Financial Services Disputes: ISDA Raises The Profile Of Arbitration

Summary and implications

On 9 September 2013 International Swaps and Derivatives Association (ISDA) published guidance on arbitration in the context of disputes arising under its documentation and a set of model arbitration clauses. This step reflects growing interest in arbitration in the financial services sector.

This briefing considers the potential for increased use of arbitration in cross-border financial services disputes, the reasons driving change and the implications for key stakeholders within the financial services sector.

A tradition of litigation

Financial institutions have historically favoured litigation over arbitration for resolving disputes connected with complex financial transactions/products.

This has been driven by a number of perceived advantages of litigation, notably the following:

1. The civil procedure rules of a number of jurisdictions (particularly England and Wales and New York) permit the courts to grant summary judgment in circumstances where a claim or defence has no real prospect of success, and default judgment where a defendant does not take part in the proceedings. Such procedures are not generally available in arbitral proceedings.

   Financial institutions have, therefore, traditionally perceived arbitration to be less efficient and cost effective for straightforward or nuisance disputes.

2. The courts (again, particularly in England and Wales and New York) take a strict approach to enforcing contractual obligations, seeking wherever possible to honour commercial bargains. They are also often perceived as "pro bank".

3. Litigation creates precedent, often preventing disputes on the same issues arising in the future (or, at least, giving greater clarity as to the likely outcome).

4. The quality of judges hearing cases in, for example, the Commercial Court in London, is extremely high. As ISDA's guidance acknowledges, they have a wealth of experience in the sophisticated and complex financial products that are often the subject of dispute.

   Between 1 March 2012 and 31 December 2012, Queen Mary University and PricewaterhouseCoopers surveyed corporate counsel in the financial services sector on their experience of, and views in relation to, international arbitration (the QMU/PWC Survey). They found that litigation remains the "clear favourite" method of dispute resolution for the financial services sector.

   However, it is noteworthy that arbitration was ranked as the "most preferred" method of dispute resolution...