Financial institutions: addressing misconceptions about arbitration

Publication November 2017


Introduction

In the previous edition of the Banking and finance disputes review, we commented on the increased use by financial institutions of international arbitration to resolve disputes (as identified in a 2016 ICC Commission Task Force Report). Elsewhere in this edition, we discuss the new popular trend of investment arbitration for banks and financial institutions. In this article, we go back to basics to address and challenge some preconceptions about arbitration. In particular, we examine arbitration issues identified by the ICC Commission Task Force as being little understood or frequently misunderstood by banks and other financial institutions.

Pre-conception No. 1: Arbitrations are easily and widely enforceable

The most common reason cited for preferring international arbitration over court litigation is the perceived ease of enforcement of arbitral awards in comparison to foreign court judgments. This perception is generally justified. The New York Convention on Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) has over 150 signatories and provides that foreign arbitral awards should be enforced in signatory states, subject only to limited grounds for refusal. For financial institutions, who might want to enforce the award against assets in a wide variety of jurisdictions, or whose counterparty might be in an emerging jurisdiction where enforcement rights of foreign court judgments are uncertain, this is certainly a significant advantage.

However, banks should consider at the outset the likely jurisdictions where any award might ultimately be enforced. Most countries, including the United Kingdom, adopt a very limited interpretation of the exceptions to enforcement set out in New York Convention. But some countries, particularly those that have less experience of international arbitration, do not. The practical challenges of enforcement are greater in those countries, even with the benefit of the New York Convention regime. If a bank is concerned about enforcing a judgment in a certain jurisdiction then arbitration is not necessarily a complete panacea as ultimately it is those same courts that will be called upon to enforce an award and they may adopt a similarly hostile approach to enforcement under the New York Convention.

Pre-conception No. 2: Arbitration is final

Financial institutions often cite the limited avenues of appeal as an advantage of international arbitration, bringing about a speedy resolution to the dispute and reducing cost. Again, this is a case of “true, but …”.

Institutional arbitration precludes appeals on the factual merits and, if the parties have so agreed and with certain exceptions, it also precludes appeal on the legal merits. The arbitration agreement itself may also proscribe appeal rights. However, the law governing the arbitration proceedings may impose mandatory provisions that include rights of appeal. Under English law, for example, the parties may challenge an award for procedural irregularity or lack of jurisdiction or resist enforcement for public policy reasons. These rights are mandatory and cannot be waived by agreement, though they can be lost by conduct – for example, failing during the proceedings to object to the conduct complained of. Parties must also have first exhausted all available processes of appeal or recourse within the arbitration.

Although these challenges might not involve a reconsideration of the merits, they still detract from the finality of awards since they involve time and cost and may delay enforcement. In practice, these challenges rarely succeed in English courts and are rarely used. However, other jurisdictions without the same safeguards may be less reluctant to interfere, resulting in more of a threat to the integrity of the arbitral process.

Pre-conception No. 3: Arbitration does not provide for summary judgment

Banks often prefer litigation for claims where there is little or no prospect of a successful defence, such as a simple debt claim, because they assume that arbitration does not allow summary procedures. The ICC Commission Task Force reported that counsel at financial institutions were frustrated by experiences of arbitration where they were forced to go through a full consideration of the merits of a dispute, even where there are no contested facts. Banks perceive this as a significant disadvantage versus the summary judgment procedure available, for example, in the English courts. However, arbitration can include something similar to summary judgment – either through party autonomy or as set out in arbitration rules. And, in any case, considerations of enforceability may dictate against using summary judgment in litigation or arbitration.

The principle of party autonomy in arbitration means that parties are free to specify how they want their disputes to be resolved in their arbitration agreement. So, for instance, they can choose to give the tribunal the power to grant summary judgment. Or they can provide for an award to be rendered within a specified period following an expedited procedure by reference to documents only. Expedited procedures can replicate in an arbitration many of the benefits of the summary judgment procedure.

Arbitral institutions are also taking steps to address the absence of summary judgment. The latest version of the ICC arbitration rules contain a form of expedited procedure. The SIAC launched a procedure akin to summary judgment in the 2016 edition of its arbitration rules. The HKIAC is currently consulting on introducing a similar procedure and other arbitration centres are expected to follow. This trend, combined with the parties’ freedom to tailor the arbitral process to their needs, means arbitration is increasingly capable of resolving disputes in a summary or expedited manner.

Even without specific provisions in an arbitration agreement or arbitration rules, arbitrators arguably derive a power to strike out the case, or make a summary judgment, from their general case management powers (see Travis Coal Restructured Holdings LLC v Essar Global Fund Ltd [2014] EWHC 2510 (Comm)). But, given the lack of a significant body of cases on this issue, it is unlikely that an arbitrator would dispose of the claim summarily without an express power to do so under an arbitration agreement or institutional rules.

Care must be taken – in both litigation and arbitration – to ensure that use of a summary procedure does not threaten the enforceability of the award or judgment. For arbitration, the award must be enforceable under the New York Convention regime. This means ensuring that use of a summary procedure does not render an award susceptible to challenge for lack of procedural fairness in any jurisdiction where the award may be enforced.

Pre-conception No. 4: Arbitration does not provide for interim remedies

Financial institutions often need urgently to preserve the status quo pending resolution of a dispute, for instance to safeguard security. Arbitrators are perceived to lack the capacity to offer interim remedies, so that only court can preserve rights while the arbitration proceeds.

Arbitral institutions have made significant progress in interim remedies. Most major institutions now offer parties the right to apply for the appointment of an emergency arbitrator who can grant interim remedies such as injunctions on an urgent basis. Alternatively, parties can apply to expedite the appointment of the substantive tribunal. Under the English Arbitration Act, the tribunal has broadly similar powers to the court in relation to interim remedies (in fact, tribunals arguably have a wider discretion in granting interim relief). This reduces the need for court involvement and allows relevant issues to be dealt with by the same tribunal which will ultimately decide the case, saving time and expense. Although in practice parties tend to comply with arbitral orders, in the event of default, only the court could enforce interim relief granted by arbitrators. This highlights the importance of the choice of seat: it is the supervising court which gives the tribunal’s interim order teeth.

Court relief may still be necessary or desirable. Courts can grants orders binding third parties or ex parte relief or an order under a penal notice. English courts are willing and able to act in support or supervision of arbitral proceedings, so again, the mere fact that the parties have chosen to arbitrate disputes does not necessarily mean that they cannot obtain interim court relief.

Pre-conception No. 5: Arbitration is confidential

Financial institutions often cite the appeal of the confidentiality and privacy of arbitration proceedings. But arbitrations are not always or automatically confidential. Depending on the seat, the default position might be that the arbitration is not confidential. If a financial institution wants their arbitration to remain private, they should specify so in the arbitration clause.

Another particular concern of financial institutions is balancing confidentiality with the need to establish precedent. This is especially so in the derivatives and bond markets, where there is appetite for rulings that set a precedent for future disputes and increase legal certainty. Although there is no system of precedent in commercial arbitration (the position is somewhat different for investment arbitration), this issue has been put in the spotlight by recent (controversial) judicial criticisms. Arbitral institutions are taking steps to improve transparency in the market by publishing redacted awards in some cases. For example, the Stockholm Chamber of Commerce and the ICC Court of Arbitration publish select awards with the parties’ consent. Published awards are redacted, such that confidential information and the names of the parties are removed, but the facts, reasoning and decision are made available. Therefore arguably a body of arbitral “precedent” is developing. Despite the fact arbitrators are not bound by awards made by other tribunals, this is an interesting development in striking an appropriate balance between improving transparency, developing the common law and practice in financial markets, and preserving confidentiality.

Pre-conception No. 6: Unilateral or asymmetrical arbitration clauses lack legal certainty

Financial institutions may want to retain the flexibility to choose litigation for some disputes and arbitration for others, using a so-called “asymmetric clause”. These clauses are frequently viewed with a degree of scepticism, with the perception that they lack legal certainty.

This perception is justified: the validity of asymmetric clauses is not clear cut. Whilst in some jurisdictions courts routinely enforce such clauses, in others they have been hesitant to do so or have rejected them on grounds of public policy or access to justice. Although the LMA loan agreement contains an asymmetric clause (and English law has no problem with such clause), specialist advice should be sought where there is an international element, particularly regarding the seat or any enforcement court. We have written previously on the enforceability of asymmetric arbitration clauses agreed between sophisticated parties in a number of key jurisdictions (see Asymmetric arbitration agreements in the October 2017 International arbitration report).

Pre-conception No. 7: Arbitration is straightforward for multi-party and/or multi-contract

The rules of most major institutions now contemplate consolidation of multiple arbitrations into one arbitration or conducting multiple arbitrations concurrently (where the proceedings are procedurally managed as a single arbitration but separate awards are issued in each). This gives the impression that arbitration in complex transactions involving multiple parties and contracts is straightforward.

In fact, these rules are not a silver bullet. Financial institutions should ensure that they are compatible with all the arbitration agreements in their transaction documents, or else face unpredictable results. For example, there might be confusion over who (if anyone) is entitled to appoint an arbitrator. Whilst rules on consolidation and concurrency provide a platform for multi-party and multicontract arbitration, specialist input is essential when drafting the various arbitration agreements. In addition, a tribunal with particularly strong case management powers is key to handling complex procedures successfully.

Conclusion

In many ways, international arbitration is a powerful tool at the disposal of financial institutions. The flexibility to determine procedure, the widespread enforcement of awards and the finality of decisions should be attractive to banks and other participants in financial markets. However, timely and effective specialist advice should be sought throughout the process, from drafting the arbitration agreement through to enforcing the award, to ensure a correct fit and maximise the value that financial institutions achieve from arbitration.


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