes, while only six percent of the interviewees used it in more than five percent of their disputes.
2) The key issues raised by skeptical financial institutions
The lack of exposure to international arbitration has certainly played a key role in the skepticism financial institutions have shown towards international arbitration. While financial institutions have been skeptical about specific issues, they also have common misgivings shared by other sectors (p. 10 of the Report):
- Setting precedents: For financial institutions, it is essential that they can count on precedents as to ensure predictability and legal certainty. They fault international arbitration for the lack of transparency and available mechanisms for setting precedents.
- Interim measures: Many financial institutions believe that interim measures cannot be obtained through arbitration.
- Costs: Misgivings about costs have been a perennial criticism of international arbitration and not limited to the concerns of financial institutions.
- Summary/default awards: Financial institutions strongly favor rapid adjudication of claims in open-and-shut cases. The absence of summary/default awards in international arbitration is particularly concerning to financial institutions.
Although financial institutions remain skeptical about international arbitration, there are, nonetheless, global forces driving the need to reevaluate or at least reconsider the use of international arbitration for finance disputes.
3) The financial sector has gone global – can litigation keep pace?
Historically, London and New York have served as the world’s preeminent financial centers. This has allowed the local courts in those jurisdictions to develop expertise in resolving finance disputes and thus ensure legal certainty for the financial institutions operating there. Financial institutions have therefore overwhelmingly litigated their finance disputes before courts in London and New York.
However, financial institutions are no longer only clustered in those two jurisdictions. According to the 2018 S&P Global Market Intelligence Report: Of the 100 largest banks in the world (in terms of assets) 18 are Chinese (four of these take the top positions in the ranking), eight are Japanese, six are South Korean, three are Singaporean and one is Indian.
The globalization of the financial sector raises a number of practical questions for the suitability of litigation in the financial sector. Court decisions are no longer only enforced in London and New York but increasingly all over the world. It is also difficult to ensure consistent interpretation of financial contracts across the globe through
litigation, as judges in different jurisdictions may not have the same expertise and training to resolve finance disputes. In this regard, it is also unclear how one can ensure the availability of expertise beyond the financial centers of London and New York. Thus, it is questionable whether finance disputes can still be resolved effectively through litigation in a globalized financial sector.
4) International arbitration is suited to the needs of the globalized financial sector
While financial institutions have shown much skepticism in the past about using international arbitration, attitudes will naturally have to shift given the globalization of the financial sector. International arbitration is, unlike litigation, well suited to the challenges that globalization presents to dispute resolution. In addition, many of the issues raised by financial institutions have either been addressed or can be resolved by using international arbitration:
- Enforcement: Thanks to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (known as the New York Convention) financial institutions may enforce arbitration awards in more than 150 jurisdictions across the globe representing every commercially important country.
- Transparency: For certain areas, such as derivatives and the loan and bond market, transparency is key to developing a consistent body of law. Arbitration institutions have a solution for this. P.R.I.M.E Finance and the International Chamber of Commerce may publish redacted awards, insofar no party expressly prohibits it.
- Interim measures: Most arbitration institutions also have arbitral rules in place that provide for an emergency arbitrator that may grant interim measures.
- Expert adjudicators: Disputes involving questions about complex financial markets require expert decision makers. International arbitration allows financial institutions to appoint arbitrators with the specific expertise and knowledge in banking and financial markets.
- Summary/default awards: Through an arbitration agreement, financial institutions can tailor the arbitration procedure to the specific needs of a transaction. If quick adjudication is required, the arbitrators may be empowered in the arbitration agreement to decide on a summary basis.
- Costs: The length of the arbitration proceeding can be a major cost-factor. Time limits could be specified in the arbitration agreement to reduce costs.
5) Arbitration institutions are leading the way
Arbitration institutions have made preparations for administrating finance disputes and are thus confident that financial institutions will begin to turn to international arbitration more often. In 2012, the arbitration institution P.R.I.M.E. Finance was established. It is solely specialized in the settlement of finance disputes. In 2018, the Hong Kong International Arbitration Centre launched its panel of expert arbitrators for financial services disputes. Hence, there are efforts in the arbitration community to align international arbitration to the needs of financial institutions.
Progress is, albeit slowly, being made to persuade financial institutions of the benefits of international arbitration. A 2018 International Arbitration Survey conducted by Queen Mary University of London with White & Case (the Survey) found that 56% of the respondents to their survey anticipated an increase in the use of international arbitration in the financial sector. The Survey also reported that arbitration institutions are eager to enhance their rules to reflect the needs of the financial sector.
Thomas Werlen (thomaswerlen@quinnemanuel.swiss)
Jascha Trubowitz (jaschatrubowitz@quinnemanuel.swiss)