Arbitration in banking and finance disputes: recent trends

The use of arbitration by financial services institutions in recent years has been on the up. We take a look at this trend and examine some of the reasons behind it.

The growth of arbitration in international finance disputes 

Financial services institutions have traditionally favoured litigation over arbitration as the forum of choice for dispute resolution. This is unlike other sectors, such as construction, shipping, and energy where arbitration clauses have long been commonplace in those markets.

However, since the mid-2000s there has been a marked increase in the number of banking and finance disputes being resolved by international arbitration; a trend that has continued in the major arbitral institutions over the last five years.

The banking and finance sector has been in the top three of the industry sectors in the LCIA Annual Casework Reports for each of the last five years.  The sector made up 32% of all cases in 2019, 20% in 2020, 26% in 2021 and 15% in 2022. The category of ‘loan or other facility’ has also been in the top three of the agreement types for LCIA disputes in three of the past five years. Similar observations can be made for other major arbitral institutions. For example, disputes in the banking and finance sector made up some 13.5% of all HKIAC cases in 2020, 16.2% in 2021 and 36.9% in 2022.

Whilst the sector covers a diverse range of institutions and financial products and the decision to choose arbitration over litigation will often depend on the particular circumstances of each transaction, it is nonetheless possible to make some general remarks as to the reasons for the growth in popularity of arbitration.

Factors behind this growth

First, the increasing globalisation of finance transactions, and particularly the involvement of parties from emerging market jurisdictions means arbitration has become more attractive to financial institutions. 

The primary attraction in this context is the enforceability of arbitral awards. Under the New York Convention, which has c.170 countries as contracting states, there is a general obligation for the national courts of each to recognise arbitration awards as binding and to enforce them in accordance with their national rules of procedure (subject to certain exceptions). More patchwork regimes exist for national court judgments, and whilst the practical reality is that enforcing arbitral awards can be difficult, the New York Convention is a helping hand in a world where transactions, particularly in the derivatives and bonds markets for example, increasingly involve parties from a range of jurisdictions. 

Further, and importantly from a cultural point of view, arbitration offers what is often perceived to be a neutral venue for dispute resolution, which can be significant in circumstances where a counter-party resists the preferred choice of national court. This can be particularly important in transactions involving parties from emerging markets where the alternative to arbitration might be litigating before local courts unfamiliar with complex financial products, or litigating against nation-states before their own local courts.

Second, there have been various attempts to actively promote the use of arbitration for the resolution of disputes in the sector. Particular examples being:

  • In 2013 the ISDA International Swaps and Derivatives Association (“ISDA”) published the ISDA Arbitration Guide which provided, for the first time, arbitration templates to be inserted into the ISDA Master Agreement, together with general guidance on the arbitration process (the standard Master Agreement template providing for English or New York courts). This was partly driven by the increasing globalisation of finance transactions alluded to above. In 2018 ISDA published an updated guide (since updated in 2022) with further model clauses now covering a large number of seats and arbitral institutions as options along with updated guidance addressing developments in the arbitration market since the previous edition. Whilst it is evidently hard to quantify, anecdotally, arbitration clauses appear to have been more frequently adopted in the market as a result, particularly over the last few years.
  • In 2012 the Panel of Recognized International Market Experts in Finance (“PRIME Finance”) was launched with the goal of utilising experts in financial markets in the resolution of complex financial disputes. The foundation provides access to a panel of expert arbitrators as well as a set of arbitral rules (last updated in January 2022) which are administered by the Permanent Court of Arbitration.  At the time of writing there are yet to be any known arbitrations conducted under these rules, but PRIME Finance has undoubtedly increased the profile of arbitration in the market.

Third, a number of the major arbitral institutions have made changes to their rules in recent years that have made arbitration procedures more attractive for the enforcement of rights under financing contracts. For example, most major arbitral rules now offer an emergency arbitration procedure and some also provide for early dismissal; two areas in which court procedure has historically been regarded as more robust than arbitration. It should be noted that in practice, at least under the LCIA Rules, these provisions tend to be used infrequently. For example, in 2022 there were 13 applications for emergency arbitrators under the LCIA Rules and none were subsequently appointed. There were also a total of 15 applications for early determination, of which only one was granted (with six pending at the time of the LCIA Annual Casework Report’s publication). That said, the perception that arbitral rules have adapted to align more closely to meet the needs of financial services institutions in some respects has been a factor in the growth of arbitration in the sector. 

In upcoming articles…

This has been a quick survey of arbitration trends in the financial services sector. Look out for future articles in which we’ll be drawing from our experiences to examine in further detail some of the more specific issues financial institutions face when navigating the world of arbitration.