The earlier published part of this article considered the general perception of international arbitration in the financial industry as well as its comparative advantages over litigation before National Courts. This part of the article will consider the plausible reasons for the negative perception towards the use and rise of arbitration in the financial industry.
Amidst the commendable advantages of arbitration particularly with respect to its swift enforcement mechanism of award by virtue of the New York Convention over litigation, it is perhaps striking that arbitration has not seen further growth. Two factors can be identified for the lack of further growth.
Firstly, the majority of banks continue to favour litigation where that is a viable option. In part, this is because of the historical preference for litigation as earlier outlined in part one of this article. The trend also reflects a degree of unease about arbitration on the part of some financial institutions. The concerns include: that arbitration can be slower than litigation; that arbitrators can lack an appreciation of how finance works; and the arbitral tribunals have fewer procedural tools at their disposal (for example, the inability to grant ex parte order or temporary Restraining order (TRO) save for the emergence of “emergency arbitrators”) and can be less robust in their procedural decisions. Furthermore, some banks take the view (most times on a transaction –by-transaction basis) that the enforcement risk associated with litigation is largely theoretical because in practice their counterparties will comply voluntarily with a judgment of a court in a major commercial jurisdiction. Survey has shown that less than 15% of large corporations globally had to seek enforcement of their awards because in large majority of cases, their counterparties had voluntarily complied with the award in question. The conclusion to be drawn from this data point is unclear. It could reflect either a culture of compliance among respondents (the statistics is not certain how many of them from emerging markets where the issue of enforceability arises most directly). Alternatively, it could reflect a recognition on the part of award debtors that contesting enforcement under the New York Convention would be futile.
Secondly, as earlier noted notwithstanding the significant enforcement advantages offered by arbitration, it is potentially problematic to provide for arbitration in relation to some financial products. A typical and often cited example that arises is the requirements in the New York Convention for the formal validity of an arbitration agreement. It is elementary that only the parties to an arbitration agreement are obliged to submit their disputes to arbitration. Arguably, Article II(2) of the New York Convention requires an arbitration agreement to be signed by the parties – although most national lex arbitral tend to apply a lower standard for the formal validity of an arbitration agreement (for example that it only needs to be in writing), and in any event Article II (2) is often interpreted liberally. Potentially, a difficulty can arise in relation to tradable securities: how can the assignee of such a security be said to have adhered to an arbitration agreement contained in, for example, the terms and conditions of an issuance of bonds? Arbitration agreements are sometimes used in this context; that may make sense if the applicable national law of the seat only requires arbitration agreements to be in writing, rather than signed, for it to be valid, but could be problematic if the applicable law requires an arbitration agreement to be signed. Furthermore there is no known example to the writers knowledge of such an arbitration agreement being found to be invalid, nevertheless, there is a good reason for financial institutions to use arbitration with caution in these circumstances.
Another example arises from the use of arbitration in relation to retail financial products. Some jurisdictions place limits on the arbitrability of the consumer disputes. As a related point, even where arbitration is chosen for a transaction, it will not necessarily be the choice for all agreements relating to that transaction. In particular, the enforcement of security under the law of the place where these circumstances, it may be sensible to provide for litigation in security documents, even if other documents (such as a loan agreement and the inter-creditor agreement) provides for arbitration.
The total outlook with respect to the topic is complex, but might be summarized in the writer’s opinion as follows. In general, financial service institutions have a well established preference for litigation. However, the enforcement advantages of arbitration outweighs the misgivings that they have about the arbitration process in some circumstances. The incidence of those circumstances is increasing in line with globalization and greater investment in emerging markets. As a result, there is growing use of arbitration in the financial services industry, although it continues to be used much less in that industry than in others such as construction, investment and insurance. There are a number of challenges to be addressed and overcome as arbitration sees more use in the financial sector. To identify just a few; effective arbitration clauses have to be drafted for complex financial structures and the guide provides a strong lead in this regard; arbitral procedures have to be crafted to satisfy the desire on the part of the creditors for prompt decision making; and the pool of arbitrators with a good understanding of complex financial products has to be widened. Clearly, there is a lot of work to be done if arbitration is going to gain further acceptance in the financial sector, and there remains plenty of scope for further innovation.