Arbitration in banking and finance deconstructed

Professor Dr Georges Affaki, C.Arb, independent arbitrator, avocat before the Court of Appeal of Paris, France, and co-chair of the ICC Task Force on Financial Institutions and International Arbitration (the Task Force), discusses the role of arbitration in banking and finance disputes.

Until recently, the general view was that arbitration was unnecessary or unadapted to the needs of banking and finance. Empirical evidence [1] shows that this affirmation, abstractly stated, is incorrect. In the flagship lecture scheduled on 5 April 2018 at the Chartered Institute of Arbitrators (CIArb) in London, I will demonstrate that arbitration is increasingly part of the strategic options considered in cross-border banking and financial disputes. In this post, I highlight some of the key areas of focus relevant to this topic.

Industry-specific initiatives

There is a growing number of industry-specific arbitral initiatives, including the introduction in 2013 of the ISDAfied optional arbitration clauses into the International Swaps and Derivatives Association (ISDA) Master Agreement, Hong Kong’s Financial Dispute Resolution Centre (FDRC) offering mediation and arbitration services in bank-customer relationships, Spanish Banking Association’s DIRIBAN that aims to resolve disputes amongst its bank members, and P.R.I.M.E. Finance which, with the case management support of the Permanent Court of Arbitration, now administers international financial arbitral proceedings. Noticeably, bank regulators are taking the initiative of proposing arbitration mechanisms in the banking sector. They all show that the perception of arbitration by financial institutions is rapidly evolving in the wake of the global financial crisis, the sovereign debt crisis, the digitalization of banking, and the new regulatory approach to bank resolution.

The role of arbitral institutions

Arbitral institutions are in a strong position to engage further with financial institutions and their regulators, and financial institutions have the tools to utilize arbitration as a viable alternative to litigation.

One size does not fit all

It is critical to start by recognizing that one size does not fit all in banking. The Task Force and I reviewed the reality of arbitration in a number of fields of corporate and investment banking including derivatives, sovereign lending, investment arbitration and banking instruments, arbitration in bank regulatory matters, international financing (including syndicated loans and trade finance), Islamic finance, multilateral and development finance, advisory banking, asset management, and interbank arbitration. Arbitration has much to offer in each of those fields provided the economics of each field are properly understood and the arbitration offer is specifically adapted thereto. Export finance is different from advisory banking that involves no lending and that requires confidentiality. Cross-border bank networks require specific localization criteria for conflict of laws purposes, as do foreign currency clearing through correspondent banking.

Financial institutions as commercial parties

Besides their role in credit supply, financial institutions often participate in commercial transactions as any other corporate entity. They purchase products, supply services, invest in equity stakes in other companies, agree to engage in joint venture projects with other financial or nonfinancial entities, discount their long-term receivables, or issue shares to the public, all of which are common business transactions that involve no idiosyncrasies unique to banking. The well-known Bank for International Settlements (BIS) arbitration in 2003 serves as a case in point [2]. Disputes arising in the context of such dealings are expected to be resolved by arbitrators in the same way they would be resolved in the case of non-banking parties.

Financial institutions as parties to arbitration proceedings

Financial institutions do use arbitration. They do so in situations which require a neutral forum and decision makers with specialized knowledge, such as project finance involving sovereign counterparties in emerging countries, derivatives in certain regions of the world, notably in Asia, sensitive capital restructuring and mergers/acquisitions, certain multilateral loans, and asset management. However, they neither use arbitration regularly nor as a default rule.

The advantages of arbitration are as relevant in this context

Amongst the many reasons why arbitration is attractive to banking businesses feature the international recognition and enforcement of awards amongst the 160 New York Convention member countries, the possibility to choose the arbitrators according to the Parties’ requirement of a specific skillset, the adaptability of the arbitral procedure potentially offering an opt-in appeal, and the possibility to obtain from the tribunal early dismissal of claims and provisional measures, including on an emergency track. The flexibility of the arbitral procedure is also a key advantage. It can accommodate both of the expectation of confidentiality in certain banking businesses, such as advisory banking, and of standard-setting precedent publication that other banking businesses, such as syndicated lending and derivatives, require to control risks in their field.

Qualifying investments in investment treaty arbitration

A key development is the opening of investment arbitration to banking and financial instruments. In the past decade, investment arbitration awards have determined that various financings, the operation of bank networks and the issue of sovereign bonds, bank guarantees and derivatives, to have the qualifying elements of protected investments. Barring a particular carve-out in the applicable investment treaty, a dispute between an investor (often a financial institution or its foreign shareholders) and the host State in relation to those instruments becomes potentially eligible for treaty protection and adjudication by an international arbitral tribunal, even though the relevant banking contract may not include an arbitration clause. Recent awards have allowed banks and their shareholders to seek vindication for expropriation or discriminatory actions by national bank regulators which were either prompted by political motives or denied their due process rights. The institutionalization of bail-in measures in the wake of the entry into force of the Bank Recovery and Resolution Directive [3] is expected to generate claims by bailed-in creditors and shareholders that may potentially be filed before investment arbitral tribunals.

Listen to the data

The new empirical data on which the upcoming conference rests are the linchpin of a constructive dialogue that is overdue between arbitral institutions and federations of financial institutions. They herald a new era in banking and financial dispute resolution.

[1] ICC Report on Financial Institutions and International Arbitration (Georges Affaki and Claudia Salomon, Co-Chairs). The first volume of the Report is available at Access the Report. The second volume is expected to be available soon on the same website.

[2] BIS was established in 1930 to facilitate cooperation between central banks. Under the BIS Statutes, disputes between the bank and its shareholders are subject to arbitration. In 2001, the BIS shareholder general meeting decided to restrict the ownership of shares to central banks and to cancel all of the privately-owned share certificates that existed. The excluded shareholders contested the valuation set by the BIS for the mandatory redemption of their shares. In the subsequent arbitration proceedings conducted under the auspices of the Permanent Court of Arbitration, the tribunal ruled on the issue of the proper valuation of the cancelled shares. The Partial Award of 22 November 2002 and the Final Award of 19 September 2003 are published in full on the website of the Permanent Court of Arbitration (www.pca-cpa.org).

[3] Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms.

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