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Looking Above The Horizon – Why Are Financial Institutions Moving Towards Arbitration And Is India Prepared For It ? (By-Parth Rathore)
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Article Details
Looking Above The Horizon – Why Are
Financial Institutions Moving Towards Arbitration And Is India Prepared For It
?
Authored
By-Parth Rathore
It is important to understand as to why this
topic is discussed at a large scale in recent times. In the year 2019, 58% of
the total number of arbitrations at the AAA (American Arbitration Association)
and 32% of the total number of arbitrations at the LCIA (London Court of
International Arbitration) had the involvement of financial institutions.[1] This change in the approach
of financial institutions was rapid and its magnitude was huge, which led
experts to speculate as to what might be the main reasons for this sudden
change in approach. If we look at financial institutions closely, we come to know
that they have traditionally always preferred litigation over arbitration as a
method for dispute resolution. There are various reasons for this. Firstly,
because the disputes in courts are of public nature and it helps banks to
create a substantial amount of pressure on defaulters. Secondly, judges in the
courts have complete freedom to exercise various powers that are vested in them
like summary judgements, interim measures and warrants for not-appearing in
court, etc., which do not exist in arbitration.
The Main Drivers
Behind The Change
-
The
nature of claims involving financial products became increasingly complex in
the previous decade. The 2008 economic crisis was hugely responsible in
changing the traditional notion of litigation in financial disputes, because
financial institutions felt that adjudicators who possess deep and specialized
knowledge of finance are needed to understand transactions which are complex.
There are various disagreements which are a
result
of formulaic calculations and complex financial models, which require serious
understanding of financial markets and financial products. Arbitration allows
different parties to choose decision makers who have specific expertise.
Arbitration unlike litigation avoids creating a precedent.
-
Parties
from emerging markets in international finance are becoming increasingly
involved. In disputes where enforcement of foreign judgements tends to become
problematic, arbitration is preferred. The primary reason for this is that
enforcement of arbitral awards under the New York Convention is comparatively
much easier.
-
Brexit
has also played a role in this shift. On 31st January 2020, the
United Kingdom ceased to be a part of the European Union (EU). Before this
happened the Brussels Regulation (recast) used to determine the rules that
would be applied by EU courts when enforcing court judgements and giving effect
to court jurisdiction clauses within the EU. Though Brexit has not affected
international arbitration in anyway but because a replacement of those rules
has not been decided therefore major uncertainty remains over enforceability of
English court judgements and court jurisdiction clauses.
-
It is
also important to understand the role globalization has played in this shift.
Globalization played a major role in increasing the use of arbitration in
derivatives transaction. This was the main reason because of which ISDA
published a guide in 2013 which primarily talked about how arbitration can be
used in the ISDA Master Agreement. This guide got updated in 2018 and
incorporated an enlarged range of ISDA model arbitration clauses which would be
applicable to many arbitral institutions and seats around the world. This
clearly proves the increased use of arbitration in financial transactions.
-
Various
changes have been made by arbitral institutions in recent years so that
arbitration can be made more attractive to financial institutions. These
amendments were primarily done to clarify and introduce some procedural tools
so that arbitration can be made more cost-effective and efficient. I am
personally of the opinion that two very important changes took place in recent time
with respect to financial institutions in International Arbitration.
·
Introduction
of Summary Dismissal – Until
very recently there was an uncertainty in international arbitration on whether
arbitral tribunals have the authority to
dismiss defence or claims that are manifestly without any merit on a summary
basis. This procedure has always been available in litigation but in recent
years this distinction between arbitration and litigation has fallen away
because P.R.I.M.E Finance (This is an arbitral institution which is completely
dedicated for arbitrations relating to the finance sector) and other major arbitral tribunals around the
world have either published guidance notes which confirm that arbitral tribunals
do have such a power or have amended their rules which has in-turn expressly
given power to the tribunals to do this. But it is important that these parties
have their arbitral seat in a jurisdiction like London or New York so that
helpful case laws are available which can conform that awards are enforceable
in accordance with summary procedures. Also, it is important that parties
arbitrate under the rules of one of these arbitral institutions which allow
summary dismissal procedure.
·
Revised
rules 2022 for P.R.I.M.E. Finance Arbitration – If financial institutions do not want to adopt procedural rules of
regular arbitral institutions, as an alternative, they have an option to arbitrate under
P.R.I.M.E Finance Arbitration Rules. As mentioned above this institution is
specifically made to deal with complex financial disputes. The 2022 revision of
the rules has introduced a new procedure of emergency arbitrator, which will
majorly help in consolidation, primarily in situations where multi-parties and
multi-contracts are involved. P.R.I.M.E also offers an option to select a
specialist arbitrator from its panel which includes almost 250 arbitrators.
Apart from summary dismissal these changes have also played a major role in
making financial institutions change their approach. [2]
Is India Prepared To
Tackle This Shift?
It is no secret that India has chosen to take
a very pro-arbitration approach in recent times. The Indian Parliament’s
revolutionary approach has been complimented very well by the Indian Judiciary
on this matter. This post talks in detail about India’s pro-arbitration stance in recent times.
As mentioned above the Indian judiciary has played a crucial role in furthering
this agenda.
The Indian Supreme Court adopted group of
companies doctrine in Chloro Controls (I) Pvt. Ltd. v.
Severn Trent Water Purification Inc. & Others in 2012 for the first time. This judgement is
widely regarded as the beginning of India’s shift towards a more pro-arbitration
approach. After this, various judgements of India’s top court have repeatedly
underlined this agenda. The Supreme Court in PASL Wind Solutions Pvt. Ltd. v.
GE Power Conversion
gave Indian parties the right to choose a foreign seat for arbitration and
underlined the importance of party autonomy in arbitration. The Amazon v. Future Retail judgement talks about different methods of
enforcing foreign-seated emergency awards in India. This post systematically breaks down the Amazon judgement and explains it in
detail.
Despite India making significant strides in
the field of arbitration, it majorly lacks in the infrastructure to deal with
financial arbitration. It is no hidden fact that financial disputes in India
are on a rise. Huge Indian corporations like Kingfisher, Reliance and Firestar
Diamonds have defaulted in recent times. It is paramount that specialized
institutions that can deal with financial arbitrations or an alternative body
like P.R.I.M.E Finance are set up as soon as possible. There is no doubt that
we can see a significant change in the field of financial arbitration if the
above-mentioned steps are taken . Leading financial institutions will always
prefer arbitration over court submissions because it results in widespread
media coverage which in-turn has adverse effects on all parties that are
involved. No specialized body exists as of now in India which can deal with
such arbitrations. Retired judges who aren’t experts in finance and possess
very limited knowledge continue to adjudicate in these types of matters. There
is one more hurdle that comes in the way of financial arbitrations in India,
specially regarding banks. There is a real chance of the award getting
challenged in a court, even though very limited grounds for challenging the
award are available in India and this can lead to huge losses and delays.
India as of now is not prepared to tackle this
global shift of financial institutions shifting to arbitration but it isn’t too
far away from embracing this change because both the government and the
judiciary are willing to take huge strides to turn India into an
arbitration-friendly jurisdiction. Certain areas which are mentioned above
require some minute changes and India can definitely turn into a financial
arbitration hub if these changes are made.
Article Information
Looking Above The Horizon – Why Are Financial Institutions Moving Towards Arbitration And Is India Prepared For It ? (By-Parth Rathore)
Authors: Parth Rathore
- Journal IJLRA
- ISSN 2582-6433
- Published 2022/09/05
- Volume 2
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
- Access Open Access
- License CC 4.0
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