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Should arbitration be the first choice for finance sector dispute resolution?
Traditionally, the finance sector has preferred to resolve disputes in the courts rather than in arbitration. Could Brexit, coupled with the new summary determination mechanisms, make arbitration even more attractive to the finance sector?
Historically arbitration has proved less attractive to the finance sector as compared to other sectors such as shipping, energy, insurance and construction.
Banks and financial institutions preferred to resolve disputes in the courts of key financial centres such as London or New York; with arbitration seen as an option for mitigating enforcement risk in emerging market transactions. However, in the last ten years, a clear trend has developed towards a greater acceptance of arbitration with banks and financial institution increasingly viewing arbitration as an important alternative to litigation.
Statistics released by the London Court of International Arbitration (the “LCIA”) show that banking and finance arbitrations constituted 32% of its caseload in 2019, up from just 11.5% in 2010. A number of industry specific initiatives have helped to drive this trend. In 2010, the ISDA/IIFM Tahawwut Master Agreement became the first official ISDA document to provide for arbitration. Industry consultation confirmed an increased interest in arbitration, resulting in the publication of the ISDA Arbitration Guide and a selection of model arbitration clauses in 2013. The Loan Market Association followed suit, including an option for parties to agree to LCIA arbitration in some standard facility agreements. Meanwhile, 2012 saw the establishment of PRIME Finance, a specialist arbitration forum for complex financial disputes.
More recently, two additional factors have come into play, which may make arbitration even more attractive to the finance sector. The first of these is Brexit: specifically the impact of Brexit on the future enforcement of English court jurisdiction clauses and English court judgments across the EU.
Arbitration is unaffected by Brexit. Arbitration clauses selecting England as the seat of arbitration and arbitral awards made in England will continue to be recognised and enforced in the remaining EU member states and vice versa.
A key advantage of arbitration has always been the relative ease of cross border enforcement of arbitration clauses and arbitral awards. This is what made arbitration an attractive option for transactions involving emerging markets. Pre Brexit, intra-EU enforcement was not considered a significant risk factor due to the availability of a comprehensive regime, set out in the Brussels Recast Regulation, for the reciprocal enforcement of jurisdiction clauses and court judgments. Post Brexit, the UK no longer has the benefit of the Brussels Recast Regulation resulting in uncertainty as to whether English court jurisdiction clauses and English court judgments will continue to be respected and enforced by the courts of the remaining EU member states.
Arbitration is one of the very few things in life that will remain unaffected by Brexit, providing a welcome certainty in an increasingly uncertain world.
Arbitration is unaffected by Brexit, as the enforcement of arbitration clauses and arbitral awards is regulated by the New York Convention to which the UK is a signatory in its own right. Described as the most successful treaty in private international law, the New York Convention has 166 signatories including, most recently, Angola and Sierra Leone.
Arbitration clauses selecting England as the seat of arbitration and arbitral awards made in England will continue to be recognised and enforced in the remaining EU member states and vice versa. This makes arbitration an attractive option for parties who are keen to continue to use English law but are concerned about the possibility of having to enforce against assets held in the EU. The second factor making arbitration more attractive is the introduction of summary determination procedures in arbitration.
One of the advantages of court proceedings in jurisdictions such as England and New York is the availability of summary judgment. In England, summary judgment can be obtained without the need for a full trial, where the court rules that a claim or defence has no real prospect of success and there is no other compelling reason why the case should go to trial. Summary judgment offers a quick and effective mechanism for obtaining judgment in debt actions or actions where a defendant has no defence to the claim and, as a result, is highly valued by banks and financial institutions.
Until recently, arbitration lacked any express procedure for granting summary judgment. In theory, the flexibility of the arbitration process meant that arbitrators had the power to make a summary determination in appropriate cases; in practice, arbitrators were often reluctant to exercise that power because of concerns over due process.
Several of the major arbitral institutions now allow for summary determination of claims and defences.
This has now changed. Several of the major arbitral institutions including the Stockholm Chamber of Commerce, the Singapore and Hong Kong International Arbitration Centres and, most recently, the LCIA, have introduced express provisions allowing for summary determination of claims and defences. For example, the LCIA Arbitration Rules 2020, which came into effect on 1 October 2020, give arbitrators the express power of early determination, allowing them to rule that any claim or defence is manifestly without merit and to issue an award to that effect. This is a significant change, specifically designed, in part, to make arbitration more attractive to banks and financial institutions.
The significant growth in the use of arbitration by the finance sector in the last decade is set to continue. Arbitration is one of the very few things in life that will remain unaffected by Brexit, providing a welcome certainty in an increasingly uncertain world. New summary judgment procedures in arbitration will allow awards to be issued more quickly than before. As arbitration becomes more attractive in a wider range of scenarios, we think it deserves to graduate to a first choice for dispute resolution within the finance sector.
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This document provides a general summary and is for information/educational purposes only. It is not intended to be comprehensive, nor does it constitute legal advice. Specific legal advice should always be sought before taking or refraining from taking any action.