Rise of Financial Institutional Arbitration

Introduction

Arbitration is an alternative dispute resolution mechanism, whereby, parties settle their

dispute outside the conventional courts. A third neutral party is appointed as arbitrator
whose decision, known as award, is binding on the parties. In India, the scope of
intervention of the courts of original jurisdiction is fairly limited by the provision of
Arbitration and Conciliation Act, 1996, the applicable law on arbitration. The law is based on
UNCITRAL (United Nations Commission on International Trade Law) Model Law on
International Commercial Arbitration, 1995.

A financial institution is a company engaged in the business of dealing with financial and

monetary transactions such as deposits, loans, investment, and currency exchange1. These
institutions act as an intermediary in the process of fund allocation. Investment and
commercial banks, insurance companies, brokerages and investment companies are types
of financial institutions.

Continuous globalisation has led to increase in cross-border transactions by financial

institutions, subsequently, leading to disputes involving different jurisdictions. A party may
not want to be subjected to the courts of other party’s jurisdiction. Hence, they tend to
adopt a neutral method, arbitration over traditional court system. Moreover, the
advantages of arbitration make it a viable option for the parties.

Report and Guidelines

At this juncture, it becomes crucial to know as to what lead to rise in arbitration by financial
institutions. The reports and guidelines by various organisations provided rules for
arbitration, leading to growth of arbitration in financial sectors.

1. ISDA Arbitration Guide 2013: The 2013 International Swaps and Derivatives Association
(ISDA) Arbitration Guide provides a model law for arbitration in cases of derivative
transactions. Historically, financial institutions have tended to use agreements governed
by English or New York law and jurisdiction clauses which refer disputes to the English or
New York courts (the options in the current 1992 and 2002 ISDA Master Agreements)
because of their reputation and experience dealing with disputes involving derivative
transactions2. But, with growing cross- border transaction, enforceability of foreign

1
Financial Institutions: What We All Need to Know. Investopedia, 2019,
https://www.investopedia.com/terms/f/financialinstitution.asp. Accessed 15 Aug, 2020.
2
Cross-Border Derivatives Disputes: ISDA Arbitration Guide 2013 Model Clauses Offer More Certainty |
Insights | DLA Piper Global Law Firm. DLA Piper,
www.dlapiper.com/en/us/insights/publications/2013/12/crossborder-derivatives-disputes-isda-arbitratio__/.
Accessed 15 Aug. 2020.
 judgement became a problem. ISDA sets out model clauses to be included in an
agreement considering cross-border transactions. The ISDA drafted three model clauses,
each for London seat, New York seat and Hague seat where English law, New York law
and Netherlands law are applicable respectively. The guide was updated in 2018.

2. P.R.I.M.E. Finance Arbitration Rules: Set up in Hague, in 2012, P.R.I.M.E Finance (Panel
of Recognized International Market Experts in Finance) provides arbitration and
mediation services in the finance sector 3. It provides expert opinion, judicial services and
education for complex financial transactions. The arbitration rules are based on
UNCITRAL Arbitration rules, 2010. The agreement between Permanent Court of
Arbitration (PCA) and P.R.I.M.E. Finance allow PCA to adjudicate cases following
P.R.I.M.E. Finance Arbitration rules4. The current version of arbitration rules in force is of
2016. It provides for an institutional arbitration with a distinct clause that allows for the
public disclosure of the award with the consent of the parties 5. The clauses provide for
interim orders and fast track arbitration for speedy disposal of disputes.

3. ICC Report On Financial Institution And International Arbitration: The International

Chamber of Commerce (ICC) in its 2018 report 6 examines the use of arbitration in
finance sector and recommends tailoring of arbitration procedure to suit the need of the
sector. Based on two years of surveying financial institutions round the globe, the report
is a coherent and reliable source. The report discusses changing landscape of financial
disputes and experience of arbitration of various financial institutions. Addressing the
issues faced in arbitration, the report then specifically discusses derivate disputes,
sovereign financial disputes, investment arbitration applied to banking and finance
disputes, disputes relating to regulatory matters, international financing disputes,
Islamic finance disputes, disputes relating to advisory matters and disputes relating to
asset management.

Types of Arbitration

At the outset, the parties are required to choose between ad-hoc arbitration and
institutional arbitration.

Ad hoc Arbitration

3
Id.
4
P.R.I.M.E. Finance. Primefinancedisputes.Org, 2020, primefinancedisputes.org/page/arbitration-rules.
Accessed 15 Aug. 2020.
5
Strik, Daniella. Launch of P.R.I.M.E Finance Arbitration Rules: Dispute Resolution in Global Financial Markets.
Kluwer Arbitration Blog, 17 Jan. 2012, arbitrationblog.kluwerarbitration.com/2012/01/17/launch-of-p-r-i-m-e-
finance-arbitration-rules-dispute-resolution-in-global-financial markets/?
doing_wp_cron=1597498163.3008511066436767578125. Accessed 15 Aug. 2020.
6
Available on https://cdn.iccwbo.org/content/uploads/sites/3/2016/11/icc-financial-institutions-and-
international-arbitration-icc-arbitration-adr-commission-report.pdf.
Ad hoc arbitration is the ones where parties are at liberty to decide arbitrators, arbitration
procedure, applicable and administrative support 7. The arbitration is not administered by
others and parties draft their own rules. However, since the process of drafting can
sometimes be time-consuming and expensive, parties leave the rules on the discretion of
the arbitrator or adopt rules specifically for ad hoc arbitration, for example, UNCITRAL
rules8.

Institutional Arbitration

Institutional arbitration is the ones managed by institutions dedicated to conduct

arbitration. The parties submit themselves to arbitration institution through an agreement.
The institution follows to own procedures and rules to adjudicate the dispute. As opposed
to ad hoc arbitration, the parties do not need to include procedure clauses for the conduct
of arbitration in the agreement. Institutional arbitration is more viable as they are well-
established, having the potential to deal with contingencies like when the defendant refuses
to co-operate9. However, they add a level of bureaucracy, sometimes, leading to additional
charges, expense and time.

Advantages of Arbitration

The benefits offered by arbitration make it a preferable option over courts to resolve
disputes.

1. Enforceability: Enforceability of foreign arbitral award is easier than the judgement of a

foreign court. Article 3 of the New York Convention 1958 states that

“Each Contracting State shall recognize arbitral awards as binding and enforce them in
accordance with the rules of procedure of the territory where the award is relied upon,
under the conditions laid down in the following articles. There shall not be imposed
substantially more onerous conditions or higher fees or charges on the recognition or
enforcement of arbitral awards to which this Convention applies than are imposed on the
recognition or enforcement of domestic arbitral awards.”

Currently, there are 164 countries that are signatory 10 to the convention, making
enforceability of arbitral award fairly universal.

2. Confidentiality: While arguing, parties may be required to share sensitive information of

their cooperation. Arbitration tackles with this situation. In open court setting, the
7
Ad Hoc Arbitration Law and Legal Definition | USLegal, Inc. Definitions.Uslegal.Com,
definitions.uslegal.com/a/ad-hoc-arbitration/#:~:text=Ad%20hoc%20Arbitration%20is%20a. Accessed 15 Aug.
2020.
8
“Use of Arbitration in Finance Disputes.” Www.Ashurst.Com, www.ashurst.com/en/news-and-insights/legal-
updates/quickguide---use-of-arbitration-in-finance-disputes/. Accessed 15 Aug. 2020.
9
Id.
10
UNITED NATIONS COMMISION ON INTERNATIONAL TRADE LAW, www.uncitral.un.org.
 information is accessible to public. But, in arbitration, confidentiality is maintained. The
details of the arbitration proceeding may not be open for the public.

3. Neutrality: It may happen that parties to a dispute may refer it for arbitration to a third
jurisdiction or other than that of theirs. This is not possible in litigation as to get a case
listed, one of the party should be of the jurisdiction of the court where dispute is
referred to. Arbitration ensures neutrality as the arbitrator is not related to any of the
party and is not influenced by the factor of belonging to the same state.

4. Procedural Flexibility: Arbitration proceedings are flexible offering parties autonomy to

decide rules, venue, seat, language, time and place of arbitration. The process is very
feasible for the parties.

5. Expertise: In litigation, the judge may not possess expertise and technical understanding
of the matter argued before him/her. The judge may adjudicate the dispute purely
based on law applicable but it may be of little benefit to the parties whose main concern
is advantage of the organisation rather than punishment to the other party. Arbitration
solves this problem. There is no bar on a person not possessing law degrees to act as
arbitrator. Arbitration institutions consist of arbitrators who are experts and specialists
in a given sector. They tend to offer a solution beneficial and acceptable to both the
parties.

6. Finality: Arbitral awards are generally not appealable. In India, the grounds for appeal
are highly restricted by the provisions of Arbitration and Conciliation Act, 1996. This
ultimately adds to the time and cost benefit of the arbitration.

Disadvantages of Arbitration

1. Judgement: One of the drawbacks which make parties to choose litigation over
arbitration is lack of summary judgement and precedent value of arbitral award.
However, leading organisations like SIAC and SCC have amended their rules to include
summary judgement11. Summary judgement is where claimant asks for quick judgement
without including quick hearing 12. The parties can include in the arbitration clause
granting power to the arbitrator to give a summary judgement.

2. Interim Orders: The fact that parties have to wait for constitution of arbitral tribunal to
have an interim order acts as a major drawback. Some important arbitral institutions
have a provision of appointment of emergency arbitrator 13 who can grant interim
orders. Thus, the said arbitrator is appointment before constitution of arbitral tribunal
to grant interim relief.
11
Singapore International Arbitration Centre Rules (2016), Rule 29.1; Stockholm Chamber of Commerce
(2017), Art. 39 (1)
12
Feris, Cliffe Dekker Hofmeyr-Jackwell, and Thapelo Malakoane. “International Arbitration and Financial
Institutions - Why Do Financial Institutions Generally Avoid Arbitration? | Lexology.” Www.Lexology.Com,
www.lexology.com/library/detail.aspx?g=e5f534b2-291a-40de-983a-e2f810a5b26d. Accessed 15 Aug. 2020.
13
International Chamber of Commerce Arbitration Rules (2017), Art. 29; International Centre for Dispute
Resolution Arbitration Rules (2014), Art. 6; Stockholm Chamber of Commerce Arbitration Rules (2017), Art. 1
Appendix II; Singapore International Arbitration Centre (2016), Art. 30.
3. Costly: This may be surprising to hear but arbitration procedure can be costlier than
litigation14. Hence, the perception that arbitration is cheaper than litigation, of which
arbitration boost of, is not applicable in all cases.

4. Consolidation: In litigation, parties can argue for different disputes arising out of a single
agreement, making the process convenient. This, however, is not always the case in
arbitration. Parties may need to adopt different arbitral procedures for dealing with
different disputes. Consolidation may also occur where multiple parties are allowed to
argue for a same dispute. Consolidation is being incorporated in arbitration. Article 10 of
ICC Rules allows consolidation in arbitration process15.

Conclusion

Financial Institutions are increasingly adopting arbitration over litigation. The reports and
guidelines of various institutions like ICC, P.R.I.M.E Finance and ISDA have provided a level
of certainty to arbitration procedure. These organisations have framed their rules keeping in
mind the demands of the financial sector. Arbitration has its advantages as well its
drawbacks. But organisations are continuously aiming at eliminating these drawbacks. It can
be said that the advantages offered by arbitration outdo the limitations it comes with.

During this period of Covid-19, the world is dealing with crisis, having financial crisis as one
of the major crisis. Financial institutions like brokerages remain badly affected by the crisis.
This may lead to increase in dispute and eventually, increase in arbitration proceedings.
What is the need of the hour is to shift to new technology, adopting virtual proceedings over
physical ones. Arbitral institutions need to play an active role to ensure speedy disposal of
the disputes so that backlog of cases does not add to the burden of financial institutions.

14
Mccarthy, Timothy, et al. International Arbitration by Financial Institutions: Current Practices and
Opportunities.
15
Supra note 12.