Academic journal article Business Law International

The Use of Arbitration in the Financial Services Industry

Academic journal article Business Law International

The Use of Arbitration in the Financial Services Industry

Article excerpt

Introduction

The subject of this article is the use of arbitration in the financial services industry. As explained below, financial institutions have historically been sceptics about arbitration. This article explores the reasons for their traditional lack of enthusiasm, before going on to consider the extent to which the tide is turning in favour of arbitration. The growing use of arbitration in the financial sector is illustrated by the publication by International Swaps and Derivatives Association (ISDA) in 2013 of its Arbitration Guide, which is explored below. The article concludes by considering further issues that arise from the growing use of arbitration in financial transactions, including whether there are enough arbitrators with experience of the financial markets and the new horizons opening up in the world of investment arbitration.

Historic preferences

Arbitration has long been popular in a number of commercial sectors. It is probably the leading means of resolving disputes in the shipping and commodities sectors, for example. One sector, however, has proven relatively immune to the lure of arbitration - at least until recently. The financial services industry has traditionally favoured litigation before national courts ahead of international arbitration. As one observer has put it: 'The world of arbitration and the world of banking are apart. Arbitration practitioners consider bankers as being most ungrateful for not showing more gratitude to the many advantages that arbitration offers... Conversely, bankers reproach arbitrators for not understanding the basics of a banker's business.'1 2 The distinct attitude of the financial sector towards arbitration continues to the present day. Thus, a survey by the School of Arbitration of Queen Mary University of London in 2013 found that, while 56 per cent of respondents in the energy sector, and 68 per cent in the construction sector, preferred arbitration as a means of resolving international disputes, in the financial services sector 82 per cent preferred to resolve international disputes through litigation.'

In particular, the financial services sector has preferred the courts of England and New York, and generally had the negotiating power to secure the acceptance of its preference. Four reasons are often given for this policy.

First, the courts of England and New York have long had a reputation for providing a high degree of legal certainty, in particular by enforcing written agreements in accordance with their terms, while doing so in a commercially sensible fashion. The quality of judges and judgments has generally been of a high standard. Since banks have tended to wield substantial influence over their contractual terms, this results in a robust and creditor-friendly judicial culture.

By contrast, banks have tended to feel that arbitration is less likely to deliver a predictable outcome. Where there is a tribunal of three, some uncertainty is introduced by one member being appointed by the debtor. Further uncertainty arises because the legal background and market experience of the chairman, or of a sole arbitrator, are difficult to predict; he or she will often be from a country other than those of the bank and the debtor, and may therefore be unfamiliar with the law governing the finance documents. Banks suspect that the constitution of the tribunal can result decisions that (in the unpleasant phrase) 'split the baby', when an English or New York court might in the same case have found more decisively in favour of the bank.

The risk of an unpredictable outcome can be mitigated by a sensible choice of arbitrator on the part of the bank and a sensible choice of chairman, either by agreement between the parties (in which case the choice must be satisfactory to the bank) or through appointment by an arbitration institution. Nevertheless, arbitration practitioners will concede that cases arise in which the decision is a product of compromise. …

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