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Financial Institution and Banks have traditionally opted for Litigation instead of arbitrations for dispute resolution. Litigation, as opposed to arbitrations, allows the judges to exercise multiple powers vested in them such as interim measures, summary judgements, warrants for non-appearance etc. which are not available in arbitrations. In addition to these, 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. The Banks and Financial institutions are increasingly opting for arbitrations instead of litigation. Remarkably, in 2019, 32% of all arbitrations at London Court of International Arbitration (LCIA) and 58% of arbitrations at American Arbitration Association (AAA) involved financial institutions. This Article discusses the steadily increasing number of financial arbitrations and suggests measures India shall adopt to create a stronger arbitration framework for financial disputes.
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 to the aforementioned powers vested in courts for recovery of money, 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, the 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 commercial minded and adept at understanding complex transactions and financial instruments.
The traditional view of litigating in financial disputes changed at the onset of 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. Such cross border transactions are, on most occasions, highly complex involving multiple parties, financial products and instruments across various financial markets. 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 judgement which can be appealed multiple times.
As per the statistics published by leading arbitral institutions, banking and finance arbitrations accounted for 32% of all arbitrations at London Court of International Arbitration (LCIA), 58% at American Arbitration Association (AAA), 10.5% at Hong Kong International Arbitration Centre (HKIAC) and 11% at Vienna International Arbitration Centre (VIAC). In fact, in a 2018 International Arbitration survey conducted by Queen Mary University of London, 56% of the respondents from banking and finance industry answered that they are likely to use international arbitration for resolving cross-border disputes.
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, 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 China, the China International Economic and Trade Arbitration Commission (CIETAC) had produced the Financial Disputes Arbitration Rules, 2003. In addition to these, the arbitral institutions have themselves altered their rules to accommodate the peculiar needs of financial disputes. To cite an example, many leading institutions such as Singapore International Arbitration Centre (SIAC), the Arbitration Institute of the Stockholm Chamber of Commerce (SCC), Hong Kong International Arbitration Centre (HKIAC) and the International Court of Arbitration of the International Chamber of Commerce (ICC) provide for disposal of disputes through summary procedure, akin to summary suits in courts.
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 requirement for providing a specialised institution dealing 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 arbitrations 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. 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. It is recommended that the government creates a panel in consultation with ICAI for facilitation of financial arbitrations. Similar to other leading arbitral institutions, such institutions in India shall amend their rules to suit the peculiar needs of financial arbitrations. Considering that the Government of India 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.
Financial arbitrations, throughout the world, have been increasing enormously. Financial institutions and experts have realised the need and advantages of resolution of disputes through arbitrations. As a result, most of the arbitral institutions have suitably amended their procedures to give leeway to such arbitrations. India however, has been silent on such developments taking place in the world of arbitrations. In pursuance of the government’s objective to create world class arbitral institutions in India, such arbitrations must be accommodated by providing appropriate infrastructure and expertise.