CASES WHERE THE BANKER HAS NO CHOICE BUT TO ACCEPT ARBITRATION

A BANKER'S APPROACH TO ARBITRATION

1. CASES WHERE THE BANKER HAS NO CHOICE BUT TO ACCEPT ARBITRATION

1. CASES WHERE THE BANKER HAS NO CHOICE BUT TO ACCEPT ARBITRATION

Bankers can in certain cases fmd themselves party to arbitration agreements without having had much of a choice. Their rejection of arbitration would simply mean the lapse of a cla]m that was key in their credit decision making. Inheriting an arbitration clause entered into by a borrower, who later assigned his commercial contract to his banker is an example of such a situation ³. This occurs as a result of the automatic transmission of the arbitration clause as part of the transmission, by assignment or subrogation, of the contract in which it is inserted. In short, if the banker wants to exercise his borrower's rights against that borrower's debtor, the banker has to step into his borrower's shoes and use arbitration.

Another example is frequently seen in export finance where loans are guaranteed by export credit agencies (ECAs)⁴• ECAs usually require that loans extended to state-owned buyers provide for compulsory arbitration. Once the ECA has made payment under its guarantee, it will be subrogated into the bank's right and directly claim reimbursement from the defaulting borrower. In such an instance, the unavailability of defenses based on sovereign immunity as well as the international enforceability of awards render arbitration attractive to the ECA. Because guarantees offered by ECAs can cover as much as 95% of the loan, bankers find it rather impolite to go against the desire of such a generous guarantor and agree therefore to arbitration.

2 !CC International Court of Arbitration Secretariat statistics as of29 January 2003.

3 Whether such assignment is made by way of security or as true sale in a forfeiting scheme, both methods being widely used in trade finance.

4 For example, France's COFACE, US' Eximbank, Britain's Export Credit Guarantee Department (ECGD), Switzerland's Export Risk Guarantee Agency (GRE).

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A third example is encountered where the borrower refuses adamantly to accept the jurisdiction of any court o.ther than that of his hometown. But even when the jurisdiction of his hometown courts is accepted, renouncing sovereign immunity does not come automatically and has to be specifically negotiated amid stirring arguments of inalienable sovereignty. In the majority of cases, bankers find that they have little choice left but to resort to arbitration.

2.

CASES WHERE THE BANKER WILLFULLY CHOOSES ARBITRATION

Those who challenge the fmding that bankers are averse to arbitration are prompt to point out the breakthrough achieved by arbitration in investment banking.

True, banks investing in equity, advising on corporate restructuring or involved in operations on securities, often resort to arbitration. The attractiveness of a specialists' tribunal combining accountancy and fmance expertise, with a lawyer to hold the quill to ensure that the award has a chance of surviving a challenge, is understandable given the specificity of investment banking. Countries where commercial judges likely to hear investment banking disputes are not career magistrates, but businesspersons who have a lifetime of experience as corporate managers, bankers or accountants remain the exception.

It is more customary to have such disputes heard before judges more used to handling bankruptcies than securities regulation. Parties' or court appointed experts are then likely to rapidly eclipse the incumbent judge, with the result that the procedure shifts from inquisitorial to the much more costly adversarial one.

The search for dedicated expertise has also prompted a number of organized financial instruments exchanges to provide. for arbitration as the exclusive method to settle disputes between their members, the majority of whom are banks. This is notably the case of transeuropean Euronext⁵, French MATIF⁶and the dispute resolution forum operated by

Euronext was created in September 2000 by the merger of the exchanges in Amsterdam, Brussels and the trading of derivatives on financial instruments and commodities. MA TIF is managed by Euronext Paris SA and its rules provide for a compulsory dispute settlement by arbitration. The MATIF Rules are available on the Conseil des Marches Financiers website at the following address: http://www.cmf-france.org.

the National Association of Securities Dealers, Inc., (NASD) for the securities industry in the United States⁷•

However, limiting the breakthrough achieved by arbitration to investment banking and securities is too reducing a view. In at least two other instances, arbitration proved to be a successful alternative to court litigation in wholesale banking as well and, indeed, in interbank disputes.

Spain's Diriban is an example of a successful arbitration system created by the banking industry for its own needs. The Servicio para dirimir cuestiones entre Bancos (Diriban) was created to settle all disputes of whatever nature or amount between banks operating in Spain. Upon adhering to the Spanish Banking Association (AEB), banks agree in anticipation to subject themselves to the exclusive jurisdiction of Diriban for all disputes with other banks member of AEB⁸• No further agreement to resort to arbitration is needed when a dispute arises. Although the enforcement of Diriban awards could be sought before the Spanish courts, the sanction of excluding recalcitrant losers from AEB has proven until now to be persuasive in ensuring respect of the award.

Diriban's approach to dispute settlement is pragmatic, rather than legalistic. Its 12 members, all named in the Diriban rules and composed of the chief counsels of the main Spanish banks and senior executives of AEB⁹, require written submissions and such other additional evidence as necessary, but do not hold oral hearings. As a result, the assistance of . external counsel is not essential and most claims and defenses are prepared in house.

Today, over 900 disputes have been successfully settled by Diriban with a 100% of the awards voluntarily enforced. The success of Diriban has led the Higher Banking Council in Spain to mirror its structure in a new dispute settlement body called SERDI with

7 NASD offers arbitration and mediation services to facilitate the resolution of monetary, business, and employment disputes between investors, securities firms, and employees of securities firms. New case filings through December 2002 include 7,704, which makes NASD the largest dispute resolution forum in the securities industry. The NASD Code of Arbitration Procedure is available at the following website:

http://www.nasdadr.com/arb _ code/arb _ code.asp.

8 Circular No. XXXIII of Consejo Superior Bancario dated 26 May 1977. In fact, Diriban has been in existence since 1962. However, the system required upon its inception a specific arbitration agreement to be provided in the contract to which the dispute relates. This requirement proved to be a serious impediment against a systematic recourse to arbitration. Hence the new regulation of 1977 which provides an anticipatory general agreement between all banks which are members of AEB to settle their disputes by arbitration before Diriban. See M. Gomez de Liaiio Fonseca-Herrero, El Diriban y el Serdi, dos procedimientos de resolucion de conflictos, La Ley, No. 5006, 2000, pp. I -5.

9 Article IV(!), Convenio sobre sumision a Diriban de determinadas incidencias entre bancos.

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jurisdiction over building societies. One can only regret that Spain's Diriban example has not been more widely foll9wed by other countries.

DOCDEX should also be mentioned¹⁰. It stands for Documentary Instruments Dispute Resolution Expertise. Under the aegis of the ICC Banking Commission and the secretarial administration of the International Centre for Expertise, DOCDEX provides a cost-effective forum for the resolution of disputes that arise under documentary credits, demand guarantees and collections, all of which are instruments that are widely used in international trade and involve an aggregate outstanding amount of several billion dollars.

Here too, the process involves an exclusively written procedure administered by bankers.

The bOCDEX rules provide that a decision shall not be binding upon the parties. As such, the decision could be characterized as an expert opinion. However, article 1.4 of the Rules offers the parties the possibility to agree at any time that the decision will be binding.

In this case, DOCDEX transforms into a traditional arbitral process, without of course any change in its straightforward procedure.

One of the main advantages of DOCDEX is its rapidity. Article 7.4 of the Rules provides that the panels shall render their decision within 30 days after they have received the parties' submissions and necessary information. Another advantage is its low cost. The standard fee, which includes administrative expenses and expert fees, is US$ 5000.

Other arbitration systems dedicated to the settlement of banking disputes also include Britain's City Disputes Panel which offers arbitral services in 30 different fields of fmancial activity¹¹^, and Maryland-based International Center for Letter of Credit Arbitration (ICLOCA) which is open to administering letters of credit disputes under its Rules of Arbitration for Letter of Credit Disputes based on the UNCITRAL Arbitration Rules¹². The extent of their success remains however to be seen.

10 DOCDEX Rules, !CC Publication No. 811, were frrst approved in October 1997, and revised in April 2002, with the currently applicable revision effective from 15 March 2002. The full text of the rules is available on the website of! CC at the following address :

http://www.iccwbo.org/home/banking/docdex_rules_2002.asp. During the last 5 years, DOCDEX panels have rendered decisions on 30 disputes.

11 An outline of the City Disputes Panel areas of expertise, ADR services and arbitration rules are available on its website at the following address: http://www.disputespanel.com.

12 The Rules of Arbitration for Letter of Credit Disputes are available on the website of the Institute for International Banking Law and Practice (IIBPL) which, in effect, manages ICLOCA, at the following address: http://www .iiblp.org/ICLOCA _ Rules.htm.

At this stage, a first finding can be made. Bankers' averseness to arbitration has to be nuanced by acknowledging that bankers are not intuitively arbitration averse. Practice shows that they even tend to favor private dispute settlement methods over court litigation provided they are satisfied that the system they confide their dispute into recognizes the specificity of their business. One way to reach this objective is for bankers themselves to set up

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dispute settlement system (as is the case with Diriban and DOCDEX) to be judged by their peers.

3. CASES WHERE THE BANKER ADAMANTLY REFUSES ARBITRATION

The banker, especially the commercial banker, makes his case crystal clear: I have extended a loan, I expect full reimbursement. At all times, in all countries, the law has supported this commonsense rule.

True, few bankers claim a pound of their defaulting borrower's fair flesh in repayment of the loan¹³• Likewise, I do not expect courts in the majority of civilized countries to imprison insolvent borrowers, especially where the unpaid creditor is but a banker. Yet, the banker will generally view his borrower's repayment obligation as an absolute undertaking, exigible whatever are the circumstances outside the loan agreement.

Where the loan is granted on a secured basis, the bank will simply enforce its security on the collateral in the place where that collateral is situated. If the governing law requires as a prerequisite to enforcement that a claim is filed before a local court, the bank expects the procedure to be short and the court to simply recognize the bank's priority over the collateral. By contrast, an arbitration, generally taking place in another country, would add an unnecessary layer to the enforcement process.

The banker generally perceives an arbitrator to be more permeable than a judge to arguments of equity and fairness. Take the case of a force majeure preventing the performance of the contract. Arbitrators are expected in such a case to suspend the performance of the contract, or even free a party from its unperformed undertaking. The question that arises in such a case is the fate of the facility granted to the buyer, or to the seller, to finance that contract. Should its reimbursement also be suspended? What about interests during the suspension period? One should remember that not all margins required

13 The bond between Shylock as lender and Bassanio as borrower provided: «let the forfeit be nominated for an equal pound of your fair flesh, to be cut off and taken in any what part of your body pleaseth me», W.

Shakespeare, The merchant of Venice, Act I, Se. Ill, line 145.

ation has to value to match the amount of the extended loan.

Likewise, bankers are concerned with what they perceive as the arbitrators' propensity to ignore the natural boundaries of their role as third party financiers and force them to take part into the assessment of the proper performance of the contract. Take the case of a bank having issued a documentary credit upon the instructions of its customer, generally the importer. Upon presentation by the exporter of the documents that the importer has instructed the bank to list in the credit, the bank becomes under an absolute duty to pay the amount of the credit. It is not concerned with the goods proving ultimately to be ill-suited for the purpose that the importer intended to use them for, including where the difference is due to a misrepresentation made by the exporter. While the importer would arguably be entitled to damages, this is a matter for him to pursue before the competent court and the bank will endeavor to avoid being raised to the pedestal of arbiter. It is simply outside a bank's normal operations to adjudicate disputes or to assess the legitimacy of reasons for non-performance.

Assuming that arbitrators are successful in convincing bankers that an award rendered at law (as opposed to equity and fairness) is unlikely to be any different in its tenor from that of a court judgement, would the traditionally heralded advantages of arbitration be sufficient to lure bankers?

In fact, a number of what are presented as decisive advantages of arbitration might, when looked at from the bank viewpoint, not be that determining. Below are examples of how a number of traditional advantages of arbitration can turn out to be at best of little impact on the settlement of banking disputes.

3.1 A worldwide recognition and enforcement of foreign awards through the New York Convention. True, the New York Convention's 133 ratifications bring it beyond the reach of any existing multilateral treaty for the recognition and enforcement of court judgements. Yet, ICSID awards aside, recalcitrant losers are increasingly considering national courts of the place where enforcement is sought to constitute a second chance to test their case, especially where those courts are their

3.2

hometown's. The result is protracted litigation before national courts with precisely the result that parties sought to avoid by resorting to arbitration ¹⁴.

A voiding jury trials. True, in countries where issues relating to civil liability are decided by civil juries, bankers run the risk of facing jury members who might lack the necessary impartiality. This could be because of their own misadventures with their personal banker. Another reason for an expected absence of empathy could result out of the defendant bank's decision to refuse to extend the term of a loan, or to advance new loans, prompting the bankruptcy of local businesses with the unavoidable economic and social consequences on the life of the community. By contrast, arbitrators facing identical facts can be expected to be more impartial.

However, this seeming advantage has to be weighed against two considerations. First, it is open to parties in most countries as well to waive jury trials while still conferring jurisdiction upon state courts. Second, the really problematic lender liability cases are tort rather than contract based and often initiated by third parties who, by defmition, are bound by no arbitration agreement with the defendant banks. Law suits seeking to hold secured lenders liable for damage caused to the environment, to assets or to individuals by hazardous goods on which the bank holds title by way of security are an example. Creating a false appearance of solvency as a result of a bank's continuing financial support of a lame business, and directly prompting that business's collapse upon abrupt interruption of credit, is another example of a favorite third party creditors' claim aiming at transcending their bankrupt debtor's vanishing estate and reaching a deep pocket.

14 The mishaps of an international award rendered by the Arbitration Institute of the Stockholm Chamber of Commerce whose enforcement was sought in Russia in 1998 illustrate the above. The dispute concerned the repayment of a loan and the award had ordered the reimbursement of that loan plus interest. In a first decision, the Volvograd Oblast Court refused enforcement on the ground that enforcing the award against the State-owned debtor which "is the only company in Russia that produces certain products for defense needs ( .. .) could threaten the security of the Russian Federation". The court referred to Article (6) of the Decree of the Presidium of the USSR Supreme Soviet dated 21 June 1998 whose terms are similar to Article V(2)(b) of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The Russian Federation Supreme Court reversed the decision and remanded the case to the Volvograd Oblast Court. Again, the Volvograd Oblast Court denied enforcement, although this time on a different ground. Citing Article 36.1.1 of the Russian Law on Internationa1 Commercial Arbitration, (equivalent to Article V(1)(c) of the New York Convention), the court found that the arbitral tribunal dealt with a question beyond the scope of the arbitration agreement. Again, the Supreme Court reversed the Volvograd Oblast Court's decision. The parties' reaching an out of court settlement prevented further rounds before the courts. This resulted in several years lapsing between the rendering of the award and the actual (partial) recovery of the sum ordered therein. Another example of uncertain fate for arbitral awards include awards rendered in Hong Kong whose recognition and enforcement is sought in the People's Republic of China. It is reported that no award rendered in Hong Kong has been granted enforcement by PRC courts since Hong Kong was returned to PRC in 1997.

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Renunciation to sovereign immunity. A State instrumentality's implicit renunciation to sovereign immunity when entering into an arbitration agreement is today an international substantive rule of law upheld by the courts of most countries.

Here too, this advantage has to be weighed against the following two considerations.

First, absent clear language, courts might consider that the arbitration agreement in itself is insufficient to waive the immunity of certain particular categories of assets, such as diplomatic assets¹⁵. Second, parties have full latitude to confer jurisdiction upon state courts and require a waiver of sovereign immunity. In fact, such waivers are often unnecessary in the majority of wholesale banking activities where loans are extended to fund State instrumentalities pursuing a declared commercial objective or to private finance initiatives operating utilities or natural resources in joint-ventures with State instrumentalities.

Consolidation of claims. Joining in a single procedure before the same tribunal the claim of a sub-contractor against the contractor and that of the contractor against the owner is often salutary. By contrast, joining the bank's claim for reimbursement in the claim arising under the commercial contract seeking to determine the liability for non-performance counters the bank's expectation and is

Dans le document Arbitration in banking and financial matters : ASA Swiss Arbitration Association Conference in Geneva of January 31, 2003 : presentations (Page 76-89)