Financial institutions and international arbitration

Financial institutions, which traditionally prefer litigation in certain select jurisdictions such as London, New York, Hong Kong and Frankfurt, are increasingly open to the use of international arbitration for cross-border banking and financial disputes, according to a report published in December 2016 by the ICC Commission Task Force on Financial Institutions and International Arbitration (the ‘Report’).

The Report’s findings tally with those in a 2013 survey by the QMUL School of International Arbitration and PwC. That survey found that a significant proportion of the banking and finance sector (69 per cent) indicated strong support for arbitration, although less than a quarter of general counsel listed arbitration as their most preferred option.

The Report found that financial institutions tend to favour arbitration where

• The transaction is significant or particularly complex.
• Confidentiality is a concern.
• The counterparty is a state-owned entity.
• The counterparty is in a jurisdiction where recognition of foreign court judgments is problematic or where enforcement of an arbitral award may be easier.

A majority prefer using institutional arbitration owing to the settled procedural rules and proven ability to handle complex and high-value disputes. The arbitral institution rules most frequently chosen are LCIA, ICC, HKIAC and SIAC, and the most popular seats are London, Paris, Geneva, New York, Hong Kong and Singapore.

Financial institutions are increasingly open to arbitration because of the changing (and often increasingly strict) regulatory environment and the fall-out faced by banking and financial institutions after the global financial crisis which brought "an unprecedented wave of claims by and against financial institutions, as well as among them". The ability to deal with such disputes in private and confidential arbitral proceedings offers a welcome respite from playing them out in public. Financial institutions, like most business, also prefer to avoid jury trials where possible.

Another point in favour of arbitration is the growth in emerging market transactions where local courts are regarded as inexperienced or unreliable, particularly where the state is a counterparty. Arbitration offers neutrality and party-autonomy. Financial institutions are also more alive to the fact that if their foreign investment is structured appropriately and the financial instrument is a qualifying investment, they may benefit from protections under investment treaties. These afford investors a direct right of action against the host state for any internationally wrongful act, generally by bringing arbitral proceedings in a neutral seat.

Parties’ ability to select specialist arbitrators with industry expertise and experience was also cited by financial institutions as a key benefit of arbitration; financial transactions are increasingly complex and financial services disputes are often highly technical. Specialist arbitrators, arbitral institutions and rules tailored to resolving complex financial disputes have all emerged in recent years.

Crucially, arbitral awards can be enforced internationally, often more readily than foreign court judgments, under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. There are currently 156 state parties to that convention with no equivalent, in terms of both scope and ease of enforcement, for court judgments.

The Report suggests that arbitration is not used consistently or on a large scale and nor is it used to its full potential in many areas (Islamic finance disputes were identified in particular as a potential growth area). Most financial institutions interviewed stated that they do not have substantial experience of arbitration but the use of and expectations about arbitration is evolving. Financial institutions remain cautious about arbitration because of a lack of awareness about the potential benefits and misconceptions about the arbitral process. The report offers detailed recommendations for tailoring arbitration to the needs of the banking and finance sector.

The Task Force compiled its findings from interviews of some 50 financial institutions and banking counsel from across the globe, as well as other sources including internal policies, publications, arbitral awards and data from thirteen arbitral institutions. It examined a wide range of banking and financial activities including those undertaken by licenced banks and funds (equity, investment or sovereign wealth). The Report can be found on the ICC’s website.