International arbitration and financial institutions – why do financial institutions generally avoid arbitration?

It is generally accepted that arbitrations are flexible, faster and cheaper than litigating in courts. Despite this, financial institutions have traditionally preferred national courts in key financial centres (such as New York) but have sought to avoid the courts in emerging markets. The International Chamber of Commerce Commission (ICC) recently carried out a study on the perceptions and experiences of financial institutions in international arbitration.

19 Sep 2018 3 min read Dispute Resolution Alert Article

The ICC interviewed approximately 50 financial institutions and examined a broad range of banking and financial activities, whether undertaken by licensed banks or by funds (equity, investment or sovereign wealth). The study focused on arbitration in, among other areas, derivatives, sovereign lending, regulatory matters and international financing trade finance.

The ICC identified the following issues as the primary hurdles preventing financial institutions from using international arbitration:

a)     Interim measures

Financial institutions are concerned with the fact they may not be able to obtain interim and urgent relief before an arbitral tribunal is constituted. In remedy of this, the ICC rules now provide for the appointment of an emergency arbitrator.

b)     Summary/default awards

The perceived inability of tribunals to issue a default judgment in the event of a party failing to appear before the tribunal is viewed as a disadvantage in terms of both cost and efficiency. Arguments have been raised that this may be overcome if parties agree and expressly authorise the tribunal to dispose of the matter by default.

In the absence of such authorisation and agreement between the parties, any party may petition the tribunal to use its powers as conferred by the applicable law or institutional rules to deal with a claim in an expedited manner. It is generally accepted that the tribunal may proceed with a case even if a party fails to participate, provided that party has been properly notified of the arbitration.

c)     Consolidation

Financial institutions expressed concern over the risk of finding themselves involved in several parallel, albeit related, proceedings. Article 10 of the ICC Rules allows for a consolidation of pending separate arbitrations. However, consolidation will not be imposed or required where the economic rationale underlying the banking transaction militates in favour of isolating the transaction from the related group of contracts. This would be the case, for instance, in the context of project finance where the project company’s obligation to repay the lenders is not expected to be impacted by the performance of the contract, absent an agreement or specific circumstances to the contrary.

d)     Precedents

Financial institutions consider the lack of precedent to be a disadvantage of arbitration. The ICC and other arbitration institutions do regularly publish awards, but these awards are usually redacted in order to avoid disclosure of sensitive information, thus preventing the creation of full and complete precedents.

e)     Costs

In some jurisdictions arbitration is viewed as more expensive than litigation. However, to effectively manage their proceedings and reduce costs, the parties may adopt one or more of the techniques suggested in the Commission’s report Controlling Time and Costs in Arbitration. (Parties have the autonomy to arrange time frames.)

f)     Lack of transparency

Some interviewees expressed concern over the lack of transparency in arbitration and, more specifically, the perception of arbitration as an exclusive club. To try and deal with this growing concern, the ICC has decided to publish the names of all sitting arbitrators in cases filed after 1 January 2016, provided that the parties consent.

g)     Insolvency and enforcing security interests

An arbitral tribunal cannot commence an insolvency proceeding or disregard a court order concerning the commencement of such a proceeding. Nor is it entitled to appoint an insolvency administrator or consider whether the assertion of a claim by a creditor before the arbitral tribunal dispenses with the need to file that claim with the court appointed insolvency administrator.

However, contractual claims that are not impacted by the stay imposed by the insolvency proceeding are clearly arbitrable, even if the award were to impact the validity or the amount of such claims. For instance, an arbitral tribunal has jurisdiction to rule on the issue of whether the claim of a bank against a borrower is due, even if the borrower is the subject of an insolvency proceeding.

As a dispute resolution mechanism, international arbitration has grown, evolved and adapted to become the solution required by financial institutions to swiftly and effectively resolve disputes.

Financial institutions are enjoined to consult an international arbitration expert before deciding on a dispute resolution mechanism to govern a contract.

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