Report: ICC Task Force on Financial Institutions and International Arbitration Much has been said about the trend towards arbitrating disputes across a range of business sectors. The banking and financial services industry has been an exception, as litigation remained the preferred method of dispute resolution.1 Yet, following the global financial crisis, and the growth of complex cross-border financial transactions, arbitration’s utility for banks and financial institutions may be worth reassessing.

A Task Force on Financial Institutions and International Arbitration set up by the ICC Commission on Arbitration and Alternative Dispute Resolution (the Task Force) has done just that. Its report, issued on 9 November 2016 (the Report), throws a spotlight on arbitration in banking and finance disputes. Recognizing that different sub sectors of banking and finance are not homogenous, the Report reviews the status quo and considers the potential for arbitrating disputes arising out of a range of activities including derivatives transactions, sovereign lending, international finance and Islamic Finance.

Several key questions frame the crucial aspects of arbitrating banking and finance disputes.

What is changing?

As the Report notes, recent developments in arbitration bolster its suitability for the financial institution sector:

  • Several arbitral institutions now provide for streamlined procedures that enable parties to resolve financial disputes within shorter timeframes. These include the China International Economic and Trade Arbitration Commission (CIETAC)’s revised Financial Disputes Arbitration Rules, which stipulate condensed timelines for appointing arbitrators, submitting written arguments, and issuing final awards in financial disputes.
  • Some arbitral institutions are now making express provision in their procedural rules empowering the arbitral tribunal to make an order for summary dismissal of a claim or defence that is manifestly without merit. This has long been considered to be the exclusive preserve of the courts and a key benefit of litigation over arbitration. The Singapore International Arbitration Centre has done so in its 2016 Rules. The Stockholm Chamber of Commerce is considering a similar provision for its 2017 Rules.
  • Institutions have been set up to cater to the need for arbitrators with technical expertise to resolve complex disputes that require sector-specific knowledge. A new arbitral institution called the Panel of Recognized International Market Experts in Finance (PRIME Finance) has recently been established to resolve disputes and to assist judicial systems in the resolution of disputes concerning complex financial transactions. PRIME Finance maintains a list of arbitrators with financial as well as legal expertise that parties can draw from when appointing an arbitral tribunal, but does not bind parties to choosing arbitrators from this pool.
  • Industry-specific measures also facilitate the use of arbitration, most notably in the derivatives space. The International Swaps and Derivatives Association’s 2013 ISDA Arbitration Guide offers model arbitration clauses for ISDA Master Agreements, providing an alternative to litigation before the courts of England and New York.

In which geographical regions is arbitration beneficial?

Arbitration is increasingly opted for in light of the geographical regions involved in financial transactions. Where counterparties or projects and assets are located in jurisdictions where there is low trust in or familiarity with the court system, arbitration may be preferable to litigation. Financial institutions are increasingly choosing arbitration over litigation for transactions involving counterparties from emerging markets, such as in Asia and the Pacific region, in Latin America, Africa and the Middle East. The Report notes in particular that in project financing transactions, the location of the financed project assets and the place or origination of the cash flows used to repay lenders, and the location of public entities granting licenses or approvals, are central to a decision to arbitrate.

When dealing with counterparties from emerging markets, enforceability may also be a consideration. This is one key advantage of arbitration over litigation: arbitral awards are enforceable in most states around the world under the New York Convention, while the international enforcement of court judgments can be less straightforward.

Indeed, this issue is not necessarily restricted to emerging market jurisdictions. To date, the enforcement of court judgments within the EU has benefited from the Brussels I Regulation (as recast in 2015), but following Brexit there is some uncertainty as to its future application (or what might replace it) in relation to UK court judgments.

With which counterparties would arbitration be preferable?

Having a sovereign counterparty can tilt the balance in favour of arbitration. A range of financial institutions, including regional international financial institutions and export credit agencies, expressed a preference for arbitration where they faced sovereign counterparties. Investor-State arbitration pursuant to bilateral investment treaties (BITs) has also been used to resolve a range of disputes, including several arising out of hedging agreements and sovereign debt products.

The Report encourages financial institutions to consider what rights they may have under BITs in respect of transactions and commercial relationships to which they are a party. There are currently more than 3,000 BITs which together protect investments in most states around the world, and recent case law has confirmed that financial instruments may qualify as investments for this purpose.

 Where counterparties are consumers, however, financial institutions’ access to arbitration may be circumscribed. Restrictions come in varied forms, including arbitration agreements being enforceable only if concluded after a dispute has arisen or in relation to particular types of transactions, or if they were specifically negotiated, rather than part of a standard-form contract.

For which financial products is arbitration the optimal choice?

As the Report notes, the parties’ ability to tailor arbitration proceedings to the dispute at hand may be particularly attractive for certain products/activities within the financial institution sector. For example:

  • Arbitration is seen as an optimal choice where a financial transaction is complex; possibly less so in cases of straightforward lending transactions giving rise to simple debt claims. This is reflected in the growing number of arbitrations relating to disputes under derivatives transactions.
  • Project finance often involves parties or security subject to the jurisdiction of courts feared to be ill-equipped to resolve disputes that may arise. Transactions in this sector benefit from the use of arbitration. A majority of Development Finance Institutions surveyed opt for arbitration in lending operations with borrowers active in developing countries.
  • Arbitration may be preferable to litigation where financial institutions are providing advisory services to clients (e.g. in the context of an M&A transaction), as confidentiality is frequently a key consideration when disputes arise.

What next?

Moving forward, arbitration’s flexibility can play a key role in expanding which sectors it benefits. Existing arbitral rules can be tailored to suit the specific sector and dispute at hand. While confidentiality is often cited as an advantage in arbitration, the Report notes that the need for precedent trumps the advantage of confidentiality where a large degree of standardization is sought. Yet, parties can have confidential proceedings while permitting publications of the award with identifying material redacted. This allows a body of case law to be established, while maintaining parties’ confidentiality.

There are a range of challenges posed by banking and finance disputes. It is critical to have counsel well-equipped to advise you on whether to opt for arbitration or court litigation, and how to navigate a dispute which has arisen. As the market leaders in international arbitration, and with a dedicated Financial Institutions Disputes Group within our Dispute Resolution practice, Freshfields has extensive experience across the spectrum of banking and financial disputes. We would welcome the opportunity to discuss the Report with you to understand whether its observations and recommendations are consistent with your own experience. It would also be interesting to consider the areas of your business where arbitration might or might not be an attractive option.