The Use of International Arbitration for Banking and Finance Disputes: Tailoring the Arbitration Clause

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As we have pointed out before, the use of international arbitration for banking and finance disputes continues to grow. The International Chamber of Commerce also recently came out with a report discussing this growing trend for financing disputes.

If you have decided-for reasons of finality, confidentiality, and enforceability, among others-that international arbitration is the preferred dispute resolution mechanism for your contract, you then must consider how to tailor the clause to the contract and any potential disputes that may arise. Below are some of the issues that should be considered:

1. Institutional or Ad-Hoc Arbitration

The first choice is whether to have an arbitral institution administer the arbitration or have an ad-hoc arbitration run by the parties. While there may be some cost-savings from not using an institution, the majority of financial institutions opt for using an arbitral institution with settled rules and experience in administering complex disputes. Some of the arbitral institutions to consider are the International Chamber of Commerce (ICC), International Centre for Dispute Resolution (ICDR), or JAMS, among others.

2. Arbitral Seat

The second choice is to decide where the arbitration will be “seated.” This does not mean that all arbitral hearings must take place there, but it will provide the applicable procedural law and the courts of that jurisdiction will have supervisory jurisdiction over the arbitration. The seat should be a member of the New York Convention (making the award enforceable in any other member-state) and should have well-developed precedent supporting arbitration. Boston is a fantastic choice for a seat (with highly skilled arbitrators-including FITCH’s own Jonathan W. Fitch-, world-class experts, and sophisticated arbitration-friendly courts), although most of the world’s major financial centers may also fit the bill.

3. Choice of Arbitrators

The arbitral rules will likely help in how arbitrators are selected, but parties can often choose between a single arbitrator or a panel of three (normally selecting a single arbitrator for smaller cases and a panel for larger, more complex cases). The parties may also specify what type of arbitrators they want (including limiting them to those specializing in financial transactions), although they should be cautious not to be too restrictive so as to significantly limit the pool of arbitrators.

4. Consolidation and Joinder

Banking transactions often involve a number of agreements and multiple parties. Including specific provisions allowing arbitrators to join and consolidate cases with similar claims under different agreements can allow for a streamlined resolution, even when claims are needed against both a borrower and a guarantor.

5. Expedited Procedures

Litigation can often be slow and grinding. But arbitration need not be, and parties can design procedures that work for their potential disputes. If time is of the essence, then parties may limit the scope of discovery (which is already much more limited in international arbitration than in standard US litigation) or may even put a deadline for resolution into their arbitration clause (90 days, six months, or a year). Many of the arbitral rule sets also have expedited procedures that parties can opt in to. All of these factors should be considered carefully, however, as some disputes can easily be resolved in 90 days while for others, such a timetable may be impracticable.

6. Confidentiality

While arbitration is, by definition, more confidential than public court proceedings, parties can go further and add language that specifically protects the confidentiality of the arbitration and the award. Particularly for disputes with high net-worth individuals, such confidentiality may be extraordinarily important.

7. Other Issues

Depending on the potential disputes, there may be other issues that should be specifically included in the arbitration clause. These can include provisions for fee shifting (the general default in international arbitration is that costs follow the event, with the losing party paying for the arbitration costs and some or all of the legal costs of the prevailing party), for preliminary or injunctive relief, for specific discovery provisions, for pre-arbitral mediation (a “step clause”), or others.

Arbitration is not right for every banking dispute. Specifically, for consumer finance transactions, it may not make sense (or be prohibited by law). But for complex cross-border finance transactions, international arbitration is often seen as the preferred method of resolving disputes and, as shown above, such clauses can be tailored to the anticipated disputes.

If you have any questions about what clauses to include in your dispute resolution provisions, please don’t hesitate to contact the attorneys at FITCH.


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