Arbitration in International Banking and Finance

Klaus Peter Berger



1 Businesses in the real economy have long since recognised the advantages of arbitration over national courts for the resolution of b2b disputes. In the financial services industry, however, all forms of private, extrajudicial dispute resolution have met with indifference, if not suspicion. Arbitration in banking and finance has simply not been a topic for many decades: "If we are owed money we sue. Why bother with arbitration?" (Golden/Werner, The Modern Role of Arbitration in Banking and Finance, in: Golden/Lamm (ed.) International Financial Disputes, Arbitration and Mediation, 2015, para. 1.22, quoting an unnamed US banker).

2 The resentment of banks and other financial institutions against alternative dispute resolution is surprising given that securities arbitration at stock exchanges, as an expression of the autonomy of stock trading, is one of the oldest forms of arbitration. Also, leading cases of the US Supreme Court in 1974 and 1987 on the arbitrability of disputes resulting from national and international securities transactions under the US Securities & Exchange Acts of 1933 and 1934 have played a crucial role in the worldwide liberalisation of arbitration witnessed in recent decades.

The Status Quo

3 As a result of the traditional antipathy of the banking and finance industry against arbitration, and in the absence of an out-of-court settlement, domestic banking disputes with commercial customers have been decided almost exclusively in national courts. The same is true for the vast majority of disputes arising from international loan agreements. In these transactions, the parties usually agree to the jurisdiction of state courts, typically in London or New York. This choice of forum is often coupled with a corresponding choice of law clause. Frequently, parties agree to a unilateral jurisdiction ("split") clause that allows only the financing bank to choose between state court jurisdiction and arbitration. In some jurisdictions, such unilateral jurisdiction clauses are considered invalid. In others, their validity has not yet been tested.

4 For many decades, disputes arising out of standard Master Agreements, such as the one used by the International Swaps and Derivatives Association (ISDA), upon which the worldwide trade of over-the-counter (OTC) derivatives was and is based, or – in case of syndicated lending – the Master Agreements of the London-based Loan Market Association (LMA) and the New York-based Loan Syndications and Trading Association (LSTA) were also exclusively settled by state courts in London or New York. Both jurisdictions are perceived as having commercially-minded judges with considerable experience with the decision of banking and financial market disputes. The English courts have rendered well over 100 decisions in the past 10 years on standard contract documentation like the 1992 or 2002 ISDA Master Agreements. Usually, the choice between the two jurisdictions depends on the substantive law which the parties have chosen to govern their contract.

5 The situation is different in loan contracts with sovereign borrowers. In light of political considerations and issues of state sovereignty, states are often reluctant to submit themselves in those contracts to the jurisdiction of foreign courts and the banks hesitate to subject themselves to the jurisdiction of the domestic courts of the sovereign borrower. Sometimes, the parties agree to submit their disputes to international arbitral tribunals sitting in a neutral country. The same applies to bonds issued by sovereign states. Of the 92 sovereign bonds reviewed by the ICC Task Force on Financial Institutions and International Arbitration in 2018, only 16 (17%) made arbitration available to bondholders and to the issuer, while two (2%) made arbitration available only to the bondholder.

6 In spite of the obvious benefits of arbitration, even in this area parties still prefer dispute resolution by third-country domestic courts, for example for the restructuring of sovereign debt. Given that previous attempts to create special tribunals like the League of Nations Loans Tribunal or the IMF Sovereign Debt Rescheduling Mechanism (SDRM) never became reality, ICSID arbitration is – for the time being – one of the few available avenues which is pursued by creditors in case of a sovereign debt crisis (for some practical example see here).

Reasons for a Change

7 From a more general perspective, the potential benefits of recourse to arbitration are not limited to financial contracts with sovereign parties. In lending, derivative, project financing for large infrastructure projects, and in other financial agreements with commercial parties from "emerging markets", e.g. in Africa or Asia, parties often agree on arbitration instead of dispute resolution before domestic courts. One reason for pursuing this approach is the interest of those parties to shield themselves from existing legal uncertainties in those countries and problems with the reliability, expertise, and efficiency of the local courts there. It has rightly been said that for these parties having to remain at the mercy of unexperienced courts "may be a time-bomb waiting to explode." (Golden/Werner, The Modern Role of Arbitration in Banking and Finance, in: Golden/Lamm (ed.) International Financial Disputes, Arbitration and Mediation, 2015, para. 1.38).

8 International arbitrators also have more flexibility than domestic courts to apply transnational financial law as part of the modern lex mercatoria in areas where private international law and its prediliction for the application of domestic law have failed. This is true not only for general contract law but also with respect to such important legal institutions as set-off, whose legal qualification remains a grey area, and netting, whose significance for international finance, for example with respect to close-out netting under the ISDA Master Agreement, cannot be overstated:

"Transnationalization on the basis of international practice or custom (within the modern lex mercatoria) may have to help out in order to make risk management through these facilities [of set-off and netting] safe at the international level, where international arbitration may be first in line to provide the necessary clarity. This may even become an issue of financial stability and also of efficiency as public order requirements in the transnational commercial and financial legal order itself." (Dalhuisen, The Law Applicable in International Financial Disputes, in: Golden/Lamm (ed.) International Financial Disputes, Arbitration and Mediation, 2015, para. 7.41).  

9 Another reason for resorting to arbitration is to benefit from the worldwide and highly efficient enforcement regime of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards in scenarios when awards rendered in their favour need to be enforced against assets in various jurisdictions around the globe. This may be the case when those parties have concluded a contract with a counterparty that has assets in multiple jurisdictions or a contract with multiple counterparties having assets in a variety of jurisdictions, e.g. in project finance scenarios. For the judgement of domestic courts, only bilateral and regional enforcement systems, like the "Brussels Regime" (principally the recast Brussels Regulation (EU) 1215/2012), exist. The Hague Convention of 2 July 2019 on the Recognition and Enforcement of Foreign Judgments in Civil or Commercial Matters has not yet entered into force.

Brexit, the COVID-19 Pandemic and LIBOR

10 Brexit has the effect that UK banks may no longer benefit from the full scope of EU's Brussels regime so that arbitration becomes an even more attractive alternative to court litigation. On 8 April 2020, the UK has submitted its application to accede to the 2007 Lugano Convention on jurisdiction and the recognition and enforcement of judgments. However, UK's accession to the Lugano Convention requires unanimous consent of all Contracting Parties, including the EU (cf. Art. 70–72 Lugano Convention). On 4 May 2021, the European Commission formally communicated that it takes the view that the EU should not consent to UK's accession. Yet, it remains to be seen whether enough EU member states will follow the Commission's unbinding recommendation and deny UK's application (cf. Art. 218 TFEU). Hitherto, the 2005 Hague Convention on Choice of Court Agreements, to which the UK acceded on 1 January 2021 on its own right, remains the only international convention to which both, the UK and the EU, are currently contracting parties. However, the scope of that Convention is limited to exclusive jurisdiction clauses.

11 Arbitration clauses remain unaffected by the UK's withdrawal from the EU, and efficient dispute resolution mechanisms are badly needed, given that, as a consequence of the COVID-19 pandemic, litigations arising out of default scenarios such as force majeure, frustration, and material adverse change, are likely to rise dramatically. This scenario may prompt banks and financial institutions to opt for arbitration not only for future but also for disputes arising out of existing contracts, e.g. by way of submission agreements.

12 LIBOR (London Interbank Offered Rate) as the standard interest reference rate for both financial and general commercial contracts will be discontinued by the end of 2021. The need to move away from LIBOR and the anticipated date of its discontinuation has not changed as a result of COVID-19. Nevertheless, there have been some changes to milestones on the roadmap to get there to reflect the acuteness of disruption to businesses in 2020. LIBOR will be substituted as of 2022 by other currency-specific reference rates such as SONIA (Sterling Overnight Index Average), SOFR (Secured Overnight Financing Rate) or €STER (Euro Short Term Rate). Parties to existing contracts using the LIBOR are encouraged by financial market organizations such as ISDA to agree to contractual fallback provisions that would provide for adjusted versions of risk-free reference rates as replacement rates. If parties are not able to change their LIBOR exposure by mutual consent they may want to have access to a quick and efficient dispute resolution tool which allows for the adaptation of contracts by experts chosen by the parties. International arbitration is such a tool. 

The Special Case of Islamic Finance

13 Disputes arising out of the fast-growing field of Islamic Finance products, such as murabaha (cost-plus financing), musharakah (joint enterprise or partnership), restricted or unrestricted mudarabah (profit sharing-loss bearing), salam (forward financed sale), ijara or ijar wa l-iqtina' (leasing, hire-purchase), should be decided by arbitral tribunals rather than by domestic courts. This view has been confirmed by the Banking Law Committee of the International Bar Assocation (IBA). One reason for that is that dispute resolution by mediation and arbitration is specifically acknowledged in the Quran from which many of the principles of Islamic law, the Shari'a, are derived. It is not surprising, therefore, that this method of alternative dispute resolution has developed gradually in the legal systems of Islamic countries over the last three decades.

14 Another reason is that domestic courts are largely unfamiliar with these products and with the specificities of Islamic law and its application in complex financial disputes. Examples for this lack of knowledge are the significance of the different schools of Islamic law and the functioning and role of the various Shari'a (supervisory) boards set up in the various Islamic jurisdictions to ensure compliance of the activities of Islamic financial institutions with Shari'a principles, including the question whether the religious edicts (fatwas) issued by these boards are binding for the courts. Also unknown to many domestic courts is the role and relationship with Shari'a Boards of standard-setting bodies and institutions like the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) which is responsible for the issuance and development of universally complied accounting, auditing, governance, ethics, and Shari'a standards for Islamic financial institutions and the industry.

15 A further, albeit legalistic reason why Islamic Finance disputes should be decided by arbitral tribunals rather than domestic courts, relates to the nature of the Shari'a as an uncodified, a-national body of religious legal principles and rules. As such, the Shari'a does not constitute the law of a state as required by Art. 3 of the Rome-I Regulation for a valid choice of law. Recital 13 of the Regulation makes it clear that domestic courts in the EU may accept such a choice of non-state law by contracting parties only as an "incorporation by reference into their contract ", i.e. as a choice of contractual principles which does not derogate the mandatory rules of the applicable state law. This view was confirmed by the English Court of Appeal in Shamil Bank of Bahrain EC v. Beximco Pharmaceuticals Ltd for the comparable choice of law provisions in the Rome Convention on the Law Applicable to Contractual Obligations of 1980.

16 Under most modern arbitration laws, such as Art. 28 (1) of the UNCITRAL Model Law on International Commercial Arbitration, however, arbitral tribunals have a much wider latitude to accept as a proper choice of law not only the parties' choice of the law of a state but also their choice of other "rules of law". It is generally acknowledged that this notion includes a-national legal rules and principles such as the Shari'a or the Lex Mercatoria. In Halpern v Halpern, the English Court of Appeal accepted that view and held that "if parties wish... some form of rules or law not of a country to apply to their contract, then it [is] open to them to so agree, provided that there [is] an arbitration clause ... The court would give effect to the parties' agreement in that way." In that context, the Court referred to Art. 46 of the English Arbitration Act 1996 which, in subsection (1) (b), mandates arbitral tribunals sitting in the UK to decide the dispute, "if the parties so agree, in accordance with such other considerations as are agreed by them or determined by the tribunal". In Musawi, the High Court referred to the same provision to indicate "the common law position" that the powers of domestic English courts to accept the parties' choice of a-national law such as the Shari'a are more restricted than those of arbitral tribunals.

The Need for Judges with Industry-Specific Expertise

17 Examples from recent practice, both in the area of commercial and investment arbitration, show that there is nowadays no reason for banks and other financial institutions to avoid arbitration in favour of state court jurisdiction as a matter of principle. In many instances, arbitration has shown itself even as a superior method of dispute resolution. Of the many advantages of arbitration, the ability of the parties to select an arbitrator with specialized legal know-how and market expertise sticks out:

"Many financial market disputes are of a highly technical nature and beg a background in market practice, custom, and usage, yet the absence of a specialized subject matter court for finance, both at the domestic level in many jurisdictions and at the international level, creates a void that a carefully selected arbitration panel, comprised of one or more arbitrators with the requisite experience, can fill. By tayloring arbitral rules and procedures to specific concerns of these markets, it can only be expected that the attractiveness of this alternative will be further enhanced." (Golden/Werner, The Modern Role of Arbitration in Banking and Finance, in: Golden/Lamm (ed.) International Financial Disputes, Arbitration and Mediation, 2015, para. 1.36). 

18 The recent efforts of governments to establish "commercial courts", like the Singapore International Commercial Court established in 2015, the international chamber of the Paris Commercial Court established in 2018, or the Netherlands Commercial Court established in 2019 as well as the plans by Germany and other governments to establish such courts with arbitrator-like legal expertise are a clear proof of this particular quality of arbitration. The same applies to the "Financial List" established in 2015 by the English judiciary as a specialist cross-jurisdictional list comprising judges from the Commercial Court and the Chancery Division, set up to address the particular business needs of parties litigating on financial matters in London. These governments and the English judiciary are now trying to imitate that quality of arbitration in order to establish a reputation of their court systems as trusted hubs for the resolution of domestic and international b2b disputes.

19 In few other areas is this classical advantage of arbitration as evident as in the field of national and international banking and capital markets law. This strong need for industry-specific expertise goes well beyond the area of Islamic Finance described above. It seems hardly possible to explain to most domestic judges the market understanding and functioning of terms like "backstop facility", "convertible preferred equity certificates", "collateralized debt obligation", "MAC-clause", "parallel debt", "senior facilities agreement", "pari passu clause", "gun jumping" or "contractual subordination" within a reasonable period of time.

20 The same applies to the need for a special approach to the interpretation of standardized contract documentation for complex financial transactions such as the ISDA Master Agreement:

"Complex financial transactions agreements place a premium on the knowledge and expertise of those using them. They are, literally and by definition, complex. They are also full of what might be called 'code'-words, expressions and usages, as well as legal underpinnings, known and understood [only] by those who use them…..To some extent, the difficulties [in interpreting and understanding the ISDA Master Agreement] also arise from the fact that the ISDA Master Agreement is necessarily a compromise between brevity and the requirement for an agreement that is effective and enforceable under at least two governing laws, as well as under other laws that may be chosen as its governing law." (Ross, Capital Markets Law Journal 2012, 221, 256).

21 With respect to the ISDA Master Agreements as standardized financial markets documentation, the need for decision-makers with market expertise and specialized legal know-how is exponentiated in light of the potential of these disputes to "infect" a multitude of transactions based on the same documentation:

"And then there is the particular challenge generated by the widespread usage in finance of standard terms and contracts. Standardization brings great benefits to the market. It enables parties to speak the same 'language' across jurisdictional borders. It fosters efficiencies, including the reduction of costs. However, it breeds a corollary risk (even in the absence of a formal rule of binding precedent), namely of contamination - that a judicial mistake made when interpreting a standard term [or standard agreement for that matter] can 'infect' trillions of dollars of trading based on the same term [or agreement]. The search for 'party intent' when resolving disputes gives way to the different search for 'market intent'. Thus, for example, we find a senior English judge admitting that the interpretation of the ISDA Master Agreement had to be sensitive also to the needs of non-litigants who relied on its terms: 'It is axiomatic that [the ISDA Master Agreement] should, as far as possible, be interpreted in a way that serves the objectives of clarity, certainty and predictability, so that the very large number of parties using it should know where the stand' [Lomas v. JB Firth Rixson, Inc. [2010] EWHC 3372 (Ch) (English High Court) at [53]]. But for this to happen, a requisite familiarity with, and sensitivity to, financial market interests and practice must be presumed. That may be lacking in many domestic courts. Arbitrators who bring with them relevant experience of finance can fill that experiential gap." (Golden/Werner, The Modern Role of Arbitration in Banking and Finance, in: Golden/Lamm (ed.) International Financial Disputes, Arbitration and Mediation, 2015, para. 1.29).    

22 In light of the "infectious potential" of individual disputes over standardized market documentation, bankers often argue that if such disputes are not settled, they require a final decision by the highest court of the jurisdiction whose law is declared applicable to the agreement before they are willing to have their documentation amended accordingly. While this may make sense for those few jurisdictions that have courts with considerable experience in this field, it may not be true with respect to others, where the risk to get a "wrong" decision is high due to a total lack of market know-how and expertise of those courts.

23 Also, in light of the general trend to attach to dispute settlement by arbitration the same weight and value that is attached to adjudication by domestic courts, arbitral awards today assume a certain precedential value, provided, however, they are published with more frequency.  (Wimalasena, Die Veröffentlichung von Schiedssprüchen als Beitrag zur Normbildung, 2016, 127 et seq. emphasising the examples of investor-state and sports arbitration and the role of arbitral institutions; see for the complexity and evolutionary character of the "permanent process of rule-making through courts" as an open-ended and continuous discovery procedure Podszun, Regelsetzung durch Gerichte als evolutionärer Prozeß, in: Möslein (ed.) Regelsetzung im Privatrecht, 2019, 255, 280, 298 et seq.: "Every judgement is just the last state of error").

24 The strong need for arbitrators with market knowledge and industry-specific legal expertise has prompted arbitral institutions to set up special panels of arbitrators for financial disputes. P.R.I.M.E. Finance is composed of a panel of 200+ legal and financial experts. They include sitting and retired judges, central bankers, regulators, academics, representatives from private legal practice, and derivatives market participants, many of them having first-hand experience structuring and executing transactions as well as with the laws, regulations and standard documentation of the structured finance market, creating an unprecedented combination of legal and market expertise. Arbitrations brought to P.R.I.M.E are administered by the Permanent Court of Arbitration (PCA) in The Hague.

25 The Hong Kong International Arbitration Centre (HKIAC) announced in May 2018 that it has set up a new Panel of Arbitrators for Financial Services Disputes (the "FSD Panel"). The Panel includes not only experienced arbitrators but also senior counsel, former judges or former in-house counsel of major financial institutions. They offer experience in a wide range of disputes arising from the financial services sector, including those in relation to structured financing, sovereign lending, forex trading, derivatives, asset management, interbank, and banking regulatory matters.

26 These panels ensure that documentation of complex financial transactions like the ISDA and LMA/LSTA Master Agreements, but also tailor-made loan and other financial agreements, are not treated in the same way as any other contract in case of dispute, but are construed and applied with the specialized legal know-how and market knowledge relevant for the respective industry sector.

The Turn of the Tide

27 The global financial crisis and its aftermath have led to a greater acceptance of arbitration and other forms of alternative dispute resolution. They have helped the financial sector to better understand the benefits which arbitration has to offer, allowing them to make better informed decisions with respect to the resolution of disputes arising out of their contracts, rather than reflexively resorting to the decades-long established practice of dispute resolution by state courts, without considering alternatives and associated efficiency gains.

28 However, a Report published in March 2018 by a Task Force of the Commission on Arbitration and ADR of the International Chamber of Commerce (ICC) has confirmed that financial institutions across the globe are not exploiting the potential benefits of international commercial and investment arbitration to the full extent possible. Brexit, as well as the extreme flexibility with which arbitral tribunals and arbitral institutions have reacted to the multitude of challenges of the COVID-19 crisis, may have helped to persuade some banks or other financial institutions of the benefits of arbitration over national court litigation. Among the reactions influencing this thought process were, for example, the conduct of remote or "hybrid" hearings and the digital, global service of awards while some domestic court systems were still trying to overcome the effects of the lockdown in their respective jurisdictions.

29 An additional factor for the increased acceptance of arbitration in the financial industry may be the growing number of provisions on early dismissal or early determination by the arbitral tribunal in the rules of leading arbitral institutions such as the London Court of International Arbitration (Art. 22 (1) (viii) LCIA Arbitration Rules 2020), the Singapore International Arbitration Centre (Rule 29 SIAC Rules 2016) or the Hong Kong International Arbitration Centre (Art. 43 HKIAC Administered Arbitration Rules 2018). Even though the test is usually more onerous in arbitration than in court litigation, banks and financial institutions tend to favour these instruments in "one-shot money disputes" involving what they perceive to be simple claims for the payment of money. After all, the finance industry is often not very keen to wait until they can recoup money which, in their view, is clearly and immediately due to them.

30 Recent data support the assumption that the financial industry is beginning to adopt a more favourable view of arbitration as an alternative to domestic courts. In the 2013 Queen Mary/PWC Survey on "Corporate Choices in International Arbitration", 69% of the respondents from the financial services industry agreed or strongly agreed that arbitration is well suited for the settlement of disputes encountered in their field of business. A considerable percentage of the caseload administered by some arbitral institutions involves international banking and finance disputes or disputes where such issues are in the background. The International Centre for Dispute Resolution (ICDR), which is the international arm of the American Arbitration Association (AAA), reported a 78% increase in financial services b2b cases in 2018. The caseload statistics of the LCIA for 2019 show continued growth of disputes in the banking and finance sector, representing 32% of all cases administered under the LCIA Arbitration Rules and an increase from 29% in 2018.

31 This increased acceptance of arbitration in the financial industry goes along with the increased complexity of disputes involving financial products. Apart from the combined effects of the financial crisis, Brexit and Corona, there are four arbitration-specific reasons which account for this increased use of arbitration in finance:

  • procedure tailor-made to the specificities of each individual case,
  • access to the legal and financial market expertise of highly qualified arbitrators selected by the parties,
  • confidentiality of the arbitral procedure, at least in commercial as opposed to investment arbitrations, and
  • worldwide enforceability of arbitral awards under the 1958 New York Convention.

32 These as well as other advantages of arbitration for the banking and finance industry are explored in more detail and confirmed in a number of key publications and reports:

  • the ISDA Arbitration Guide of 2013 and the second edition published in December 2018,
  • the Report on Arbitration in Banking and Financial Matters published by a Working Group of the French Arbitration Committee (Comité français de l'arbitrage) on 19 May 2014,
  • the Report (with Supplementary Materials) on Financial Institutions and International Arbitration of the Commission on Arbitration & ADR of the International Chamber of Commerce (ICC), Task Force on Financial Institutions and International Arbitration of 2016, and
  • the Report on Arbitration in Banking and Financial Matters of the High Legal Committee for Paris as a Financial Center (Haut Comité Juridique de la Place Financière de Paris) published in 2020.

33 The acknowledgment of these benefits have led ISDA to recommend to its members the use of "ISDAfied" arbitration clauses in the 2002 and 1992 ISDA Master Agreement. However, the significance of arbitration goes well beyond the area of derivatives transactions. It may even be relevant in cases that involve straightforward and undisputed claims for the payment of a sum of money, e.g. for the repayment of a loan. For such disputes, the parties may benefit from the rules for expedited proceedings ("fast track rules") which have been issued in recent years by a variety of arbitral institutions and which allow for a speedy resolution of disputes through arbitration.


34 Arbitration is certainly no panacea for the resolution of all problems related to dispute resolution in international banking and finance. However, it may provide a highly attractive alternative to dispute resolution before domestic courts in specific cases. This is true even for areas like securitisation that, so far, rely exclusively on the support by domestic courts. The ultimate decision for or against arbitration by banking lawyers and their management must always be based on an informed choice in each individual case rather than on untested and vague preconceptions. That choice depends, among other things, on the type of transaction in dispute, the parties involved, and an assessment of the available alternatives.