Towards a rapprochement for international arbitration and FIs
December 2018 | SPECIAL REPORT: INTERNATIONAL DISPUTE RESOLUTION
Financier Worldwide Magazine
December 2018 Issue
The traditional wisdom that financial institutions (FIs) and international arbitration are reluctant bedfellows has been getting a fresh look. The evolving needs of international finance and enhancements to the capabilities of arbitration are leading to a renewed interest between the two.
FIs have historically been well served by the national courts of major financial centres – most prominently London and New York. These assured reliable decision making, early disposal of manifestly unsound defences and claims through summary judgment and default procedures, as well as interim remedies to prevent the dissipation of assets, including the English courts’ worldwide freezing order.
As international finance spreads into new and developing markets, and participants in financial markets are increasingly based in different regions, arbitration is taking on increased relevance.
International enforcement. One of the key advantages of international arbitration is the ability to enforce an arbitral award internationally, pursuant to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (NY Convention). The NY Convention requires its current 159 signatory states to recognise and enforce foreign arbitral awards, subject to closely limited objections relating to lack of jurisdiction, due process, public policy of the enforcing court, or the award not being binding or having been annulled by the courts at the place of arbitration. No equivalent instrument provides for international enforcement of civil court judgments: outside the EU, international enforcement depends on the willingness, and local procedures, of the foreign court.
Some participants in financial markets are also becoming more assertive over the choice of jurisdiction, and arbitration also presents a neutral option that avoids the home courts of either party. The flexibility and privacy or confidentiality afforded by arbitration are additional attractions.
While international enforceability of arbitral awards is receiving renewed attention, recent enhancements of the procedural capabilities of arbitration are also likely to be of interest to FIs.
Summary disposition. A prominent issue is the early disposal of issues and claims by an arbitral tribunal. Two features of arbitration mean that arbitrators have been hesitant to make a summary determination of a dispute, which FIs often consider important. These are first, the general absence of any appeal against the substance of an arbitral award, and secondly, the fact that an arbitral award may be set aside, and enforcement may be refused if a party was not given sufficient opportunity to present its case. Because of these concerns, arbitrators’ power to dispose of issues without a full hearing has been a longstanding debate.
This debate has recently taken a step forward. In Travis Coal Restructured Holdings LLC v Essar Global Fund Ltd (2014), the English High Court rejected an argument that “a summary judgment process by arbitrators necessarily amounts to a denial of due process” and expressed the view that a challenge to the award in New York, on the ground that the procedure exceeded the arbitrators’ powers, had no realistic prospect of success (the dispute subsequently settled). The English court emphasised that the parties got what they bargained for, as their arbitration clause provided that “[t]he arbitrators shall have the discretion to hear and determine at any stage of the arbitration any issue asserted by any party to be dispositive of any claim or counterclaim, in whole or part...”.
Major arbitral institutions have also updated their arbitration rules to include an express power for tribunals to make summary determinations. The current arbitration rules of the Singapore International Arbitration Centre (SIAC) and Stockholm Chamber of Commerce (SCC) both include procedures for the early summary dismissal of a claim or defence that is “manifestly” unsustainable or without legal merit. The recently announced 2018 edition of the Hong Kong International Arbitration Centre (HKIAC) rules include a similar provision. The International Chamber of Commerce (ICC) adopts a similar ‘manifest’ standard for early dismissal of claims or defences, but includes its provisions for summary determination in a guidance document rather than in its rules. The ICC’s approach is consistent with the view that arbitral tribunals have the power to make summary determinations even without an explicit statement in the arbitral rules, and allows for greater flexibility.
The current generation of institutional arbitration rules also include a number of other features aimed at increasing efficiency.
Expedited procedures. Many sets of arbitral rules now provide for expedited procedures. The 2017 ICC Rules contain a mandatory expedited procedure applicable to low value disputes (under $2m). This features a sole arbitrator, who has the power to limit the number, length and scope of written submissions and witness evidence, to exclude requests for document production and to decide the dispute without holding a hearing.
The arbitration rules of both the SIAC and HKIAC likewise provide for expedited procedures, which apply automatically where the amount in dispute does not exceed a defined threshold (SID5m and HKD25m, respectively), or where the parties agree, or in cases of exceptional urgency. The American Arbitration Association (AAA) also provides for expedited procedures which apply, under its rules for international disputes, where no claim exceeds $250,000. The London Court of International Arbitration (LCIA) rules provide for the expedited formation of an arbitral tribunal, thus leaving any further expedited procedures to the tribunal’s discretion.
Emergency relief. A party’s right to request interim measures from a national court without waiving its rights under the arbitration agreement is well established, and has been important to safeguard rights and avoid harm before an arbitral tribunal has been constituted. The major arbitration rules confirm this and reflect a presumption that after the arbitral tribunal is constituted, it is the primary source of interim orders.
Recent versions of arbitration rules now permit the appointment of an emergency arbitrator, with jurisdiction to decide on interim orders in cases of particular urgency, before the constitution of the arbitral tribunal. For example, under the ICC rules an emergency arbitrator is normally appointed within two days of a request and is required to rule on the request for an emergency order within 15 days – far sooner than an arbitral tribunal can normally be constituted. Emergency arbitrator procedures reflecting similar timeframes are available under the SIAC, HKIAC, LCIA and SCC rules.
An English court has held that where a party could apply to an emergency arbitrator, English courts should not grant interim relief, making an emergency arbitrator the first option for urgent relief (Gerald Metals SA v Timis (2016)). It remains to be seen whether this approach will be followed in England or adopted in other jurisdictions. An emergency arbitrator order is also useful inter alia where the order of a national court would be ineffective or difficult to enforce, or the relevant national courts are unreliable or unable to act in the required timeframe.
Arbitration rules have also become better developed on issues of joinder of additional parties, consolidation of multiple proceedings and disputes under multiple contracts. Since arbitral jurisdiction is based on consent (which is usually contained within a contract) these issues must still be approached with care. Nonetheless, with proper planning and drafting, arbitration is now better placed to deal with transactions involving multiple contracts and multiple parties. It also bears recalling that parties enjoy substantial autonomy in concluding arbitration agreements, and there is considerable scope to tailor an arbitration agreement to the types of dispute that are thought likely to arise.
Expertise. One reason why FIs have traditionally preferred litigation is the perceived expertise of judges in complex financial transactions. The Panel of Recognized International Market Experts in Finance (P.R.I.M.E. Finance) was established in 2012 and has a roster of arbitrators with expertise in financial services, as well as arbitral rules tailored to financial disputes. P.R.I.M.E. Finance is a valuable resource for identifying arbitrators with suitable expertise for financial disputes, particularly as parties to an arbitration have the ability to select the arbitrators who will decide their dispute.
Of course, there is no ‘one size fits all’ for the multitude of financial transactions, and in many cases a reputable national court remains a sound choice to resolve disputes. On the other hand, several areas of financial services are showing interest in arbitration. Project finance has been receptive to the benefits of international enforceability of arbitration and development finance institutions often rely on international arbitration, reflecting their focus on developing jurisdictions where enforceability is an important consideration.
Derivatives are another area where arbitration is gaining interest. The 2013 ISDA Master Agreement includes the possibility to submit disputes to arbitration and the related ISDA Arbitration Guide provides model arbitration clauses with a variety of arbitral institutions and arbitral seats, as well as drafting for consequential modifications to the Master Agreement. In another context, the US Financial Industry Regulatory Authority (FINRA) provides for mediation and arbitration tailored to securities-related disputes involving broker-dealers and investors.
The arbitration community is also looking more closely at FIs. The ICC Commission’s ‘Report on Financial Institutions and International Arbitration’, published in March 2018, analyses how different branches of financial services are using arbitration and their particular procedural needs, based on input from a substantial number of FIs. The report provides recommendations for tailoring arbitral procedures to meet the needs of FIs and is a highly useful resource.
There are thus a growing number of situations where arbitration offers a viable and attractive option for dispute resolution for FIs. FIs should more fully take advantage of the possibilities to tailor their arbitration experience, including through the recent procedural enhancements of arbitration.
Alexander Uff is a partner at Shearman & Sterling LLP. He can be contacted on +44 (0)20 7655 5961 or by email: email@example.com.
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