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ARBITRATION IN FINANCIAL DISPUTES

Contracts must be drafted carefully- or courts will render them unenforceable. Banks should approach hybrid clauses with caution, following recent decisions in Singapore, Hong Kong, and the UK Supreme Court.

Arbitration offers substantive advantages for the finance and banking sector.

Arbitration decisions are globally enforceable in all major jurisdictions, with 169 countries agreeing to honour decisions.

Globalisation and emerging markets have driven increases in the use of arbitration in the financial sector over the last five years.

Countries party to the New York convention

85.2% of participants in London’s arbitration centre are based internationally

ANGIE NORMANDALE 2022

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ANGIE NORMANDALE

ARBITRATION:

FINANCIAL DISPUTES

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CONTENTS

Arbitration in the finance sector
Choosing between arbitration and litigation
Drafting the arbitration clause: Current issues, and key considerations
Recommendations

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Arbitration in the finance sector

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In-house counsel prefer arbitration for resolving cross- border disputes.

9 out of 10

Countries have signed the New York Agreement

169

of parties in the LCIA are international

85.2%

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Arbitration as a global tool

9.8% US

7.2% RUSSIA + CIS

9.2%

ASIA

11.7%

AFRICA

Map of parties in LCIA

Financial disputes:

Usually financial disputes are resolved in London or New York courts due to predictable sound decisions. However international arbitration in finance disputes is increasing because:

Decisions are also being taken by courts which impact on global markets, for example, decisions on the close-out mechanics of industry standard contracts such as the ISDA Master Agreement.
mention emerging markets- neutrality, and financial products
More post-Brexit certainty- northern irish dispute, the UK is planning to leave the ECHR and there’s still some uncertainty about what extent to which UK judgements apply in the EU and vice versa.

Organisations:

International Chamber of Commerce- ICC, London Centre for international arbitration, SIAC -, International Centre for Dispute Resolution ICDR in New York, International council for commercial arbitration ICCA rules

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	FLEXIBLE	COMPETENT	CONFIDENTIAL	GLOBAL	FINAL
LITIGATION
ARBITRATION

Why choose arbitration?

Commercial factors:

Public/private. Arbitration is private and confidential, litigation is public
Precedent. Arbitration doesn’t set a precedent and litigation sets a binding precedent- avoid creating an unfavorable precedent
Flexibility - arb is tailored to meet the parties needs, lit is rules based. No point arbitrating if you don’t trust the other party to follow the rules.
Expertise - choice. arbitration allows the parties to choose a specialist expert in complex financial products: important for fintech, algorithms and formulae, whereas you cannot choose what judge you get
Final or Appealable? arbitration can’t be appealed and litigation can go up to the highest courts. However the UNCITRAL is looking at creating a specialist appellate body for investor-state dispute resolution.
Third party? Arbitration a third party has to agree to be involved, but in litigation courts can order a third party to join

Location

Cost- and parties often share the costs. Litigation becomes more expensive as the cases goes on and the losing party pays the winner’s costs. However again in practice it depends where you’re based. In some countries arbitration is more expensive due to the cost of the experts, venue, arbitrators, and institution fees
Time- litigation takes longer and arbitration is shorter - in some countries, reverse is true
Where- the assets are based, where the parties are based. Usually finance disputes are resolved through litigation in London or New York courts, however, there’s been a big rise in financial arbitration as markets become more globalized and in emerging markets.
Global- New York Convention with 160 signatories means that arbitral decisions are enforceable in all major jurisdictions, though some states are more reliable than others. There’s no equivalent in litigation. International assets
Emerging markets where the parties might not want to use London or New York but the local legal system may also not be optimal- allows parties to choose place that’s mutually convenient, investor-state dispute resolution for public private contracts. Increase in popularity of the Singapore International Arbitration Center SIAC, Hong Kong International Arbitration Center HKIAC
Singapore- regulatory framework for crypto disputes
PRIME the Hague specialist international finance arbitration center. Follows the UNCITRAL rules and only deviates where it’s going to be really useful for financial disputes, so for example there are a few ways for parties to speed up a dispute.

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LOCATION

INSTITUTION

RULES

MECHANISMS

ENFORCEMENT

Language, Location of parties and assets

Choice of law, legislative seat, approach

Ad hoc or institutional? How many arbitrators?

Procedural law, governing law of the contract and clause

Scope, appeals,

confidentiality

Drafting the arbitration clause

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Summary

and

Recommendations.

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Enka Insaat Ve Sanayi AS v. OOO Insurance Company Chubb [2020] UKSC 38

Silverlink Resorts v MS First Capital Insurance Ltd [2020] SGHC 151

Sté Saint Joseph v Dexia Banque Internationale, n°17-21309, 3 October 2018

Russian Telephone Company CJSC v. Sony Ericsson

Mobile Communications Rus LLC (A40-49223/2011

Arbitration clauses:

a warning

Case updates

Ericsson, Dexia- asymmetric/unilateral clauses not allowed in Russia and other civil law jurisdictions - see notes on next page

Construction company v guarantor 2021 HKCFI 2558, judgment date: 17 August 2021

Hong Kong court upheld a U.S. arbitral award made pursuant to a split dispute resolution clause.
In dismissing the application to set aside the award, the court gave due weight to the decision by the supervisory court at the seat of the arbitration. The court also considered the limitative effects the clause has on the arbitrator’s jurisdiction, and its interaction with issues of procedural fairness.
Arbitration clause was really restricted to a particular issue. Is the construction of the contract legal- therefore allow arbitration- or not- therefore disallow it? Contrasting decision to Silverlink- interesting

Enka v Chubb 2020 UK Supreme Court

A turkish subcontractor vs a Russian insurer for a power plant accident in 2016- law of contract was russian but arb agreement was to arbitrate in England. UK supreme court ruled that the seat of the arbitration agreement applies in this case Enland.
Enka and Chubb- about where to arbitrate.
Concerned a fire at a Russian power plant in 2016. Chubb, a Russian insurer, sued Enka, a turkish subcontractor, for liability for the damage caused.
Chubb wanted to have the case in the Russian courts, however Enka tried to arbitrate in the UK as their contract provided for arbitration in London.
The UK Supreme Court ruled in favour of Enka on the grounds that although the law governing the main contract was Russian law, the ‘Rome 1 Regulation’ which governs EU choice of court doesn’t apply to arbitration agreements.
The majority stated that, generally speaking, where the parties have not chosen the law which governs the arbitration agreement but have chosen the law that governs the main contract, it’s the main contract law which is going to apply.
However the seat of the arbitration chosen was london so the supreme court decided that the law of london should apply to the arbitration agreement

But Kebab-ji v Saal 2021 hong kong

Afghani vs kuwaiti kebab franchise, arbitration clause- seat of the contract was french but the arbitration clause said to arbitrate in england. French court said France wins, England agreed.

X v ZRPC Hong Kong

no firm conclusion about seat of law and seat of arbitration agreement. HK court said it’s the law of the main contract.
so the best approach to reduce uncertainty is to have an express provision in the arbitration agreement about what law is governing that agreement.

Silverlink v MS First Capital insurance singapore

Silverlink- about when to arbitrate.
Luxury hotel resort in Phuket that was forced to close due to COVID and made a claim on its industrial risks insurance policy.
The Policy was split into two sections:
Section I was entitled “Material Loss or Damage” and dealt with damage to covered properties.
Section II of the Policy was entitled “Business Interruption” and dealt with the interruption of or interference with the covered businesses.
MS Insurance rejected Silverlink’s claim under the Policy on the grounds that, for a claim to be admitted under Section II, the claim also had to be made and accepted under the corresponding Section I of the Policy.
Section I related to material damage loss and, since “there was no material damage whatsoever to any of the insured properties”,
MS Insurance asserted that Silverlink’s claims were not admissible.
Clause 11 of the General Conditions (titled “Arbitration”) stated that “any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination shall be referred to arbitration and the parties shall unless otherwise mutually agreed, use the best practice within the jurisdiction of this Policy to have the dispute arbitrated before legal action is commenced” (arbitration clause).
Clause 12 of the General Conditions (titled “Jurisdiction”) stated that “should any dispute arise between the Insured and the Insurers regarding the interpretation or the application of this Policy the Insurers will, at the request of the Insured, submit to the jurisdiction of any competent Court in Singapore” (jurisdiction clause).
A renewal certificate also provided that “in the event of any dispute over interpretation of this Policy”, the courts of Singapore would have jurisdiction. unsurprisingly the courts of Singapore agreed.
important- restricting the scope of arb agreement- was not effective - insurance company hamstrung by own argument

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Arbitration as a global tool?

Image shows countries where an asymmetric clause will and won’t be enforced. (Not in talk: just some extra information for research) : ref https://www.cliffordchance.com/content/dam/cliffordchance/briefings/2021/02/clifford-chance-unilateral-option-clauses-survey-2021.pdf

Asymmetric or Unilateral arbitration clauses - not same as split or hybrid jurisdiction clause allowing Ora (but not the customer) to elect, once a dispute has arisen, between litigation and arbitration. This is an attractive proposition for Ora as it would mean they could decide which forum is most appropriate in each particular dispute rather than having to make a determination one way or the other now. Accordingly, Ora has asked whether there are any issues around this they should be aware of.

Enforceability depends on where you are.

England: Yes.

This is useful in that if assets have moved abroad you might want to arbitrate but you may want to move for fast closure in English courts.
Often: arbitrate abroad, litigate at home. Or arbitrate for bank litigate for customers.
They’re prohibited in China.
However the Singapore Court of Appeal in Dyna-Jet Pte Ltd v Wilson Taylor Asia Pacific Pte Ltd [2017] SGCA 32. Decided that they are valid - in this case a clause saying that Dyna Jet could opt for arbitration and Wilson Taylor could not. Singapore CoA wasn’t concerned about the lack of mutuality of obligations.
The UK courts have a long history of enforcing asymmetric clauses- Etihad Airways PJSC v Flöther [2020] EWCA Civ 1707, Ourspace Ventures Limited v Halliwell [2019],Mauritius Commercial Bank v Hestia Holdings Limited [2013] EWHC 1328

France, luxembourg: maybe not.

February 2018 Crédit Suisse decision (Sté Crédit Suisse v Sté Civile Immobilière ICH, n°16-24497, 7 February 2018), in which the French Supreme Court held that the validity of a jurisdiction clause depends on whether the clause meets “a requirement of precision in order to satisfy the objective of foreseeability and legal certainty (sécurité juridique)” provided by the Lugano convention.
The Supreme Court held that a jurisdiction clause providing one party with an option to litigate before “any other competent court” did not meet that requirement and was ineffective.
October 2018 Dexia decision (Sté Saint Joseph v Dexia Banque Internationale, n°17-21309, 3 October 2018), in which the French Supreme Court held as invalid a “one-sided” jurisdiction clause (i) providing that the Luxembourg courts had jurisdiction, but (ii) offering the beneficiary of the option the right to litigate before any other competent court. As in Credit Suisse, the Court’s decision was guided by the lack of a “sufficiently precise and objective element” which would allow it to determine which other courts were competent.
In light of the above cases (and uncertainties), those drafting arbitration agreements with a French nexus should be cautious to ensure not only that the existence of the option (to litigate or to arbitrate) does not itself render the intention to arbitrate uncertain, but also that the court(s) of competent jurisdiction can be determined on the basis of objective criteria.

Germany: yes

Supports party autonomy, generally fine with unilateral arbitration clauses
As long as the parties freely agree from the outset that one party shall be granted the option to initiate arbitration proceedings unilaterally, this is to be respected.
German courts do not require a specific justification for using a unilateral option clause and the prevailing opinion amongst German legal commentators is that unilateral option clauses are generally valid (although some legal commentators suggest that unilateral option clauses should only be permitted if the legitimate interest of a party is at risk, e.g. due to a purchaser’s bankruptcy or unwillingness to pay).
The only limits to party autonomy in this respect are boni mores “good morals” (Section 138 of the German Civil Code) or domestic public policy (Section 1059 of the German Civil Procedure Code).
And that the clauses should relate to standard business agreements.

USA- not valid for unconscionability - Texas case

Russia - not valid

In December 2018, the Russian Supreme Court issued guidance saying ‘If an optional dispute resolution clause provides only one party with the right to refer disputes arbitration or a competent court, then the other party will be conferred the same right.’
In 2019- another Russian Supreme Court decree essentially saying the same.
Russia, US, France are civil law jurisdictions whereas Singapore, HK, AUS, UK, all common law- interesting

Singapore, Hong Kong, Australia - both valid.

India, UAE: mixed decisions, nothing substantive

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S	W	O	T
STRENGTHS	WEAKNESSES	OPPORTUNITIES	THREATS
International applicability Neutrality Choice of arbitrator Expert understanding of financial products Confidential Avoid adverse precedent risk Flexibility	Cannot order third party to join Cost and speed depends on location No appeal right Less established than financial litigation in London or New York	PRIME -the Hague New arbitration model clauses FinTech Singapore, Hong Kong tribunals used for emerging market disputes Cross-border disputes	Poor drafting: case may be heard in a suboptimal environment UNCITRAL creating new appellate body in 2023 Asymmetric clause enforceability