The financial service industry traditionally favours litigation before national courts ahead of international arbitration. Arbitration practitioners often consider bankers as being 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. The distinct attitude of the financial sector towards arbitration continues to the present day.  In 2013 our survey at the School of International arbitration found out that while 53% of respondents in the energy sector, and the 68% in the construction sector, preferred arbitration as a means of resolving international disputes, in the financial service sector 82% preferred to resolve international disputes through litigation.  London and New York are preferred options in most prorogation agreements (i.e choice of court agreements)  and generally had the negotiating power to secure the acceptance of its preference.  The reasons for this policy is not far fetched. Firstly, the courts in 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 which by implication impacts on the quality of judgments has generally been high standard. Since the financial institutions tend to wield substantial influence over their contractual terms, this results in a robust and creditor-friendly judicial culture.  By contract, financial institution tends to feel that arbitration is less likely to deliver a predictable outcome.  A typical example,  in party appointed arbitrations, some uncertainty is introduced by one member being appointed by the debtor or strong dissenting view held by any of the members.  Another reason for the preference for national courts by financial institutions is the appreciation of summary judgment procedure which is afforded by the rules of most national courts especially in the two cities under reference. In Nigeria, a large number of the states have incorporated in their Civil procedure rules tailored after the English CPR either the undefended list procedure or summary judgment procedure, which are all for liquidated money demand claims.  This is particularly valued when it is a liquidated money demand. On the flipside, the right under most major arbitration laws for a party to have a fair hearing makes default judgment in arbitration impossible and summary judgment procedure seemingly impossible.  It is true therefore that the availability of summary judgment can enable debt to be recovered more quickly through litigation than arbitration. However, the advantages sometimes can be overstated. Post-crisis finance litigation suggests that it is not so difficult for a recalcitrant debtor to resist an application for summary judgment. A plausible jurisdictional objection or uncertainty in the sum is enough for the trial judge to transfer the matter to the general cause list and order pleadings which leads to a full blown trial which is often protracted for years, even when the financial institution regard the matter as a simple debt claim. Discoveries, interrogatories and other pre-trial proceedings will compound the process.

Equally, just as accelerated decision-making in litigation can be hard to achieve, so too there are ways to accelerate decision making in arbitration. For example, a parties’ ability to adapt arbitral procedure to suit their needs can enable decisions to be resolved on quite short timetables in certain cases- often more quickly than would be possible in national courts. For instance, some clearing system rules provides for fast-track arbitration scheme to resolve disputes, reflecting the facts that time is necessarily of essence in this context.

Another notable advantage of National Courts in the eyes of financial institutions is that they have generally appreciated the greater certainty available in litigation that applies the doctrine of precedent. A court decision can provide public guidance to the market on the interpretation of standard documentation such as the ISDA master agreement. A leading case on a particular issue can therefore eliminate, or at least reduce, the risks arising from that issue henceforth. For as long as banks favour precedent rather than fearing it, this is likely to represent an advantage of litigation over arbitration.

 

Howbeit, these advantages of litigation over arbitration stated above, which is largely dependent on the jurisdiction with an advance legal system, the rise of arbitration in the financial industry is quite remarkable. The figure given above from our SIA Queen mary Survey in 2013 has some way to go before it challenges the widespread preferences for litigation in the financial services industry. Nevertheless, the question of how much arbitration is preferred is distinct from the question of how widely it is used. While empirical data about a confidential process is inevitably hard to find, there is a broad consensus that arbitration is used more by the financial service industry than it used to be. What appears to happening is that, while banks would generally prefer to provide in their dispute resolution clause for litigation if that is a sensible choice, they are opting for arbitration out of a pragmatic recognition of its benefits in certain circumstances. Amongst the numerous advantages of arbitration few factors are regarded as relevant by financial institutions to a choice of arbitration. The most important, is the greater ease with which, generally speaking, arbitral awards can be enforced across borders than court judgments. The search for yield has led to an increasing question arises more acutely as to whether a judgment of the financial institutions preferred court world be enforced.  A global convention for the enforcement of judgments has to date, proven impossible to conclude. In its absence, there are only various partial regimes to enable a court judgment of one country to be enforced in another. There is an effective regime for enforcement of judgment in the EU under Brussels Recast 1215/2012 and another regime by which English Judgments can be enforced in some countries of the commonwealth and vice versa.  There are a number of bilateral treaties for the reciprocal enforcement of judgments. Under those regimes, enforcement of court judgments across borders depends on the vagaries of the local law of the place of enforcement (lex loci). In most jurisdictions, a judgment creditor will be required to commence fresh proceedings to recover the judgment sum already adjudged which is not without its procedural objections or even have a full rehearing on the merit. A typical example is the ACCESS BANK v AKINGBOLA (2014) 3 CLRN page 124-146, wherein, the applicant after obtaining a judgment in the English court sought to enforce same in Nigeria under the reciprocal Enforcement of Judgment Act and Rules of 1958. This attempt was vehemently resisted and eventually lead to a setting aside of the order for leave to enforce by Candide-Johnson J of the Lagos State High Court on jurisdictional grounds. Even between EU countries and in the United States with a clear policy of reciprocity, it is not easy to enforce a court order of one in the other. The comparative advantage of enforcement in arbitration arises because it benefits from the global regime for the cross – border enforcement of arbitral awards under the New York Convention of 1958. Essentially, the New York Convention imposes an obligation on the courts of contracting states to recognize and enforce arbitral awards upon presentation just of the arbitral award and the underlying arbitration agreement, subject only to specific and limited grounds for refusal, which do not include a review of the merits. There are now about 151 contracting states to the New York Convention. More fundamentally, most contracting states have domesticated the provisions into their National Legislation such as the ACA in Nigeria. Though the practice of enforcement of an award can ofcourse be trickier than the theory afore-stated. Nevertheless, the New York Convention regime still compares favourably with the restricted means available for enforcing court judgments abroad. While the relative ease of enforcement is the leading reason for the growing use of arbitration in financial transactions, a further reason is that, while many counterparties to financial institutions remains comfortable with litigation in London or New York as a neutral alternative to litigation in their home jurisdictions, some counterparties in other parts of the world are increasingly resisting a requirement to litigate in these cities. Large corporations in the international circles considers it as disputes resolution in their lenders home turf being the acclaimed financial capitals of the world.  Accordingly, arbitration is sometimes chosen as a neutral alternative to the leading commercial courts preferred by banks and the local courts of the borrowers. From the financial institution perspective arbitration is preferable as a second choice to litigation in local court. Beyond these general factors behind the growing use of arbitration, certain corners of the financial services industry may have particular reason for preferring arbitration. Thus, the confidentiality that can be achieved in arbitration is an important reason for its use in private wealth industry, while some securities exchange provides for arbitration in their membership rules as it enables a bespoke, and often fast-track, dispute resolution scheme to be established. A further factor has been the greater involvement of state entities and international organizations in the financial markets. Such entities typically resist submitting to the jurisdiction of foreign courts and prefer therefore to arbitrate disputes. The result of these various factors has been a substantial growth in the use of arbitration by the financial sector, in some parts of the world, notably Asia, but increasingly so in Africa, arbitration has become arguably the market standard for (by way of example) syndicated loans and derivative transactions. …….

 

To be continued.