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ARBITRATION IN INTERNATIONAL FINANCIAL DISPUTE
By: Ereblinda Sadiku and Natthawat Siriprasomsap, Legal Counsels at the Thailand Arbitration Center
I. Introduction
International Finance is the branch of financial economics broadly concerned with monetary and macroeconomic interrelations between two or more countries.[1] This branch also faces legal issues that were brought mainly around the new international financial markets that evolved in London, and in the world, after the 1960s and 1970s.[2]
It is a known fact that litigation, meaning the process of taking legal action to a court of law, has been consistently the chosen dispute resolution method in international finance.[3] This mean was especially preferred in situations where the national courts were from already established markets, as opposed to courts in emerging markets.[4] In the late 1970s’, London was declared “the dominant international banking centre in the world”[5], closely followed by New York and Tokyo. A direct consequence of the position of these cities – as leaders of international finance – is that the regulation around this topic was mainly following the London law and the New York law. Because London and New York were considered jurisdictions that were familiar with international financial institutions, many major financial centres preferred choosing either English or New York courts. We will observe the systems of both these jurisdictions later in this article (supra II/A).
Nevertheless, if litigation had undeniably its position as the preferred dispute resolution method, many years have passed, and with them happened many financial crises and economical changes, such as globalisation. These factors have impacted the stability of the position of national courts as the preferred method, especially with disputes arising between parties with further geographical positions and with disputes including more complex topics. The usage of arbitration as a method of dispute resolution will be discussed later in this article (supra II/B).
II. Dispute Resolution Methods within the International Financial field
A. English and New York as chosen jurisdictions
Venues such as London and New York were perceived as reliable jurisdictions, with established laws. An additional reason why English laws were preferred is because of the certainty and predictability they offered.[6] Indeed, under English law at least, the national courts have no power to interfere with provisions that already regulate the legal obligations between the parties, in case of a contract breach.[7] For this reason, other jurisdictions, such as France, were less attractive to financial institutions, since the national courts were not bound to give effect to this kind of provision.[8]
Traditionally, financial institutions preferred to choose a system of law that has been used to govern the transactions they carried out. English law qualifies as an entity that is familiar with topics related to international finance.[9]
Prior to the popularity of arbitration and to the effects of globalisation, jurisdictions such as London, New York, Frankfurt, and Hong Kong were the most chosen ones. The certainty and the predictability they would offer were their main selling point. Nevertheless, many of the advantages that used to be specific to English law are now also available under arbitration. These advantages will be mainly discussed later in this article (supra II/B).
B. The position of Arbitration as a chosen method
For a long time, arbitration was not perceived as well suited for the disputes arising in international finance. One of the main reasons is that arbitration does not have a binding jurisprudence system, and thus would lead to inconsistent decision-making. Arbitration remains a method that does not have a binding system of precedent, which means that this disadvantage has not disappeared. Nevertheless, we can only observe that arbitration is becoming more and more attractive and chosen by parties in an international finance dispute. This article aims to share the reasons for the success of arbitration in this field and raise awareness of its effectiveness when facing international finance disputes.
I. Developments
The situation back in the late 1900s was an increased interconnectivity of global markets, which inherently lead to increased correlation of global disputes.[10] As mentioned before, arbitration was not the preferred method of dispute resolution for international finance disputes (infra I).[11] This statement was correct back in a time when venues such as London and New York were perceived as reliable jurisdictions, with established laws. Financial institutions have preferred national courts in key financial centres, such as New York, London, Frankfurt, and Hong Kong.[12] In practice, financial institutions always preferred avoiding having any third party involved in their dispute resolution, unless they can receive a guarantee of certainty and predictability.[13]
Nevertheless, with the financial disputes becoming more and more complex and with deeper components, national courts lost this position for options that could offer answers to contemporary challenges, which can be the case of arbitration. We can now observe, especially since the 2008 economic crisis, an increase in international finance cases in front of arbitral institutions. For instance, the London Court of International Arbitration (LCIA) has observed an increase of up to 26% of their case being banking and finance-related disputes in 2021, placing banking and finance among their top three industry sectors.[14]
This increase can be related to two main reasons. First, with the emergence of international finance disputes involving more parties from emerging economies, the choice of jurisdiction became less intuitive. For instance, when coming from a country like Thailand, a civil law country located in Southeast Asia, following English and New York law would not be close to the legal practice. On another hand, choosing a national court can be perceived as risky by the other party. Second, the nature of the claims involving financial products has increased in complexity. These disputes require a high level of expertise and understanding, which can be fixed by appointing an arbitrator who is an expert in the concerned field.
As a direct consequence of this increase, various regulations have been adopted, that provide us with guidelines.
II. Arbitration Rules on International Finance
With the increase in international finance cases, came more concerns. It resulted in the creation of specific guidelines and specialised centres.
The most famous guidelines are the 2013 ISDA Arbitration Guide. This guide provides guidance on the use of an arbitration clause with either the ISDA 2002 Master Agreement or the ISDA 1992 Master Agreement (Multi-Currency Cross Border) and includes a range of model arbitration clauses.[15] An ISDA Master Agreement is the standard and internationally agreed document regularly used to govern over-the-counter derivatives transactions. It is an umbrella agreement between the parties who wish to trade OTC derivatives. The original purpose was to gauge members’ interest in using arbitration for disputes arising in connection with derivatives transactions documented under the Master Agreements and to ascertain what steps ISDA might take to assist its members.[16]
One of the most famous Arbitration Rules are the one provided by the P.R.I.M.E. Finance. This name stands for the Panel of Recognised International Market Experts in Finance. This centre is an independent, not-for-profit foundation based in the Hague and established in the wake of the 2008 global financial crisis.[17] One of the concerns that was raised before the establishment of the P.R.I.M.E Finance Arbitration Rules was the complexity of the disputes. The goal of this foundation is to be a solution to this concern. The P.R.I.M.E. Finance Arbitration Rules are inspired by the UNCITRAL Arbitration Rules. The Finance Arbitration Rules are administered by the Permanent Court of Arbitration (PCA), located at the Hague.[18] Even if the P.R.I.M.E. Finance Arbitration Rules are closely following the UNCITRAL Rules, especially with regards to the role of the PCA, it is tailored to the financial markets issues.
III. Conclusion
To conclude this introduction to arbitration in international finance disputes, it is important to answer if arbitration is more suitable to resolve disputes in the field of international finance. Based on our article, the answer is more than yes. With globalisation and a post-Covid-19 society, we are witnessing financial deals made with ease around the world. The difficulty of having international parties is no longer an issue, as online deals and internationalisation of services are becoming the most preferred and fastest transaction methods. Disputes arising from these transactions are no longer narrowed to western jurisdictions since they can follow international arbitration rules, easily available and applicable.
In a location such as Thailand, an important financial market hub, and close to very strong centres as well, international financial disputes will continue to appear, and help will be required. The Thailand Arbitration Center Arbitration Rules are based on the UNCITRAL Arbitration Rules, which makes them easy to apply to international finance disputes.
[1] Keith Pilbeam, International Finance, p. xxi, 3rd Edition, 2006.
[2] For a more complete perspective on the legal issues regarding the new international financial markets developed in London: Ravi C. Tennekoon, The Law and Regulation of International Finance, Student Edition, 1991.
[3] ICC Commission Report, Financial Institutions and International Arbitration, par. 4, 2016.
[4] Ibidem.
[5] Gunter Dufey and Ian H. Giddy, The International Money Market, p. 40, 1978.
[6] Ravi C. Tennekoon, The Law and Regulation of International Finance, Student Edition, p. 21, 1991.
[7] Ibidem.
[8] Idem, p. 22; cf. art. 1184 of the French Civil Code.
[9] Ravi C. Tennekoon, The Law and Regulation of International Finance, Student Edition, p. 24, 1991.
[10] For more information about the effect of globalization on international finance: Gerd Hausler, The Globalization of Finance, Finance and Development, vol. 39, no. 1, p. 2 ss, 2002.
[11] ICC Commission Report, Financial Institutions and International Arbitration, par. 4, 2006.
[12] Ibidem.
[13] Ravi C. Tennekoon, The Law and Regulation of International Finance, Student Edition, London, p. 21, 1991.
[14] London Court of International Arbitration, 2021 Annual Casework Report, https://www.lcia.org/media/download.aspx?MediaId=890.
[15] 2013 ISDA (International Swaps and Derivatives Association, Inc.) Arbitration Guide, p. i (Introduction), https://www.isda.org/a/6JDDE/isda-arbitration-guide-final-09-09-13.pdf
[16] Ibidem.
[17] https://primefinancedisputes.org/page/mission.
[18] https://primefinancedisputes.org/page/p-r-i-m-e-finance-arbitration-rules.
