The Singapore Law Gazette

Let’s Bank on Arbitration … Why Or Why Not?

Introduction

In 2023, the value of the global financial services market was estimated at US$28,115 billion,¹Global Financial Services Market Report 2023. encompassing a complex web of domestic and international transactions entered into by banks, financial institutions and other participants. Access to and the provision of banking and financial services are vital to the modern economy, serving a range of customers from the everyday consumer to the large multilateral institution. With the sheer number of transactions occurring on a daily basis, what happens when a dispute arises?

A Traditional Preference for Litigation

Traditionally, banks and financial institutions have looked to resolve their disputes through litigation in the national courts. Arbitration and other forms of amicable dispute resolution (ADR) tend to be less popular. For instance, statistics from the ICC International Court of Arbitration show that in 2022, banking and finance disputes comprised only 5% of the Court’s global arbitration case load. The use of ADR by the banking and finance sector appears to be even more limited, with empirical evidence suggesting that it is rarely considered.

The question of why banks are generally slow to engage with arbitration and ADR to resolve disputes is a complex and layered inquiry.

The starting point is that there are many good reasons militating in favour of arbitration and ADR as preferred dispute resolution methods for the banking and finance industry.

For instance, in relation to arbitration, the ease of enforceability of arbitral awards under the New York Convention is a key advantage. An arbitral award is far more likely to be enforced, and is typically easier to enforce, than a court judgment. Another key advantage is a party’s ability to appoint an arbitrator with sector-specific expertise, particularly as banking and financial disputes grow increasingly complex, and deal with novel forms of asset classes and even environmental, social and governance obligations. Finally, confidentiality in arbitration proceedings could be seen as an attractive prospect, to avoid any unwanted negative publicity.

ADR services like mediation also have significant advantages. They create an opportunity for parties to resolve their disputes outside formal proceedings, which generally brings about time and cost savings. The inherent flexibility of the process also permits parties to shape a resolution that is mutually beneficial and commercially acceptable, even if the solution falls outside what could be ordered by a court or tribunal. Another ADR service, neutral evaluation (offered by the ICC International Centre for ADR), involves the engagement of a third-party neutral to provide an evaluation of the parties’ differences, and similarly promotes settlement of disputes.

With all these advantages, why are banks and financial institutions generally reticent to engage with arbitration and ADR to resolve their disputes? The authors suggest that there are three main reasons.

The first is that the historic preference for litigation to resolve banking and finance disputes arose from some of the comparative disadvantages of arbitration. Historically, there was no possibility of pre-action interim measures, summary disposal of unmeritorious claims and defences, or consolidation of proceedings within the arbitration process. As identified by the 2016 Report on Financial Institutions and International Arbitration published by the ICC Commission on Arbitration & ADR (the 2016 ICC Report), the lack of availability of such tools led banking and financial institutions away from arbitration as a preferred dispute resolution mechanism.

A further factor is the importance of precedents to the banking industry. If the subject matter of a particular clause in a template has been litigated, the bank can learn from the reasons set out in the publicly-available judgment, and evolve its templates to address any shortcomings. Establishing precedents is also important in relation to internationally recognised standard templates such as the International Swaps and Derivative Association (ISDA) Master Agreement. In contrast, the confidentiality inherent in most arbitration proceedings can stymie the setting of precedents.

However, arbitration procedures have evolved rapidly to meet users’ needs in recent years. All of the tools described above are now available in ICC Arbitration, as well as in several other institutional rules. Further, significant strides have been made by institutions towards the publication of anonymised awards for precedential value, for example through the partnership between the ICC and the Jus Mundi database for the publication of ICC awards. Despite all these innovations, banking and financial institutions have been slow to change their dispute resolution preferences to keep pace with such developments. And that leads us to the second reason.

The second reason is the simple fact that is not yet standard market practice in the banking and finance industry to adopt arbitration and ADR to resolve disputes. Banks are conservative creatures, and rely heavily on templates. It is no secret that the dispute resolution clause is a “midnight clause” which is only given attention (if at all!) on the doorstep of signing. By that stage, it is not likely that parties engage in thoughtful reasoning on the relative pros and cons of various dispute resolution options – parties would most likely sign up to whatever clause was already in the template. If it was not an arbitration clause, the same historical approach of opting for litigation would simply perpetuate over and over.

As for ADR, its relatively low take-up rate may be explained by an additional consideration: if a bank or financial institution offers to resolve its dispute via ADR, it could be perceived as being weak or overly pliant, and any settlement achieved may open up the “floodgates” to similar cases or solutions being pursued by other counterparties.

The final reason, as identified by the 2016 ICC Report, is “a lack of awareness” in the banking and finance industry of the potential benefits of arbitration, and some common misperceptions about the process. This is no doubt also applicable to ADR mechanisms.

However, the paradigm is changing – and quickly. With continuing growth in the global banking and finance industry, disputes are becoming ever more sophisticated, and more nuanced approaches are being adopted to deal with them. A huge amount of work has been carried out by institutions and disputes lawyers in educating clients about the benefits of arbitration and, more recently, ADR. Further, many in-house banking teams now include disputes specialists who are aware of the importance of deploying the appropriate dispute resolution strategy for the matter at hand. This has not had a significant impact so far on the number of banking and finance disputes submitted to arbitration and ADR, partly because disputes lawyers are not often consulted on drafting appropriate dispute resolution clauses (as we discuss in our conclusion below). Nevertheless, there is much cause for optimism about the future.

Moving forward, it will be critical for banks and financial institutions to focus on “appropriate dispute resolution”. With this in mind, we explore briefly when arbitration and ADR options may be appropriate for the dispute at hand.

When is Arbitration the Most Appropriate Option?

It is important to appreciate that the banking and finance sector comprises a huge variety of participants, performing a vast range of transactions with counterparties of diverse profiles. The type of dispute arising in each case would be very different. For example, a consumer bank facing an everyday customer dispute would naturally have different concerns from a private bank dealing with a high net worth customer, and from a bank dealing with a high stakes inter-bank dispute. Quite simply, there is no “one size fits all” solution.

The 2016 ICC Report found that financial institutions tend to favour arbitration where:

1. the transaction is significant and complex;
2. confidentiality is a concern;
3. the counterparty is a state-owned entity; and/or
4. the counterparty is in a jurisdiction where enforcement under the New York Convention will be easier than enforcement of a court judgment.

Arbitration may be highly appropriate for a complex dispute involving sophisticated, novel and creative deal structures, and where technical expertise on the part of the tribunal would be helpful. If the counterparty is located in a jurisdiction whose national courts may not possess the deep bench expertise required, or are generally slow, or where there are other reasons to doubt the national court process, arbitration would clearly emerge as the preferred alternative. The competence of the arbitral tribunal, integrity of the system and enforceability of the resultant award would be, to a large extent, guaranteed, In the case of institutional arbitration (eg. ICC-administered arbitrations where scrutiny of the tribunal’s award is mandatory), parties may be further reassured that the outcome will be fair and well-reasoned.

On the opposite end of the spectrum, consider a simple debt collection case, where the counterparty’s liability to pay is clear, and the main commercial focus is to obtain a quick resolution and an outcome that is easy to enforce and execute. Here, domestic litigation may be most appropriate. Crucially, obtaining judgment from the national court of a jurisdiction where the debtor’s assets are located will aid in enforceability and execution, and local court procedures may impose strict timelines and permit summary judgment (which is only just beginning to gain traction in international arbitration).

These are of course extreme scenarios, and most cases will lie on the continuum between the two. The decision to litigate or arbitrate will depend on the texture of a particular case, and the unique considerations which arise.

One potential factor which may influence the decision whether to litigate or arbitrate is the availability or absence of confidentiality. Confidentiality is an oft-touted advantage of arbitration, and one might assume that banks, wishing to preserve their reputations and avoid the erosion of confidence, prefer their legal disputes to be arbitrated, shielding them from the public scrutiny that arises in national court litigation. But empirical evidence suggests that banks can and do use publicity arising from litigation as a tool to exert pressure on their counterparties – particularly, when the counterparty is another bank or financial institution!

Another consideration to highlight is one that tends to be more obvious to dispute resolution lawyers – the different scope of discovery (or “document production”) in litigation and arbitration. Discovery is a process that requires parties to review all their records for documents, and disclose those which are relevant to the dispute. Generally speaking, the scope of discovery in litigation tends to be far more extensive (and expensive!) than arbitration, and this practical concern may shape a financial institution’s ultimate choice of dispute resolution procedure.

The above discussion is by no means exhaustive. Other differences between litigation and arbitration which may impact the choice of forum include the greater procedural flexibility and the general lack of an appellate mechanism in arbitration. On both sides of the argument, there are very rational and cogent reasons why a bank may choose arbitration over litigation, or vice versa.

When is ADR the Most Appropriate Option?

The authors would argue that it is always in a disputing party’s interests to consider amicable settlement options, and how an out-of-court settlement may be achieved, deploying ADR tools where appropriate. However, the current reality is that many banking and financial institutions still lack knowledge and first-hand experience of ADR mechanisms, leading to a reluctance to suggest them to counterparties.

Charting a Way Forward

We conclude with our recommendations on how to move the needle to ensure that banking and financial institutions do not miss out on the many benefits of arbitration and ADR.

The recommendations can be summarised as follows: Mindset, Intentionality and Teamwork.

1. Mindset – in the increasingly complex field of banking and finance, the focus must be on a different form of “ADR” – “appropriate dispute resolution”. This will require banks and financial institutions to adopt an open mind, and abandon the pre-conceived notion that litigation is “better” simply because it has historically been the default choice.
2. Intentionality – whether crafting a bespoke dispute resolution clause for a complicated transaction, or considering the best form of dispute resolution to include in a template for routine transactions, banks and financial institutions must be intentional about dispute resolution clauses. This will require an open and early discussion on what is the most appropriate dispute resolution mechanism for the transaction or template at hand, having regard to the type of dispute that might arise, and the identity, location and assets of the counterparty involved.

Banks may also consider the adoption of more sophisticated clauses such as tiered dispute resolution clauses in which ADR mechanisms can be incorporated. For instance, a clause could first require the parties to mediate, and if the parties do not resolve their dispute within a certain number of days, they will proceed to arbitration or litigation. Coupling mediation with a “hard-stop” deadline may mitigate concerns that adopting too “soft” an approach encourages errant debtor or counterparty behaviour.

3. Teamwork – a very real challenge to encouraging banks to adopt “appropriate dispute resolution”, rather than litigation by default, is that those who usually negotiate (or simply insert) dispute resolution clauses into contracts are transactional lawyers (whether in-house or external). Whilst more and more banks have in-house disputes lawyers, both internal and external disputes lawyers are often not consulted on dispute resolution clauses. But “appropriate dispute resolution” can only be deployed when those with expertise on all the different dispute resolution options available have a seat at the table. This way, relevant factors influencing the choice of dispute resolution forum can be raised for consideration, ranging from enforceability, to more discrete issues such as the different approaches in discovery between litigation and arbitration.

It takes a village – it is only with concerted efforts from external counsel, in-house counsel and arbitral institutions to educate all lawyers (whether external or in-house, transactional or disputes lawyers), that the banking and financial sector will feel supported and encouraged to engage with arbitration and ADR methods to resolve their disputes. This is the hope that the authors have for the future.