Use of Arbitration in Banking and Finance (Part 1): LCIA Statistics Show Growth – Arbitration and Dispute Resolution

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The LCIA released its annual case report for 2021, showing that disputes in the banking and financial sector represented the largest industry sector in the LCIA in 2021, surpassing disputes related to energy and resources. The 2021 Report shows that 26% of disputes registered with the LCIA in 2021 concern the sector. The LCIA has seen a corresponding increase in loan agreements and other loan facility agreements in LCIA arbitrations, from 16% in 2020 to 21% in 2021. Although overall industry statistics were bolstered by a group of 27 related business (constituting 32% of all banking and finance business at the LCIA in 2021) as discussed below, the LCIA figures are consistent with a softening in the attitude of finance customers towards arbitration.

This Part 1 of our series on arbitration in banking and finance examines what may have caused this increase and offers some observations on current trends in dispute resolution. Part 2 will examine the myths and realities of arbitrage, covering some of the key points that industry clients should be aware of. Part 3 will examine the increasing use of investment treaty arbitration by banks to protect their investments. A full analysis of the LCIA’s annual case report will follow.

General rise in arbitration of disputes in the banking and financial sector

This year’s statistic shows a continuation of the growing trend of arbitration in banking and finance since 2016.

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Paula Hodges QC, President of the LCIA Court and Global Head of International Arbitration at HSF comments: “The increases in recent years suggest a change in the attitude of banks and financial institutions towards resolving their disputes through arbitration. Certainly, in private practice, we are seeing greater interest from clients in this sector to explore what arbitration has to offer. Although there are many factors at play, arbitration can be suitable for a wide range of different financial transactions, not only where there are concerns about the enforceability of court decisions or the need for a neutral forum , but also in cases where the procedural flexibility of arbitration or private dispute resolution may be to the advantage of the parties. Clients are also increasingly recognizing that arbitration offers the opportunity to choose a decision maker from a very high quality group.“.

The LCIA is not alone in this trend. An increase in the sector can also be observed in some other institutions – for example, banking and financial services disputes represent 16.2% of cases registered in 2021 with the HKIAC (compared to 13.5% in 2020).

Interrelated Factors Driving the Growth of the Use of Arbitration in the Banking and Financial Sector

A number of interrelated factors appear to be driving the growth in the use of international arbitration in banking and finance:

  • Increase the participation of parties from a multitude of jurisdictions, including emerging market jurisdictions, in complex financial transactions – parties need a neutral venue to resolve their disputes, as well as to ensure an enforceable outcome. There is no reciprocal enforcement regime for court decisions with the global scope of the 1958 New York Convention, to which 170 countries are parties.

  • Institutional efforts – the institutions highlighted the main characteristics of arbitration likely to work for disputes related to complex financial products, such as the choice of specialized adjudicators and the correction of perceived flaws, such as the absence of an equivalent to summary proceedings. In particular, the institutions now provide for the early rejection of unfounded claims or defences. The 2020 LCIA Rules expressly affirmed the power of the Tribunal to make a speedy decision and expedite the proceedings. The annual case report confirms that in 2021 there were 15 requests for early determination, of which seven were granted, two were denied, one was superseded by the settlement of the case by the parties and five were n had not yet been decided as of the end of 2021. Other institutions, such as the ICC, have also clarified that their rules empower the court to make similar early decisions. Additionally, institutions such as ISDA – which published an Arbitration Guide in 2013, revised in 2018, for use with an ISDA Master Agreement – ​​and PRIME Finance, a specialist foundation focused on access to expertise and arbitration rules for the resolution of complex disputes in the financial markets – have helped to raise the profile of arbitration as a method of dispute resolution.

  • Decreased fear factor – traditional myths about arbitrage are dispelled and there is increased interest in how the features of arbitrage can offer certain advantages in certain complex banking and financial transactions – our experience of financial clients’ evaluation of their dispute resolution options is described in more detail below. Procedural flexibility, confidentiality, the ability to select an arbitrator with hands-on industry experience, and more limited document production can all be valuable in the right circumstances.

HSF’s observations on the most recent trends – no changes in the wholesale market, but an increase in “arbitrage-curious”

In our experience, a jurisdiction clause – often in favor of the English or New York courts – remains the preferred choice in many banking and financial transactions. Before the English courts, the parties were able to rely on a solid body of law (both on the general principles of contract law and, in particular since the financial crisis of 2008, on the interpretation of complex financial products). The law is applied by English courts in an accurate and predictable manner.

However, some banks and financial institutions, particularly in the lending and derivatives markets, have also cautiously viewed arbitrage as an appropriate option in certain situations. For example, arbitration represents a neutral choice for transactions where a counterparty opposes the preferred choice of forum; it helps manage enforcement risk where emerging market jurisdictions are involved or in sovereign lending cases (including when trading sovereign wealth funds) where the counterparty may benefit from jurisdictional immunity.

Quite reasonably, Brexit and the changes around the English court judgment enforcement regime in the EU have not seen an automatic pivot to arbitration. However, both due to Brexit, and certainly periodically, banking and financial customers have reviewed their internal policies on the choice of dispute resolution clause. In particular, our clients have thought about the use of unilateral jurisdiction clauses (which are widely understood to fall outside the reciprocal enforcement regime of the Hague Convention on Choice of Court Agreements – for more information on this, please see our Guide here). They also considered the scope of these dispute resolution policies as they point to arbitration. In particular, they asked for advice on how arbitration might work for the type of disputes they encounter and how they might make the most of the features of the arbitration process.

In Part 2 of this series, we will focus on some of the key considerations for banking customers when considering arbitration in their range of dispute resolution choices. We will discuss the myths and realities of arbitration in the context of banking and financial sector disputes and highlight situations in which arbitration can provide strategic advantages.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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