Financial Institutions and Arbitration - ICC Commission on Arbitration Releases Report

The ICC Commission on Arbitration Task Force released today its multidisciplinary report Financial Institutions and Arbitration (the Report). The Report addresses how banks and financial institutions (and their clients) can use arbitration for efficient and effective resolution of what can be complex disputes. Lowndes Jordan litigator Tim Lindsay is a member of the Task Force and led the Sovereign Finance work stream.

What is arbitration?

It is useful to start by noting the important similarities, but equally important differences, between arbitration and litigation.

Arbitration, as with litigation, is an adversarial system of dispute resolution. Formal claims are made, lawyers advocate their clients’ positions in written and oral submissions, and evidentiary hearings during which the cross-examination of witnesses and experts is conducted is the norm in international practice. The arbitrators, as do judges, then make factual findings and determine the dispute in accordance with legal principles, typically in a reasoned award. Arbitration is not mediation or conciliation, where a mediator or conciliator will seek to broker a negotiated settlement between the parties in dispute.

In contrast to litigation, however, arbitration is not public, disputes are not adjudicated by judges and hearings are not conducted in a court. Arbitration is a private process, disputes are heard before and determined by independent arbitrators (typically with specialised legal expertise in the subject matter of the dispute, appointed by the parties) and arbitration hearings are held in hearing rooms at arbitration institutions or board rooms at law firms and, often, hotels. Procedural flexibility, informality and efficiency are the hallmarks of arbitration practice, unlike the rigid, formal and often inefficient procedures of most court systems.

The Report and the Task Force's recommendations

The Report addresses the historical usage of arbitration by financial institutions, the potential benefits of commercial arbitration in banking and financial matters and some common misconceptions about the process. As regards the latter, the Report answers oft-cited concerns of banks and financial institutions regarding arbitration such as the ability to obtain interim measures, absence of summary and dispositive procedures, consolidation and joinder and the precedent value of published judgments.

Important from a practical perspective, the Report includes a series of detailed recommendations for tailoring the arbitration procedure to suit the needs of the banking and finance sector. Key recommendations that banks and financial institutions will wish to consider include:

  • Interim measures: Under the ICC Rules of Arbitration (as with all other leading arbitral rules and the Arbitration Act 1996), prior to the constitution of an arbitral tribunal parties can seek interim relief from national courts. Once the tribunal is in place, it has the same powers as a court to order interim relief.
  • Emergency arbitrators: Under the ICC Rules of Arbitration (as with all other leading arbitral rules), prior to the constitution of the arbitral tribunal parties in urgent cases parties can seek emergency orders for interim relief from an emergency arbitrator. This avoids the need to resort to separate proceedings before the very courts that parties, through their agreement to arbitrate, are trying to avoid. As noted in our recent update, New Zealand has amended the Arbitration Act 1996 to confirm that orders made by emergency arbitrators are enforceable in the same way as awards made by arbitral tribunals proper.
  • Summary judgment and dispositive rulings: While in this writer's view arbitral tribunals have the inherent power to award summary judgment and make dispositive rulings provided they have given all parties the opportunity to be heard, parties can avoid any ambiguity by specifically providing for such procedures in their arbitration agreement. As we have recently reported, some arbitral institutions have included this express power in their rules.
  • Expertise of arbitrators: One advantage of arbitration is the ability for parties, whether in their arbitration agreement or when appointing their tribunal, to specify the qualifications and expertise of the arbitrator(s). Familiarity with financial instruments is regularly of concern to banks and financial institutions particularly in jurisdictions without specialised commercial and/or financial courts. P.R.I.M.E Finance (see below) provides a list of industry and dispute resolution arbitrators with expertise in banking and financial instruments.
  • Confidentiality: Arbitration is private, but not necessarily confidential. If confidentiality of the existence and conduct of the arbitral proceedings and the arbitral award is of concern, parties should make specific provision in their arbitration agreement. This is often a relevant consideration for banks and financial institutions, principally for reputation and precedent reasons.
  • Consolidation and joinder: The ICC Rules (as with all leading arbitral rules) permit consolidation of two or more arbitrations in certain circumstances. Consolidation will also be possible where two or more arbitration agreements themselves (say in related financing documents, such as a loan, a swap and a guarantee) provide expressly for consolidation of disputes arising under two or more of those instruments. Where parties wish to enable consolidation (sometimes they may not) then very careful drafting is required to ensure that consolidation is in fact possible, practicable and the resulting award is valid. Likewise for the possible joinder of third parties.
  • Availability of appeal: International arbitration rules typically exclude the availability of appeals on questions of fact and law, providing finality to disputes. Given the predominance of international arbitration as the means for resolving cross-border disputes, commercial parties globally have clearly voted with their feet in favouring this approach. In domestic arbitrations, however, national legislation typically requires parties to opt-out of appeal procedures. Opting-out is to be recommended. Institutions that wish to consider retaining appeal rights should carefully consider whether such procedures are proportionate and meant to be expressly contracted for in the arbitration agreement, and provide the so-called "right answer" sought.
  • Precedent: Whilst arbitral awards cannot typically be published publicly, some arbitral rules permit anonymised publication. Parties themselves can likewise provide for the same in their arbitration agreement.

As the Report makes clear, these points (and various other important practical matters) need to be considered in the circumstances in each case. Important practical and strategic matters will arise in any given finance transaction or related transactions (whether a 'one-off' or a repeat transaction under standard from documents). Banks and financial institutions should therefore review their options carefully. At the same time, the Report dispels common misconceptions around these issues and other aspects of the arbitral process.

Arbitration of financial disputes is on the rise

As the Report notes, the work of the Task Force should not be seen in isolation. Rather, the use of arbitration by financial institutions and counter-parties has been increasing steadily over recent years. Other developments that banks, financial institutions and their clients should be aware of include:

  • International Swaps and Derivatives Association (ISDA): The increased interest in arbitration in cross-border finance is reflected in ISDA’s publication in 2013 (after several years of consultations with its members) of a range of optional arbitration clauses, which are intended to form part of the Schedule to a Master Agreement. The Model Arbitration Clauses can be found in the 2013 ISDA Arbitration Guide (the IDSA Arbitration Guide) which supplements and amends the corresponding guidance in the ISDA User’s Guides. The Model Arbitration Clauses provide for use of the leading institutional arbitration rules, offering numerous combinations of arbitral rules, governing law, and seat (IDSA Arbitration Guide, Appendices A-G).
  • P.R.I.M.E. Finance: The increasing use of, and anticipated future demand for, arbitration of international financial disputes also led to the establishment in early 2012 of a new financial dispute resolution institution, the Panel of Recognised International Market Experts in Finance (P.R.I.M.E Finance). P.R.I.M.E Finance’s aim is to provide a bespoke forum for the resolution of complex international financial disputes. Its offering includes a panel of specialist senior arbitrators who are experts in complex international financial disputes, customized arbitration rules, mediation and expert services. In the 2013 ISDA Arbitration Guide, ISDA has included in its model arbitration clauses an arbitration clause that provides for arbitration under the P.R.I.M.E Finance Arbitration Rules. P.R.I.M.E Finance's website, including copies of its Rules can be found here.
  • London Arbitration Club: In 2015 the Financial Sector Branch of the London Arbitration Club published its Financial Services Expedited Arbitration Procedure for adoption by financial institutions. This takes the form of standard form arbitration clauses that can be included in finance documents which mandate that pre-agreed efficient arbitral procedures be used in the event a dispute arises. A copy of the Financial Services Expedited Arbitration Procedure can be found here.

We have been at the forefront of these policy developments, as a member of the ISDA Arbitration Committee that developed ISDA's optional arbitration clauses and published the ISDA Arbitration Guide and a regular speaker at ISDA conference, a member of the London Arbitration Club Financial Branch and contributor to the work of P.R.I.M.E. Finance.

Careful drafting of arbitration agreements is critical

Planning for disputes is a critically important component of managing the risks associated with any contract or transaction.

To this end, the Report, the ISDA Arbitration Guide and the work of P.R.I.M.E. Finance and the London Arbitration Club provides an excellent toolbox for in-house counsel at banks and financial institutions and their external legal advisors. However, in each case careful drafting of arbitration agreements is critical to ensure that the agreement is valid and does the things parties want it to do.

Particular care is required around complexities common to domestic and international banking and finance, such as expertise and appointment of the arbitral tribunal, multi-party and multi-contract scenarios, joinder of third parties, consolidation of disputes arising under related financing documents and instruments (e.g., loans, swaps, guarantees), emergency arbitrator powers and interim relief, dispositive motions and summary judgment, confidentiality, costs, appellate procedures.

Whilst receiving advice on these matters can be critical to the enforcement of rights, it often only takes a quick phone call or email to ensure an arbitration agreement is drafted correctly. Give us a call.

Lowndes Jordan: arbitration specialists

Tim Lindsay returned to Lowndes Jordan in August 2016, having been a partner in one of the world’s leading arbitration practices at Dechert LLP and leading that firm’s international arbitration practice in London. For the past decade Tim has acted as counsel in dozens of international and domestic arbitrations under all of the leading arbitration rules. He has also been at the forefront of policy development in the arbitration field, in particular the use of arbitration in the banking and finance field. Recent matters as counsel in the banking and finance sector include acting for financial institutions and debtors/counter-parties under loan agreements, complex syndicated loans, bonds, ISDA Master Agreement currency swaps, guarantees, investment banking mandates, and banks, hedge funds and private equity funds as equity owners.

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