New ICC report on financial institutions and arbitration of interest to New Zealand
On 9 November 2016, the International Chamber of Commerce (ICC) Commission on Arbitration released its multidisciplinary report “Financial Institutions and Arbitration” (the Report). The Report addresses how banks, financial institutions and their clients, who have historically resorted to traditional litigation to resolve disputes arising out of their dealings, can use arbitration for efficient and effective resolution of what can be complex disputes. Lowndes Jordan litigator Tim Lindsay was one of the leaders of the Task Force, and comments on why the Report will be of interest to banks and financial institutions in New Zealand.
Internationally, commercial arbitration is the predominant means by which commercial parties resolve their disputes. Banks and financial institutions have appeared to resist this trend, however, historically reverting to national courts to resolve disputes with their clients and each other. Whether there is aversion to change, “stickiness” of boilerplate dispute resolution clauses in financing documents or misconceptions around the arbitration process, in recent years there has been increasing use of arbitration by financial institutions.
Against this background, the ICC recognised the need to study financial institutions’ perceptions and experience of arbitration and how arbitration procedures can be used and adapted to meet their needs.
The Report’s findings and recommendations are based on input from approximately 50 financial institutions and banking counsel, data from 13 arbitral institutions, arbitral awards, relevant literature, and lawyers experienced in banking and finance disputes. The Task Force examined a wide range of banking and financial activities, whether by licensed banks or by funds, including lending activities, derivatives, sovereign lending, regulatory matters, international financing, trade finance, Islamic finance, advisory matters, asset management and interbank disputes. Based on this research, the Report addresses usage of arbitration by financial institutions, the potential benefits of commercial arbitration for banks and financial institutions (e.g. efficiency, expert decision-makers, global enforceability of arbitral awards, confidentiality, finality) and some common misconceptions about the process.
The Task Force's recommendations
Important from a practical perspective, the Report also includes a series of recommendations banks and financial institutions should consider in tailoring the arbitration procedure to their needs. These include:
- Enforcement: If a client and its assets may be located outside New Zealand, then parties may wish to opt for arbitration to benefit from easier enforcement of the arbitral award under the New York Convention.
- Interim measures: Under most institutional arbitral rules and domestic arbitration legislation (including the Arbitration Act 1996) parties can, prior to the constitution of an arbitral tribunal, seek interim relief from national courts. Once the tribunal is in place, it has the same powers as a court to order interim relief.
- Summary judgment and dispositive rulings: While, in this writer’s view, arbitral tribunals have the inherent power to award summary judgment and make dispositive rulings (provided they have given all parties the opportunity to be heard), parties can avoid any ambiguity by specifically providing for such procedures in their arbitration agreement. Some arbitral institutions (such as the Singapore International Arbitration Centre or SIAC) have included this express power in their rules.
- Emergency arbitrators: Under many institutional arbitration rules, in urgent cases parties can, prior to the constitution of the arbitral tribunal, seek emergency orders for interim relief from an emergency arbitrator. This avoids the need to resort to separate proceedings before the very courts that parties, through their agreement to arbitrate, are trying to avoid. New Zealand recently amended the Arbitration Act 1996 to confirm that orders made by emergency arbitrators are enforceable in the same way as awards made by arbitral tribunals proper.
- Expertise of arbitrators: One advantage of arbitration is the ability for parties to appoint the tribunal, or otherwise specify the qualifications and expertise of the arbitrator(s). Familiarity with financial instruments is regularly of concern to banks and financial institutions, particularly in jurisdictions without specialised commercial and/or financial courts (such as New Zealand).
- Confidentiality: Arbitration is private, but not necessarily confidential. If confidentiality of the existence and conduct of the arbitral proceedings and the arbitral award is of concern, parties should make specific provision in their arbitration agreement. This is often a relevant consideration for banks and financial institutions, principally for reputation and precedent reasons.
- Consolidation and joinder: Many institutional arbitration rules permit consolidation of two or more arbitrations in certain circumstances. Consolidation will also be possible where two or more arbitration agreements themselves (say in related financing documents, such as a loan, a swap and a guarantee) provide expressly for consolidation of disputes arising under two or more of those instruments. Careful drafting is required to ensure that consolidation is in fact possible, practicable and the resulting award is valid (likewise for the possible joinder of third parties).
- Availability of appeal: International arbitration rules typically exclude the availability of appeals on questions of fact and law, providing finality to disputes. Given the predominance of international arbitration as the means for resolving cross-border disputes, commercial parties globally have clearly voted with their feet in favouring this approach. In New Zealand domestic arbitrations, however, parties need to opt-out of appeal procedures. Opting-out is to be recommended. Parties considering retaining appeal rights should carefully assess whether such procedures are proportionate and provide the so-called “right answer” sought.
- Precedent: Whilst arbitral awards cannot usually be published publicly, some arbitral rules permit anonymised publication. Parties themselves can likewise provide for the same in their arbitration agreement.
As the Report makes clear, these points (and various other important practical matters) need to be considered in the circumstances in each case.
Careful drafting of arbitration agreements is critical
Planning for disputes at the time of contracting is essential to managing the risks associated with any contract or transaction, as well as ensuring any disputes that arise are dealt with efficiently.
The Report, the International Swaps and Derivatives Association (ISDA) Arbitration Guide and the work of P.R.I.M.E. Finance (the Panel of Recognized Market Experts in Finance) and the London Arbitration Club provide an excellent toolbox for in-house counsel at banks and financial institutions in assessing whether arbitration is the appropriate form of dispute resolution for any given transaction. However, in each case careful drafting of arbitration agreements is critical. Particular care is required around complexities common to domestic and international banking and finance, such as expertise and appointment of the arbitral tribunal, multiparty and multi-contract scenarios, joinder of third parties, consolidation of disputes arising under related financing documents (e.g. loans, swaps, guarantees), emergency arbitrator powers and interim relief, dispositive motions and summary judgment, confidentiality, costs, appellate procedures etc.
Whilst receiving advice on these matters can be critical to the enforcement of rights, it often only takes a quick phone call or email to ensure an arbitration agreement is drafted correctly.
Lowndes Jordan litigator Tim Lindsay is a member of the ICC Task Force on Financial Institutions and Arbitration and led the Sovereign Finance work stream. He is a member of the ISDA Arbitration Committee and the Financial Sector branch of the London Arbitration Club.