Financial institutions and banks have traditionally opted for litigation instead of arbitration for dispute resolution. Litigation, as opposed to arbitration, allows judges to exercise multiple powers vested in them such as interim measures, summary judgments, warrants for non-appearance, etc., which are not available in arbitration. In addition, the public nature of disputes in courts allows the banks to create pressure on the defaulters.
However, the paradigm of dispute resolution for financial disputes has changed in the recent years, owing to the highly complex nature of financial transactions and a need for confidentiality. Banks and financial institutions are increasingly opting for arbitration instead of litigation. Remarkably, in 2019, 32 per cent of all arbitrations at the London Court of International Arbitration (LCIA) and 58 per cent of arbitrations at the American Arbitration Association (AAA) involved financial institutions.
Litigation, traditionally, offered a more potent forum for recovery of money and resolving financial disputes as the judges are vested with stronger powers than an arbitrator. In addition, the public nature of disputes in courts allowed financial institutions to create pressure on the defaulters to discharge their debts as public disclosure hinders their future investment prospects. As a result of these, financial institutions traditionally preferred litigating. These litigations were mostly brought to the courts in New York or London considering that the judges in these jurisdictions are adept at understanding complex transactions and financial instruments.
The traditional view of litigating in financial disputes changed following the 2008-09 financial crisis. The financial institutes felt a need for adjudicators who possess a deep knowledge of finance and an understanding of complex transactions.
In addition to these, the institutions opted for a private forum for adjudications considering that financial disputes of large quantum often lead to public distress, resulting in negative variations in listed stocks which could consequently lead to collapse of economies, if big financial institutions are involved. Thus, the parties moved to a private mode of dispute resolution i.e., arbitration, thereby maintaining privacy of proceedings and ensuring that the adjudicator is a person with expertise in finance. Another reason why arbitration was preferred over litigation is that it is easier to enforce an arbitral award as opposed to a court judgment which can be appealed multiple times.
According to statistics published by leading arbitral institutions, banking and finance arbitrations accounted for 32 per cent of all arbitrations at LCIA, and 58 per cent at the American Arbitration Association (AAA)
These statistics portray the demand for financial arbitrations throughout the world. As a result, many arbitral institutions have created panels of arbitrators specialising in banking and finance. The Panel of Recognised Market Experts in Finance (P.R.I.M.E. Finance) was set up in The Hague, Netherlands, in 2012 for providing a panel of arbitrators specialising in banking and finance, offering arbitration rules tailor-made for financial arbitrations and providing financial experts for assistance during such arbitrations.
Similarly, the International Swaps and Derivatives Association (ISDA) has created its own model arbitration clauses for resolution of financial disputes. In America, the Financial Industry Regulatory Authority (FINRA) provides assistance and advice for dispute resolution involving securities. In addition to these, the arbitral institutions have themselves altered their rules to accommodate the peculiar needs of financial disputes.
The position in India is, however, substantially different. Considering the rise of financial disputes in India, including defaults by some of the biggest Indian corporations such as Anil Ambani’s Reliance Group, Vijay Mallya’s Kingfisher and Nirav Modi’s Firestar Diamonds, there is a need for providing a specialised institution to deal with financial arbitrations or in the alternative a body such a P.R.I.M.E. Finance rendering assistance to financial arbitrations. Leading financial institutions prefer arbitrating against such defaults instead of submission to courts which result in huge coverage by the media leading to adverse consequences for all parties involved.
Presently, no such body for financial arbitration exists in India and such arbitrations continue to be adjudicated by retired judges, who are generalists and do not possess a specialised knowledge of finance and financial markets. The Institute of Chartered Accountants of India (ICAI) is one such institution which possesses a body of some of the most prominent financial experts in India. Perhaps, the government should create a panel in consultation with the ICAI for facilitation of financial arbitrations. Considering that the Government has been making strides towards establishing India as an arbitration friendly jurisdiction, such a move would attract arbitrations in India from other countries as well.
The writer is Partner, Seven Seas Partners LLP