Introduction

Since the financial crisis of 2008, arbitration has increasingly been recognised, including in the banking and financial sector, as a means of dispute resolution that can meet the needs of parties who are no longer satisfied with the characteristics - and often the timeframe - of litigation before national courts.

There has thus been a reversal of the previous trend, whereby financial institutions showed a clear preference for national courts. It is not by chance that, in 2018, the widely cited "Queen Mary International Arbitration Survey", prepared by Queen Mary University of London to highlight the main trends in international arbitration, noted that "financial institutions, including banks, and their advisers are considering arbitration with much greater interest than ever before".

Figures from the major institutions administering international arbitration proceedings (e.g. the International Chamber of Commerce – “ICC” – and the London Court of International Arbitration - LCIA) show that, on average, more than twenty per cent of the disputes they handle relate to the banking sector. The Hong Kong International Arbitration Centre even reported that banking and financial disputes accounted for 36.9 per cent of the cases it handled in 2022.

The banking and financial disputes where arbitration is chosen arise out of both the commercial sector - i.e. banking and financial transactions with (primarily) commercial clients  - and the so-called international investment sector, where a financial institution commences arbitration proceedings against a foreign state alleging that the financial institution's rights have been violated by that state.

The reasons why banks increasingly opt for arbitration (by including in their contracts, particularly contracts with foreign counterparties, an arbitration clause) may be summarised as follows:

• Flexibility: through international arbitration, the parties choose a form of private jurisdiction that can be negotiated and tailored to their needs. They can select private judges (the arbitrators) with specific expertise or experience and can choose their preferred rules of procedure, instead of having their disputes resolved by national courts under the mandatory rules of procedure applicable in those courts.
• Neutrality: arbitrators are independent third parties, in order to ensure an impartial decision-making process that reduces the risk of decisions being unfairly influenced by political or economic interests.
• Expertise: the parties have the opportunity to choose arbitrators with experience in the banking and financial sector, as well as tried and tested professional competence and reliability.
• Enforceability: arbitral awards benefit from the preferential legal regime of the well-known and widely-adopted 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which is designed to facilitate cross-border enforcement.
• Confidentiality: parties can opt for confidentiality, allowing banks to protect the secrecy of the information in their possession.

The use of arbitration in commercial matters

The ability to commence commercial arbitration proceedings depends on the existence of a valid arbitration agreement between the parties. Therefore, banks and financial institutions wishing to arbitrate should ensure that an arbitration clause is included in the relevant contract, specifying the arbitral institution that will provide administrative support to the arbitration, the number of arbitrators (and how they are to be selected), the language of the arbitration, the substantive law to be applied and the country to which the arbitration will be legally linked (the so-called “seat of arbitration”, whose national courts will play a supporting and supervisory role in the arbitration).

On closer examination, this approach also meets practical needs. The ICC Task Force on Financial Institutions and International Arbitration has stressed that banks and financial institutions, which engage in commercial transactions like any other commercial entity, benefit from ensuring that their transactions are decided through international arbitration, especially when it comes to the purchase of financial products, services or investments in other companies, as well as other financial transactions and operations. In this respect, the LCIA has noted that financial markets have increasingly turned to arbitration in preference to litigation in national courts. This trend is particularly evident where financial transactions involve counterparties from emerging markets, and further responds to the need for highly skilled arbitrators in areas - such as derivatives - which require specialised expertise.

In international commercial disputes, the economic interests at stake are often of such magnitude and the economic and legal issues involved are often so complex that (depending on the country in question) the national courts of a State may lack the specific expertise required and other desirable attributes, such as fluency in the relevant language(s). Furthermore, the rigidity of procedural laws in many national courts (including fixed deadlines to file defences), the inability to negotiate procedural terms and (in some cases) the limited familiarity with conflict of laws and the application of a foreign legal system have led to a growing preference for arbitration, especially in cross-border disputes, including in the banking and financial sector. This is evident from the increasing inclusion of arbitration clauses in contracts entered into by banks and financial institutions.

However, choosing arbitration requires a thorough understanding of the arbitration sector. Below, therefore, are some key takeaways for banks and financial institutions opting for arbitration:

• seek the assistance of lawyers to draft arbitration clauses that adequately protect their needs;
• choose a seat of arbitration that can provide the necessary support for the proceedings;
• choose an arbitration institution experienced in handling disputes in the financial sector;
• request that the arbitration proceedings preserve confidentiality (if needed);
• verify, on a case-by-case basis, that that the arbitral award can be enforced in accordance with the New York Convention.

Parties who choose arbitration over other forms of dispute resolution (such as litigation in national courts) should avail themselves of their opportunity to tailor the arbitration process to their specific needs, as they are entitled to freely negotiate (almost) all aspects of the procedure.

Unfortunately, this opportunity is often overlooked when negotiating arbitration clauses, and this is why it is advisable to consult experienced lawyers at the drafting stage, to fully leverage the benefits of a well-drafted arbitration clause and to avoid the adverse consequences of a poorly-drafted clause.

The use of arbitration under investment treaties

Investment arbitration is arbitration brought by a private individual/entity against a foreign State in whose territory that individual/entity has an investment. The popularity of this method of dispute resolution stems from the fact that the "host" State's consent to arbitration does not need to be provided for in a contract with the investor; instead, unconditional consent to arbitration is contained in an  investment treaty.  Investment treaties can be bilateral (between two States; “BITs”) or multilateral (between more than two States).

Investment treaties provide investments with substantive rights and protections (such as protection from unlawful expropriation and the right to fair and equitable treatment) and the possibility to bring an arbitration against the host State if those rights and protections are breached.

Since the State’s consent to arbitration is already embedded in the treaty, all that the investor needs to do to confirm its consent to arbitration is to initiate arbitration proceedings against the State.

Data collected by the International Centre for the Settlement of Investment Disputes (ICSID) - a World Bank institution and the main centre for resolving investment disputes - shows that financial disputes account for 7% of the institution's workload. 

This is not by chance: in certain circumstances the only alternative to bringing an investment dispute would be bring a claim before the domestic courts of the host State, which may lack the technical expertise required to deal with the issues raised in this type of dispute. Moreover, since the domestic court would be hearing a case against the government (or other public body) of the territory to which that court belongs, domestic courts may be unlikely to be perceived as impartial. Consequently, investment arbitration - at least from the claimant's perspective - is the only true protection for the investor.  Equally, it is possible that conduct of a State affecting a foreign investment would not contrary to domestic law, but would be contrary to the State’s international legal obligations.

In order for a bank and/or financial institution to benefit from the protection afforded by an investment treaty and to use arbitration in the event of breach of its rights, the business carried out in the host State must fall within the notion of "investment" as defined in the relevant treaty and the bank must qualify as an "investor".

In practice, the following transactions by banks have been qualified as “investments”:

• Loan agreements - in British Caribbean Bank Ltd v. Belize, a guaranteed loan agreement in favour of the State was found to be an investment under the United Kingdom-Belize BIT, as it fell within the terms of "movable and immovable property and all other property rights such as mortgages, pledges or encumbrances" and "rights to credit or to any performance having financial value".
• Hedging contracts - in Deutsche Bank AG v. Sri Lanka, an ICSID arbitral tribunal held that a financial derivative product constituted an asset with economic value and therefore should be considered as an investment under the Germany-Sri Lanka BIT.
• Purchase of government bonds - in a number of cases brought against Argentina as a result of its financial crisis in the early 2000s, holders of Argentine government bonds were held to be entitled to protection under investment treaties.
• Long-term loans (swaps) in project finance transactions - in Porgiton v. Spain, the tribunal established that project finance in the form of long-term loans and so-called swaps is a protected investment under the Energy Charter Treaty.
• Promissory notes - in Fedax v. Venezuela, the issuance of promissory notes in favour of the host State - which were not repaid - was held to be a protected investment under the Netherlands-Venezuela BIT.

In addition to the above, a banking or financial institution could qualify as an "investor" in those cases where the investment was made under its direction and was directly and actively managed by it. However, while definitions of “investor” are often very similar across investment treaties, it is important to closely review the definition in the relevant treaty.

All in all, investment treaties provide significant protection for banking and financial institutions, particularly in relation to developing countries with unstable governments. Obviously, in order to take advantage of investment arbitration, banking and financial institutions need to be familiar with the characteristics of the investment arbitration system.

Here are some key takeaways for operators in the financial sector when considering recourse to investment arbitration:

• before investing in a foreign country, check for the existence of BITs or multilateral investment treaties;
• consider revising your corporate structure to take advantage of the investment treaties entered into by the host State;
• evaluate available arbitration institutions;
• in the absence of an investment treaty, consider including an arbitration clause in an agreement with host State governments or public bodies.

Conclusions

Banking and financial institutions are increasingly likely to choose arbitration as a means of dispute resolution where the relevant business or subject-matter of a dispute has characteristics that make it unsuitable for resolution by national courts. The following factors are particularly relevant in this respect:

• the location of the parties and their assets (if located in jurisdictions where enforcement of a court judgment may be complex)

• the complexity of the legal and economic issues to be resolved;

• the law applicable to the dispute;

• the high value of the dispute;

• the need for an efficient and tailor-made decision-making process;

• the desire, in commercial disputes, to ensure the confidentiality of the proceedings.

Authored by Patrizio Messina, Andrea Atteritano and Giovanni Zarra.