Rise in financial institution arbitration : all you need to know

Rise in financial institution arbitration : all you need to know
Image source: https://www.smartsheet.com/financial-audit

This article has been written by Pooja Agrawal, pursuing a Diploma in US Corporate Law and Paralegal Studies from LawSikho and edited by Shashwat Kaushik.

It has been published by Rachit Garg.

In recent years, litigation has been increasing day by day due to non-payment of dues to banks and financial institutions. This may lead to litigation between the parties due to a fear of losing money. Most banks or financial institutions are preferred for litigation, i.e., taking action against SARFAESI, DRT, and the Insolvency and Bankruptcy Code of 2016, instead of adopting arbitration, meditation and so on.  

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Litigation, which is opposed to arbitration, allows remedial measures, i.e., the issue of notices for non-appearances, interim orders, etc., and such an option is not possible in arbitration. The litigation is public in nature, which may harm the party’s reputation, breach the confidentiality of data and also hinder future investment prospects. Further, it leads to the collapse of the economy due to negative variation and financial distress in the public. Thus, the party needs a private mode of resolution, i.e., arbitration, to maintain the privacy of the proceedings.

Today, a transaction with a financial institution is very complex  and the principle of dispute resolution for resolving the dispute has changed and the same requires confidentiality. In such a situation, banks and financial institutions are trying to adopt arbitration instead of litigation. Even in litigation, the judges have more power exercised by the law than the arbitrator. Arbitration is growing with the pace of development and with this growth, India is quite ambitious to emerge as the hub that facilitates international arbitration. Arbitration in India is ad hoc arbitration or institutional arbitration. India preferred international arbitration when foreign companies entered into business contracts with Indian companies. Still, India lacks institutions with international arbitration repute like the ICC, P.R.I.M.E., SIAC, LCIA, HKIAC, etc. Arbitration institutions have taken steps to increase the need for arbitration in the finance sector.

Finance dispute cases are growing interested in arbitration when it identifies that the courts have perceived it as unreliable and there is no document or agreement that can reach the party to the choice of the court. To deal with this situation, several arbitration institutions incorporated the rule and system that seek to address the parties in the finance sector. Arbitration has experienced an abrupt increase in issues in the financial sector. 

Arbitration is certainly a kind of dispute resolution process in which the parties privately resolve their dispute (by agreement of the parties involved in the dispute). When the party faces a dispute about their settlement (the arbitration clause), they seek the help of the arbitrator. The arbitrator is considered a third party who concentrates on both sides of the party in dispute and, in return, tries to remedy their dispute by giving their decision in the form of an arbitral award. This method was adopted to resolve the dispute outside the courtroom, as indicated in the arbitration agreement. 

A specialised institutional arbitration that conducts the arbitration process is international arbitration. Each institution has its own set of rules that provide the framework and also administer the process. Institutional Arbitration has organised a procedure that provides advantages to the parties who opt for arbitration.

The manner of resolving the dispute between the investor and brokers, or between brokers, is finance arbitration. Financial institutional arbitration requires a person who has deep knowledge of finance and an understanding of complex transactions. A large number of institutional arbitrations exist across the globe. The benefit of institutional arbitration is that the party can get assistance from the institutional professionals and staff.

In short, international arbitration is the most logical dispute-resolution mechanism for international banking and finance dealings.

Here we discuss the benefits of arbitration and the reasons for the parties to opt for institutional arbitration.

Arbitration benefits in economic areas:

  1. The choice-making is done with the aid of arbitrators, who are usually appointed by the parties, and the same is not possible when the parties opt for litigation. 
  2. Institutional Arbitration has instituted a panel of arbitrators who have specialised knowledge and information in banking and finance for the enforcement of the arbitral award. 
  3. It’s far more consensual. In a few circumstances, public courts might also assert jurisdiction over a dispute even in the absence of an agreement between the parties to that effect. In contrast, an arbitral tribunal, which is most effective, has jurisdiction if all parties have agreed to submit the dispute to arbitration. This is typically dealt with by putting an arbitration clause inside the relevant agreement.
  4. The process of arbitration is confidential, unlike other court proceedings; matters are not open to the public at large. Even the arbitral award is not to be had in the public domain.
  5. The arbitration award is generally final and confined to rights of assignment, not like  the judgements of public courts, which are normally appealed through various further rounds of litigation, and the same is going on sometimes for an unlimited period.
  6. Arbitration offers a desire for the events to offer a single dispute resolution route of action for those financial instances that comprise a range of associated agreements. 
  7. Arbitration provides a flexible procedure for the arbitrator, and the procedure is tailor-made to meet the parties’ needs.

Institutional arbitration trained the professionals and staff to determine the procedure of arbitration.  

The parties, on their own, select the arbitrator to do the process. The parties sometimes choose the institution for instituting the draft clause of the institution arbitration, which may be amended from time to time, and for these changes, there is no ambiguity in the process. 

Institutional arbitration employs a lot of arbitrators from various places who have vast experience and knowledge. As and when needed, the parties and arbitrator seek advice from the institution’s arbitrator.  

If an arbitral award challenges a tribunal member, then the institution of arbitration assists the tribunal to deal with the matter that arises from the conduct of the arbitration. 

Day by day, the use of international arbitration in the financial sector is increasing to resolve financial disputes. However, in the context of dealing with parties from rising markets, the biggest advantage that international arbitration has over national court litigation is enforcement.

The 2013 ISDA Arbitration Guide

The International Swaps & Derivatives Association (ISDA) has posted after consultation with the ISDA member for the following two years, and on September 9, 2013, it issued a guide regarding tips on how one can use arbitration in the ISDA master agreement. This guide addresses the increasing trend to resolve disputes in the financial sector by way of arbitration. 

This guide involves the model clause in numerous elements of arbitration for derivative transactions, and sometimes it may or may not be appropriate for all cases. In addition to that, this guide highlights various matters on which the parties wish to modify their own.

This guide addresses the judgement in a summary manner that other arbitration institutions apply in their rules. 

In advance, it included a sample clause in the agreement; later on, an accelerated range of model clauses was delivered around the year 2018 for huge ranges of utilisation of institutional arbitration everywhere in the world and included an expanded range of “ISDAfied” version arbitration clauses for a larger number of arbitral institutions and seats around the globe. This diversification may be considered an attempt to fill the gap between the wide variety of lawsuits and the provision of arbitration with the aid of different arbitrators. In the absence of this, the parties use the personal model of a clause in the agreement that’s being veined and unsettled.  

The International Chamber of Commerce (ICC) Commission report  

The ICC Commission on Arbitration and Alternative Dispute Resolution prepared a document on financial institutions and international arbitration (the “Report“).

This report was prepared after conversing with at least greater than or about 50 financial institutions from throughout the globe, and banking counsels or sectors with diverse regulations, various policies, scholarly writing, and awards from a minimum of about 13 arbitral institutions were also examined while making this particular report.

It concludes that this seems to be due to a lack of clarity on the benefits of international arbitration, in combination with the traditional view that arbitration does not meet the wishes of specialists in financial disputes. To tackle these two findings, the report seeks to give specific recommendations on how to tailor arbitration to the desires of the finance industry. This means that the specific procedure can be tailor-made as deemed appropriate for the dispute and adapted to the legal culture of parties and arbitrations. 

This report speaks approximately of the arbitration that is being carried out within the regulatory method. In international financial matters, disputes between the banking sectors, disputes relating to trade finances, etc., and quite a massive increase in the growth sectors of arbitration were also recognised in this report. The ICC burdened that Article 22 of its rules allows a party to apply for expeditious determination of a claim that is manifestly unmeritorious.

The President of the ICC International Court of Arbitration, Alexis Mourre, said: “The immediate disposition of a manifestly unmeritorious claim or defence may, in the proper circumstances, be a useful tool to increase the time and cost efficiency of the arbitration. This addition aims to clarify that this procedural tool is available under the ICC rules of arbitration.”

This report turns out to be beneficial in determining the rise of financial institutional arbitrations in the world by classifying the forms of disputes and by means of recognising the energy of the arbitration method too.

Criminal litigation

P.R.I.M.E. Finance Rules

When courts were not able to cope with the nexus disputes arising from the financial sector, this resulted in the creation of an international finance centre known as the Panel of Recognised International Market Experts in Finance (P.R.I.M.E. Finance). PRIME consists of a panel of expert arbitrators with vast in-depth knowledge and extensive practise in this field.

This offer is related to ADR and, in return, provides resolution through the medium of mediation, arbitration, and other dispute resolution services. 

They have their own rules and clauses, which were released with this centre on January 16, 2012, situated in the Hague. The purpose of opening this centre was to fulfil the need for arbitration processes in the financial sector. It also offers a default mechanism for the appointment of an arbitrator when the parties fail to reach an agreement. All the provisions made under this had only one aim; that was to encourage the use of arbitration or law in the financial markets and to provide justice to people who suffered or went through the wrongdoing or scam of others in this area.

The P.R.I.M.E. Finance arbitration rules cover a wider scope for resolving financial disputes, including derivatives, private equity, fintech, and sustainable finance.

The P.R.I.M.E. Finance arbitration rules are inspired by, and very closely follow, the UNCITRAL arbitration guidelines. P.R.I.M.E. finance arbitration rules are made to fit the needs of arbitration in financial markets, whereas the UNCITRAL Rules were written for ad hoc arbitration. Under Prime Finance rules, the award may be made available to the general public with the consent of all parties. These provisions are geared towards supporting the overall goal of P.R.I.M.E. Finance and growing a robust framework of law. 

These rules undoubtedly enhance the attractiveness of the party to resolve the dispute concerning complex financial products, which is increasing in this competitive market. 

This year’s statistic shows a continuation of the growing trend for arbitration in the banking and finance sector since 201According to Queen Mary’s International Arbitration Survey, in 2013, the first choice (82%) for the financial service industry ranked as litigation in terms of dispute resolution mechanisms, and in 2018, it was questioned for resolving cross-border disputes by the use of international arbitration in the sector of banking and finances, which is believed to be 56%. It appears to be a rather conservative view when contrasted with the over 80% expressed by respondents from other sectors, which is increasing from the previous iteration of the survey. 

As of now, a number of arbitral domestic and international institutions do exist in India. The P.R.I.M.E. Finance rules, the ICC report, and other tasks are being advocated and set as a means to absolve the disputes through the process of arbitration and are being recognised by the financial institutions or sectors.

In the modern era, the use of arbitration in the finance sector continues to increase, but there are instances in which arbitration is not always a viable tool. It would be determined by the character of the subject matter of the dispute, by the existence of insolvency proceedings, by the characteristics of one of the parties (i.e., a public entity that should be submitted only to the transparency of a public hearing), or by their numbers (multiple-party arbitration won’t be a viable option), or sometimes the parties might not have signed the relevant arbitration clause. 

Alternatively, the accelerations of litigation, including default or brief judgement, can be warranted, although they are not presented by courts too comfortably. In the end, there can be instances where the jurisdiction of the courts cannot be ousted.

The legislature and judiciary, as well as the government, played an important role in developing the concept of institutional arbitration, including in the field of the financial sector.

That being said, every factor has its pros and cons, and the same applies to arbitration. It might nevertheless be that arbitration is suitable to solve the maximum number of financial disputes and will retain advantage recognition in the financial sector in the future.


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