International Arbitration in 2022
Arbitration and financial institutions
Financial institutions have traditionally favoured court litigation as a means of resolving their contractual disputes. However, there are situations in which financial institutions may want to consider opting for arbitration for certain types of deals, especially in light of recent developments in arbitral procedure designed to make arbitration more attractive to the banking community.
In addition, financial institutions are increasingly alive to the protections available under investment treaties in the event of government action that adversely affects their investments. We take a closer look at both of these trends below.
Arbitration for contractual disputes in finance deals: recent developments
For contractual disputes, deciding whether to opt for arbitration or litigation involves weighing a variety of factors and will depend on the specific circumstances of each individual transaction. As mentioned above, financial institutions have traditionally favoured litigation for many of their contractual disputes, particularly in the London and New York courts. These jurisdictions have judges who are especially familiar with the complexities of financial transactions and have an established track record of rendering sound decisions, as well as well-established summary dismissal procedures for claims and defences that manifestly lack merit. Where financial institutions opt for arbitration over litigation, it is often because a deal involves a counterparty based in a jurisdiction where arbitral awards are more readily enforceable than court judgments, or the institution anticipates that it may benefit from the increased confidentiality protection and/or narrower disclosure requirements of arbitration as compared to litigation.
To make arbitration more attractive to financial institutions and other businesses, in recent years many of the major arbitral institutions have amended their rules to introduce or clarify certain procedural tools aimed at making arbitration more efficient and cost-effective. These changes include new rules on summary dismissal, emergency arbitrator procedures for urgent interim relief before the arbitral tribunal is constituted, and expedited procedures (see trend 6 for a more detailed analysis of these tools).
For financial institutions in particular, two recent developments are worth highlighting in more detail:
- Summary dismissal. Until recently, there has been uncertainty as to whether an arbitral tribunal can dismiss a claim or defence that is manifestly without merit on a summary basis (eg, dispensing with a full evidentiary process). In contrast, summary dismissal procedures are readily available in litigation, particularly in the English and New York courts. That divergence has increasingly fallen away: over the past few years, the major arbitral institutions, and now P.R.I.M.E. Finance (an arbitral institution dedicated to arbitrations in the finance sector), have either amended their rules to expressly confer on the tribunal a power of summary dismissal or (in the case of the ICC) published guidance notes confirming that tribunals have such a power. Provided that parties arbitrate under the rules of one of those arbitral institutions and seat their arbitration in a jurisdiction such as London or New York where there is now helpful case law confirming that awards rendered pursuant to summary procedures are valid and enforceable, they can be comfortable that such procedures will be available and can be confidently deployed by the tribunal.
An arbitral tribunal’s power to make an order summarily dismissing a meritless claim or defence is now written into the procedural rules and guidance notes of the major arbitral institutions. That is an important step forward for the use of arbitration in the financial institutions community.
- Revised P.R.I.M.E. Finance Arbitration Rules 2022. As an alternative to adopting the procedural rules of the traditional arbitral institutions, financial institutions can choose to arbitrate their disputes under the P.R.I.M.E. Finance Arbitration Rules, the latest version of which came into force on 1 January 2022. The P.R.I.M.E. Finance Arbitration Rules are specifically designed for the arbitration of finance disputes, including under complex financial products such as derivatives and in emerging areas such as fintech and sustainable finance. The 2022 revisions seek to address feedback from financial institutions on earlier versions of the rules, including by introducing an emergency arbitrator procedure, making better provision for consolidation in multi-party and multi-contract situations, incorporating a new expedited procedure and (as noted above) providing for summary dismissal of meritless claims and defences. P.R.I.M.E. Finance’s offering also includes the option to select arbitrators from its expert panel of around 250 international arbitrators with specialist knowledge and experience in the finance sector.
It remains to be seen whether these recent developments will lead to more financial institutions opting for arbitration in future finance deals, but the framework now exists for arbitration to better meet the needs of financial institutions.
Using investment treaty protection as a risk-mitigation tool for cross-border investments
Financial institutions are increasingly structuring (or restructuring) their cross-border investments to take advantage of one or more of the thousands of investment treaties that protect investors from adverse government action affecting their foreign investments. Many institutions are now conducting “investment treaty planning” simultaneously with tax planning.
Most treaties guarantee foreign investors a basic set of rights such as: the right to be treated fairly and in a non-arbitrary manner; the right to compensation for any expropriation; protections against discriminatory treatment favouring domestic competitors or competitors from other foreign countries; and the right to transfer funds and returns outside the host country. Critically, most investment treaties permit investors to bring a damage claim directly against the host government through arbitration in circumstances in which their treaty rights are violated. This is a powerful tool, and the threat of such a claim may provide a financial institution with leverage to negotiate with the government and secure a favourable resolution.
A significant percentage of the investment treaty claims referred to arbitration each year are brought by financial institutions. For example, in 2021, HSBC brought a claim against El Salvador alleging that El Salvador violated its BIT with the UK (HSBC Latin American Holdings (UK) Limited v Republic of El Salvador (ICSID Case No. ARB/21/46)). Alpene Limited also brought a claim against Malta in 2021 on behalf of its wholly owned entity, Pilatus Bank, for alleged violations of Malta’s BIT with the People’s Republic of China.
We expect this trend to continue as states grapple with the COVID-19 pandemic and disruption in global supply chains by changing regulations affecting financial institutions, for example by suspending or limiting their ability to collect on debt, including mortgages, or prohibiting the collection of fees on public projects, with a detrimental impact on the project financing for those projects.
Financial institutions are increasingly attuned to the value of investment treaties as a tool to protect themselves against the risk of future adverse government measures that impact their cross-border investments.