Introduction to the Supplementary Materials

Julien Fouret, Partner at Betto Seraglini in Paris, Co-Editor in Chief of the ICC Dispute Resolution Bulletin, Member of the ICC Task Force and WorkStream leader (Investment Arbitration)

The ICC Commission on Arbitration and ADR published in 2016 its Report on Financial Institutions and International Arbitration.¹ The Report is a refined, condensed and concise analysis, in some 30 pages, of the various issues that were discussed during the work of the Task Force on Financial Institutions and International Arbitration, chaired by Claudia Salomon and Georges Affaki.

The Task Force and its constituent workstreams produced wide-ranging considerations for each of their particular areas of study. Given that the amount of available data and information as well as the use of arbitration greatly varied from a topic to another, some further developments were not included in the Report.

The Supplementary Materials, a 150 page publication with a 50-page bibliography, now provide the reader with the comprehensive analyses of the workstreams which structured the Task Force. It comprises of seven chapters of in-depth study by the following workstreams: Derivatives Disputes, Sovereign Finance, Investment Arbitration, Regulatory Matters, International Financing, International Financial Institutions, Development Finance Institutions and Export Credit Agencies, Asset Management.

The Supplementary Materials therefore present an exceptional opportunity for arbitration practitioners and in-house banking lawyers to access to what is believed to be an unprecedented and invaluable research on these rarely addressed issues in the arbitration sphere.

The various launch events illustrate the high interest for these issues and how the banking and arbitration industries misconceive each other. The aim of the Report and the Supplementary Materials is therefore to reconcile both industries, illustrate how compatible they are, and how arbitration can offer solutions that may have not been yet considered by financial institutions.

The Report on Financial Institutions and International Arbitration

Georges Affaki, Independent arbitrator and Avocat before the Court of Appeal of Paris, Co-chair of ICC Task Force

Claudia T. Salomon, Partner and co-chair of global International Arbitration practice at Latham & Watkins’s New York office, Co-chair of ICC Task Force

The ICC Report on Financial Institutions and International Arbitration finds that arbitration is increasingly a part of the strategic options considered for cross-border banking and financial disputes. The industry-specific arbitral initiatives include the introduction in 2013 of the ISDAfied optional arbitration clauses into the International Swaps and Derivatives Association (ISDA) Master Agreement. Bank regulators also have taken the initiative of proposing arbitration mechanisms in the banking sector. In short, the oft-cited financial institutions’ averseness to arbitration, abstractly stated, is incorrect. But financial institutions neither use arbitration regularly nor as a default rule.

Financial institutions tend to use international arbitration when:

• the transaction is particularly complex and specialized decision makers are sought (such as project finance, mergers & acquisitions, certain multilateral loans, asset management, sensitive capital restructuring)
• confidentiality is a concern;
• the counter-party is a state-owned entity; and
• the counterparty is in a jurisdiction where the enforcement of an arbitral award under the New York Convention will be easier than enforcement of a court judgment.

Financial institutions’ perception of arbitration is rapidly evolving in the wake of the global financial crisis, the sovereign debt crisis, the digitalization of banking, and the new regulatory approach to bank resolution. With the data disclosed in the Report, financial institutions have the tools to utilize arbitration as a viable alternative to litigation.

The methodology

The Task Force took stock of the use of arbitration in banking and financial disputes through interviews with more than 50 financial institutions on five continents. The Task Force also collected statistics from 13 arbitral institutions and conducted an in-depth examination of relevant investment and commercial arbitration awards.

Recognizing that one size does not fit all, the Task Force analyzed all the fields of corporate and investment banking including: derivatives, sovereign lending, investment arbitration and banking instruments, arbitration in bank regulatory matters, international financing (including syndicated loans and trade finance), Islamic finance, multilateral and development finance, advisory banking, asset management, and interbank arbitration.

The Report underscores the fact that financial institutions often participate in commercial transactions as is the case with any other corporate entity. They purchase products, supply services, invest in equity stakes in other companies, agree to engage in joint venture projects with other financial or nonfinancial entities, discount their long-term receivables, or issue shares to the public, all of which are common business transactions that involve no idiosyncrasies unique to banking. Disputes arising in the context of such dealings are expected to be resolved by international arbitration in the same way they would be resolved in the case of non-banking parties.

The Report findings and recommendations

The Report offers recommendations regarding how financial institutions may adapt arbitration to their requirements and identifies the many features that make arbitration attractive for businesses. These recommendations include ways to reduce time and costs; expressly empower the tribunal to consider dispositive issues or claims and defences on a summary basis; specify that the arbitration shall remain confidential; specify that the arbitrators must have particular expertise relating to the financial sector generally, or a specific financial instrument; address the parties’ rights to obtain interim relief; address joinder of parties and consolidation of claims under multiple contracts; allocate costs; and provide for appellate review.

The Report also recommended that financial institutions develop their own set of internal policies regarding the use of international arbitration and their preferred ingredients of an arbitration agreement, tailored to the particular circumstances and segments of their business.

In underscoring the flexibility of arbitration, the Report emphasizes its potential accommodation both of the expectation of confidentiality in certain banking businesses, such as advisory banking, and of standard-setting precedent publication that other banking businesses, such as syndicated lending and derivatives, require to control risks in their field.

The Report also offers insight into the opening of investment arbitration to banking and financial instruments. In the past decade, investment arbitration awards have determined that various financings, the operation of bank networks and the issue of sovereign bonds, bank guarantees and derivatives, to have the qualifying elements of protected investments. Barring a particular carve-out in the applicable investment treaty, a dispute between an investor (often a financial institution or its foreign shareholders) and the host State in relation to those instruments becomes potentially eligible for treaty protection and adjudication by an international arbitral tribunal, even though the relevant banking contract may not include an arbitration clause.

Recent awards have allowed banks and their shareholders to seek vindication for expropriation or discriminatory actions by national bank regulators which were either prompted by political motives or denied their due process rights. The institutionalization of bail-in measures in the wake of the entry into force of the Bank Recovery and Resolution Directive 2014/59/EU, of the European Parliament and of the Council of 15 May 2014, establishing a framework for the recovery and resolution of credit institutions and investment firms is expected to generate claims by bailed-in creditors and shareholders that may potentially be filed before investment arbitral tribunals.

Overview of the Launch of the ICC Report on Financial Institutions and International Arbitration

Claudia Salomon, Partner and co-chair of global International Arbitration practice at Latham & Watkins’ New York office, Co-chair of ICC Task Force

After the release of the Report on the Task Force on Financial Institutions and International Arbitration in Rome in the fall of 2016, launch events were held in 2017, around the globe, including in Jakarta at the ICC Banking Commission meeting, Dubai, Hong Kong, London, Miami, New York, Panama, Rome and Singapore. The launch events highlighted the key finding from the Report – financial institutions do in fact use international arbitration, including investment treaty arbitration. However, the interest and openness to international arbitration varies among the business lines within the financial institution and the type of transaction. The key takeaway is that the arbitration process can be tailored to meet the needs and interests of financial institutions, and the ICC remains at the forefront in addressing these issues.

An Italian Perspective

Cecilia Carrara, Partner at Legance Avvocati Associati in Rome, Member of the ICC International Court of Arbitration

The Italian Financial market is among the ones that could benefit more from a widespread diffusion of the Report, since Italian financial institutions, agencies and private banks have traditionally expressed some hesitation in adopting arbitration clauses for their disputes. It is common opinion among the banking institutions in Italy that they would be better placed in selecting civil courts rather than arbitration clauses for the following main reasons: possibility to obtain summary judgments and interim measures (in particular as concerns litigation connected with demand guarantees or other forms of collateral), relatively low cost of court litigation in Italy as opposed to arbitration, greater facility to join multiple parties, potential limitations to the arbitrability of disputes in case of insolvency of the debtors (see para. 32 of the Report). In this sense, Italy is no exception in the broader banking sector.

Moreover, it is a fact that the standard contracts in the past decades in the banking sector have been mostly complying with English law contractual standards, or were governed outright by English law, with choice of courts clauses in favor of the English courts in most cases. The Italian legal, financial and banking community have acknowledged recourse to English law and English courts almost as a given, in particular as regards international transactions, with little questioning of the high legal costs involved and reluctance in embracing arbitration. However, these choices appear to be made generally without a deep analysis of the pros and cons of the different available options.

• Derivative disputes: In the past years, Italy has experienced a significant wave of court litigation concerning derivative disputes which, in the majority of cases, involved parallel litigations before both UK courts and Italian courts. Overall, neither in terms of legal costs nor in terms of complexity, would have arbitration been more challenging. The adoption of the International Swaps and Derivatives Association’s 2013 ISDA Arbitration Guide, which include standard arbitration clauses, may facilitate a new approach in the years to come.
• Disputes in the regulatory sector: The Italian legislator has repeatedly proposed arbitration as the preferred means of dispute settlement in the regulatory sector, in particular for disputes involving banks and small investors/consumers. Indeed, over the past years, also prompted by the EU authorities, the Italian legislator has introduced several kinds of special arbitration proceedings aimed at providing effective redress for consumers, especially as an alternative to ordinary court proceedings.² This new legislation favors arbitration especially in view of the possibility to shorten the duration of the proceedings as opposed to court litigation, to the benefit of the investors, and in consideration of the greater finality of an arbitral award as opposed to courts decisions.
• Investment arbitration: The Report rightly indicates that investment arbitration is an area of potential development in the financial and banking sectors. Not only because in some cases financial instruments may qualify as investments, but also because financial institutions, public agencies, including export credit agencies, and investment funds may refer their disputes to investment arbitration. The potential benefits of investment arbitration were until recently scarcely known by Italian institutions and operators. Italy has now had significant experiences in the field of investment arbitration concerning financial instruments. In the Abaclat case, approximately 60,000 Italian bondholders pursued arbitration against the Argentine Republic under the bilateral investment treaty between Italy and Argentina, following Argentina’s default on its sovereign debt.³ The majority of the Arbitral Tribunal found that holders of sovereign bonds qualify as investors for the purposes of international investment law. Interestingly, the Italian Banks’ Association established a special agency, Task Force Argentina, with the specific purpose of handling the recovery of the bondholders’ claims through the ICSID arbitration, including through the collection of all proxies and relevant documentation of all individual bondholders. The Report addresses the fact that the regulatory activity in itself may give rise, under certain circumstances, to an investment arbitration claim (see para. 15 of the Report).
• Emerging markets: Italy has also strong players investing in emerging markets. The Report highlights that the general reticence shown towards arbitration is stronger in syndicated lending and in asset finance than in international project finance, especially in the emerging markets (see para. 101 of the Report). The 2018 Risk Map drafted by Sace, Italy’s export and investment protection agency, as well the recent statistics provided by MIGA, the Multilateral Investment Guarantee Agency of the World Bank confirm that disputes relating to emerging markets are on the rise .⁴ In this sense, the conclusions of the Report suggest to carefully consider the potential benefits of international arbitration also in these contexts.
• Insolvency proceedings: Pending insolvency proceedings in Italy may constitute an actual obstacle to the enforceability of arbitration clauses under Italian law. Although an arbitral tribunal can, as the Report accurately concludes, assert jurisdiction over all matters that do not fall specifically within the exclusive jurisdiction of the insolvency court (see para. 64 of the Report), insolvency scenarios may significantly affect the possibility to effectively arbitrate several disputes pursuant to Italian law.

The ICC Report on Financial Institutions and International Arbitration is an ideal tool to promote awareness of the potential benefits of international arbitration and the possible areas of election. With such Report and Supplementary Materials the traditional skeptical positions of the banking and financial institutions towards arbitration, also in Italy, will hopefully gradually be overcome through a deeper knowledge of the actual potentials that arbitration offers as opposed to court litigation.

Hong Kong and Singapore: Feedback and Local Experiences

Patricia Peterson, Independent Arbitrator, Member of the ICC Task Force and Co-workstream leader (Regulatory Matters)

The launch events in Hong Kong and Singapore in April 2017 for the ICC Commission Report on Financial Institutions and International Arbitration provided a forum for discussion among arbitrators, counsel and representatives of financial institutions of the perceived advantages and limitations of arbitration as a dispute resolution mechanism. Consistent with the findings of the Task Force empirical study, it was observed that financial institutions in Asia were increasingly interested in arbitration. In view of the enforcement difficulties with court judgments in the region, practitioners noted that financial institutions had already shown a willingness to consider arbitration clauses for their transaction documentation where enforcement was a matter of concern. This was confirmed by the in-house counsel from major financial institutions who spoke at each event.

Because financial institutions are engaged in a wide variety of transactions and activities, one of the conclusions of the Task Force study was that there is no ‘one size fits all’ model that can be adopted for financial disputes. The discussions at both launch events therefore covered dispute resolution needs in a range of areas, such as secured, unsecured and syndicated lending, project finance, trade finance, derivatives, sovereign finance, regulatory matters, as well as investment arbitration. Perceived limitations of arbitration within the banking community were discussed, such as the lack of summary judgment, concerns surrounding the adequacy of arbitration to resolve disputes where certain security rights are to be enforced or in the context of insolvency. However, more emphasis was placed upon the neutrality that arbitration offers as a dispute resolution mechanism and the flexibility that it affords parties to tailor dispute resolution procedures to fit their needs. Among the benefits discussed were the possibility of choosing arbitrators with expertise relating to the financial sector generally or a specific financial instrument, the possibility of specifying that proceedings will be confidential (or not), the option of addressing procedural features such as parties’ rights to obtain interim relief, joinder of parties, and consolidation of claims under multiple contracts.

One noteworthy development discussed at both Asian launch events was a Consultation Paper issued by the Hong Kong Financial Dispute Resolution Centre (‘FDRC’) in October 2016 regarding proposals for the revision of its Terms of Reference to enhance the centre’s offering of services,⁵ in particular, by raising the monetary limit on claims handled by the Centre and extending the applicable limitation period. The FDRC consultation process has since resulted in revised rules that came into effect in 2018.⁶ The Hong Kong FDRC was one of the dispute resolution mechanisms examined by the ICC Task Force Work Stream on Regulatory Matters.⁷ Among other topics, the Regulatory Work Stream looked at the resolution of disputes arising in relation to the civil consequences of regulatory breaches in the form of disputes between financial institutions and their customers. Although the FDRC’s focus has been on small claims of retail investors, the Workstream found that the centre provided a cost-effective alternative to traditional litigation of these claims, with streamlined procedures. The Workstream concluded that these procedures were of general interest, given the feedback received by the Task Force from financial institutions concerning the desirability of resolving disputes more quickly.

Some of the time and cost-effective features of FDRC arbitration proceedings, such as an expedited timetable and deciding cases on a ‘documents only’ basis unless the arbitrator determines that a hearing is justified, are features of the ICC’s Expedited Proceedings introduced in March 2017 for disputes under US$ 2 million. In the context of a presentation in Singapore on the drafting of arbitration clauses for financial transactions, it was pointed out that parties may agree that the Expedited Procedure Rules shall apply irrespective of the amount in dispute. Equally, parties may agree to raise the monetary limit for disputes to be resolved under those Rules to a level above US$ 2 million.⁸

Both launch events generated discussion which tended to confirm the key findings of the Task Force Report, suggesting that, in Asia, international arbitration is increasingly one of the strategic options that is being considered for the resolution of disputes arising out of financial transactions. With the development of Hong Kong and Singapore as major arbitration centres, both benefitting from a supportive legislative framework for arbitration, this trend may be expected to continue.

ICC Report Strongly Welcomed in Panama

Aníbal M. Sabater, Partner at Chaffetz Lindsey LLP in New York, Member of the ICC Task force

The Panama launch attracted practitioners from around Latin America, with a predictable emphasis on those from the host jurisdiction. Reflective of the economic diversity of the region, the debate at the launch primarily focused on how to tailor arbitration proceedings to the gamut of financial transactions, from complex collateralizations to community-based micro-loans, and from high-risk lending to low-yield bond issuances.

Procedural complexities created by fluctuating exchange rates, high volatility of certain economies, and retail banking were addressed. As confirmed throughout the Report, with appropriate aforethought in the drafting of the clause, arbitration allows for procedural flexibility and can be effectively adapted to the various range of disputes within the field of financial services.

Participants recognized that the absence of specialist financial judges in the region raises arbitration to a particularly useful dispute resolution mechanism, for bet-the-farm disputes and other disputes requiring experienced adjudicators with insightful understanding of the type of transaction at issue.

Participants also deemed coordinated institutional and practitioners’ work warranted for arbitration to be generally accepted in the area of lower amount transactions and banking consumer disputes, where courts have historically enjoyed a ‘de facto’ monopoly.

With increasing international banking hubs such as Panama, many comments from speakers and participants addressed the use of arbitration in transnational financial guarantees’ disputes such as letters of credit. There was consensus that emergency arbitrator proceedings can be of particular interest in those disputes.

The general mood at the launch was one of guarded optimism – recognizing, on the one hand, the potential for international arbitration in a region where the ‘lion’s share’ of arbitrated disputes involves the energy, construction, and investment sectors, and on the other, the need for a concerted effort from the arbitration community to allow arbitration to reach its full potential.

---

---