Arbitration is the new alternative of privately resolving the dispute rather than dragging a person to the traditional age-old court litigation as a means of resolving disputes, has now attracted quite a few sector’s attention one of them being the ever crucial Financial Sector. Most of the financial institutions and organizations are now tilting towards the method of arbitration as a solution for any disputes arising regarding the relevant contract between both parties. The key features of this practice being how consensual it is in nature, how it always holds a neutral ground, how it is more casual than a national court hearing, how there’s a touch of finality to any decision of Arbitrator rather than rounds of appeals in the court systems, makes arbitration a relatively better alternative than the tedious and lengthy court procedures.
ADVANTAGES THAT LED TO THE GROWTH OF ARBITRATION IN THE FINANCIAL SECTOR
The current situation of Arbitration in the financial sector is that it brings with it the element of confidentiality. Any delicate financial situation like Mergers and Acquisitions which affects international markets worldwide and if discussed in open court may easily lead to leakage of any sensitive information, demand a process in which only the private parties are involved and the decision-maker must be a person who by contract won’t blurt out any of this crucial information to any third party. Secondly, the expertise that the arbitrators generally have is lacking with the courts. Specific arbitral tribunals have within them arbitrators with respective knowledge about the subject matter at hand, which makes it easier to adjudge in such situations leading to a higher level of satisfaction among the parties. Further, Arbitral proceedings can be tailor-made to suit the requirements of both parties so that there is a level of convenience maintained and enforceability of an arbitral award is much easier compared to the order or judgment of any court.
PERCEIVED LIMITATIONS OF ARBITRATION
However, all these aspects do not guarantee that this is a foolproof method and like any other practice, it is not devoid of the disadvantages and problems that it has to deal with. One of the most attractive features of arbitration was that of it being cost-effective. However, in the case of cross border dealings and partnerships. The cost has become a factor as both parties may not belong to the same country and thus may involve high costs regarding the expenditure of procedure and transportation. Apart from that, both parties and arbitrators may belong from different countries which may lead to delay in coordination between the parties and the arbitrators which may lead to slow remedies. This coupled up with the facts such as no prospect of appealing the final award and having no binding precedent to follow because of awards generally being confidential, puts Arbitration a bit in the shadows. With this being said, it still appears that arbitration even with all its pros and cons is the most suitable option to solve most financial disputes and will continue to gain popularity in the financial sector in the near future.
REPORTS AND GUIDELINES THAT HAVE LED TO THE GROWTH OF ARBITRATION IN FINANCIAL THE SECTOR
I. THE ICC COMMISSION REPORT ON FINANCIAL INSTITUTIONS AND INTERNATIONAL ARBITRATION
The Task Force on Financial Institutions and International Arbitration examined several banking and financial activities by licensed banks or by funds (equity, investment or sovereign wealth). Analysis of arbitration in regulatory matters, international financing, trade finance, Islamic finance disputes, advisory matters, asset management and interbank disputes was done in this report and major potential growth areas where arbitration could be utilized were identified.
An overview of major sections of this report conveys the constant significance being given to arbitration in this sector. Section II sets out the Task Force’s detailed recommendations for tailoring the arbitration procedure to suit the needs of the banking and finance sector whereas
Section III discusses the changing landscape of financial disputes. Further, the Report’s conclusions and findings tally with the 2013 survey by the QMUL School of International Arbitration and PwC. In this survey it was found out that approximately 69% of the banking and finance sector shows strong support for arbitration, however, less than one-fourth of general counsel listed arbitration as their most preferred option.
For the making of this report specifically, 50 financial institutions and banking counsel from across the world were interviewed, as well as various internal policies, publications, arbitral awards and data from approximately thirteen arbitral institutions were considered, thus making the report (which is available on the ICC’s website) a reliable one.
II. THE 2013 ISDA ARBITRATION GUIDE
The International Swaps and Derivatives Association (ISDA) published a guide in September 2013 on the use of arbitration in the ISDA Master Agreement. It included within itself sample clauses for use in both the 1992 and 2002 Master Agreements. Later on, updated in 2018, it included an expanded range of “ISDAfied” model arbitration clauses for usage in a large number of arbitral institutions around the globe. This reflects the increasing use of arbitration in finance transactions.
III. P.R.I.M.E. FINANCE ARBITRATION RULES
When the issue regarding the ability of the courts to deal with complex disputes arose, it resulted in the establishment of an international finance disputes center i.e. P.R.I.M.E. Finance. Based in The Hague and launched on 16 January 2012, this center offers mediation, arbitration and other dispute resolution services to the finance sector and has its own arbitration rules which have been adapted to meet the needs of the financial markets. Apart from this. It also boasts of its panel of experts and arbitrators from different fields to provide the diversified knowledge needed in adjudication.
On a close analysis it can be found out that these rules bear a striking resemblance with the UNCITRAL Arbitration Rules. However, the P.R.I.M.E. Finance Arbitration Rules are made to suit the needs of arbitration in financial markets whereas the UNCITRAL Rules have been written for ad hoc arbitration.
The clauses in P.R.I.M.E. Finance Arbitration Rules also provide for making awards public with the consent of all parties. P.R.I.M.E. or the awards may be published anonymously. These provisions are aimed at supporting the overall goal of P.R.I.M.E. Finance and creating a robust framework of law.
IV. SUMMARY PROCEDURES NOW AVAILABLE
Earlier, one of the primary reasons given for preferring national courts over arbitration was to secure a relatively speedy resolution via the summary judgment procedure whereas, in arbitration, it was the duty of arbitrators to give a “full opportunity” to parties to set out their cases.
However, that has changed now. The Singapore International Arbitration Centre (SIAC), the Arbitration Institute of the Stockholm Chamber of Commerce (SCC) and the Hong Kong International Arbitration Centre (HKIAC) now provide for summary disposal or early determination of disputes making arbitration now a more viable option.
As of now, a number of arbitral domestic and international institutions do exist in India. However, none of them are of global repute and thus it is difficult imagining their role in finance and banking. Arbitration is a vitally important supplement to enhance ease of doing business but sadly, India is lacking behind others. However, the Government of India has made major strides in greater efficiency and efficacy in resolving commercial disputes, including major legislative measures on promoting ADR and one can hope that day won’t be far when we as a nation would be leading our way.
This article is authored by Shreya Shrivastava and Sachin Bhatnagar, students of Dr Ram Manohar Lohiya National Law University, Lucknow.
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