ICC report on financial institutions and international arbitration: a condensed overview of a gradually changing landscape

This autumn, the ICC Commission on Arbitration and ADR published a report on Financial Institutions and International Arbitration (the "Report"). The Report offers a detailed analysis of the use of international arbitration in specialist sectors of the banking and finance industry, from derivatives and sovereign finance to advisory matters and asset management. The Report is based on interviews with over 50 financial institutions from across the globe, data received from 13 arbitration institutions and a review of relevant awards, internal policies and scholarly writing. Overall, the Report finds that despite a recent gradual shift towards more arbitration in the finance and banking industry, the use of arbitration by financial institutions remains limited. It concludes that this appears to be due to a lack of awareness of the benefits of international arbitration, combined with the traditional view that arbitration does not meet the needs of specialist financial disputes. In order to tackle these two findings, the Report seeks to give specific recommendations on how to tailor arbitration to the needs of the finance industry.

I.The users' experience with arbitration

The Report gives a condensed overview of financial institutions' experience of arbitration and concludes that there is only limited experience of arbitration to date. 70% of interviewees did not know whether their financial institution had participated in an international arbitration over the last five years. 24% of the interviewees had been involved in a small number of international arbitrations over the past five years, representing 5% or less of all of the financial institutions' disputes. Only 6% of the interviewees had participated in a larger number of arbitration proceedings.

As to the benefits that financial institutions perceived in international arbitration, the Report confirms that financial institutions favour arbitration when:

• the transaction is significant or complex;
• confidentiality is important;
• the counterparty is a state-owned entity; and
• enforcement of a judgement in the counterparty's jurisdiction may be an issue.

As regards the limitations of arbitration, the Report revealed the following to be greatest concern for financial institutions:

• the need to seek interim measures before state courts before an arbitral tribunal is constituted;
• the lack of summary disposition in arbitration as well as the inability of arbitral tribunals to issue default awards, which hampers a swift resolution of so-called "open-and-shut" cases;
• the concern that parallel, and yet interrelated, proceedings may not be consolidated in arbitration;
• the lack of precedent;
• the costs of arbitration, in particular in those jurisdictions were court litigation is comparably cheap;
• the lack of transparency, meaning that financial institutions do not feel comfortable navigating an arbitration; and
• limited powers in situations of insolvency and enforcing security rights.  

II.Insights into specialist sectors

A significant part of the Report is devoted to analysing the use of arbitration in specific specialist areas of the industry. Without going into the details of all sectors, the Report rightly points out that in light of the differences in financial disputes there can be no one-size-fits all approach.

There are areas where the use of arbitration has grown to a notable extent. Arbitration is increasingly used in derivatives disputes where counterparties come from emerging markets and where the financial expertise of the decision makers is considered to be vital. However, arbitration is not often used for derivatives disputes in Europe as arbitration is not viewed as the "default" dispute resolution option. It will be interesting to see whether this finding shifts over the next five to ten years as the ISDA Arbitration Guide makes arbitration more mainstream and accessible.

In sovereign finance, arbitration is an accepted form of dispute resolution and is generally viewed as advantageous both for the neutrality of the decision making body and the ability to appoint arbitrators who are outside the scope of influence of a sovereign counterparty. For Regulatory disputes, public policy considerations seem to deter financial institutions to opt for arbitration. However, industry-specific arbitration rules have developed that are tailored to these types of specific disputes, such as the Financial Industry Regulatory Authority in the United States or the Financial Dispute Resolution Centre in Hong Kong.

The Report notes that arbitration has yet to make inroads into the field of Islamic Finance Disputes and that it offers untapped potential for growth.

III.The ICC's recommendations

In response to the perceptions of arbitration in financial institutions, the Report reiterates the general advantages of arbitration which could be of benefit in financial disputes including the ability to appoint specialist arbitrators and obtain interim relief through emergency arbitrators. The Report also highlights the way in which arbitration can be tailored to reduce the concerns of users, from using case management techniques in order to reduce time and cost, to agreeing on an appellate procedure to limit concerns about the finality of the arbitral process.

The full report can be accessed on the ICC's website. 

For further information, please contact Mathias Wittinghofer, Partner or Tilmann Hertel, Senior Associate.