LAW AND ECONOMICS
5. PRACTICAL EXAMPLES
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Disputes of a purely debt enforcement or bankmptcy nature are never arbitrable as they can also affect third parties.20
Another chapter in this field of organised financial markets with financial intermediaries as participants (mainly of exchanges) involves the various types of sales contracts which are concluded, collateralised and executed (settled, which means delivered against payment). Here, there is a defmite need not only for clear mles in case of default but also for quick and market adaptable conflict resolution.21 Traditionally, the exchanges have referred to arbitration for disputes between the institution and its members or between members. The conflict mechanisms are more or less built into the Exchange organisation .
5. PRACTICAL EXAMPLES
5.1 NYSE
In 1817, we note the first discussion about arbitration in the NYSE, where arbitration is often viewed as a more practical alternative to lengthy and expensive litigation.22 The NYSE now provides neutral arbitration panels to hear and decide disputes in more than 35 cities throughout the United States (in some cases, a hearing may be held outside the U.S.). The introduction to the essential characteristics of this system read as follows23:
• "Arbitration enables a dispute to be resolved quickly and fairly by impartial people, known as arbitrators, who are knowledgeable imd trained in the art of resolving controversy.
• A securities customer has the right to require a stockbroker that works for a NYSE member firm to submit to arbitration.
• When a customer chooses arbitration to resolve the dispute, he waives the right to pursue the matter in court.
•
Arbitration is fmal and binding .20 See, e.g., T. Riiede/R. Hadenfeldt, supra note 19, p. 51; 0. Vogel/K.. Spiihler, Grundriss des Zivilprozessrechts, 7lh ed., Bern 2001, 14. Kapitel, N 32.
21 Cf. M. C. Boeglin, supra note 9, p. 21; F. Fages/J. Rossi, Arbitrage en matiere jinanciere: Nouvelles perspectives, Gazette du Palais, Les cahiers de l'arbitrage, N° 2002/2- lre partie, p. 32.
22 F. Fages/J. Rossi, supra note 21, p. 29.
23 See "About the NYSE," on <http://www.nyse.com/about/about.html>.
never arbitrable as ·
Pre-arbitration discovery is generally more limited than court discovery .
The arbitrators' award is not required to include factual fmdings or legal reasoning.
The panel of arbitrators will typically include a minority of arbitrators who were or are affiliated with the securities industry."
In June 1987, the United States Supreme Court upheld the arbitration process as a
"fair, equitable and efficient method for settling disputes in the securities industry".24
Injunctions have also been granted by English state courts in cases where respondents registered proceedings in a foreign state court, although they were obliged by contract to submit the dispute to an arbitration panel. In such cases, English courts have protected the arbitration clauses in question and issued injunctions restraining the party from proceeding in a foreign court in breach of the arbitration agreement.25
5.2 NASD
90% of all arbitration cases received by self-regulatory organisations in the United States in 1997 were filed at the National Association of Securities Dealers (NASD) and 8%
at the NYSE. The NASD operates the largest dispute resolution forum in the securities industry. Broker-dealers typically require prospective customers to sign an agreement with a pre-dispute arbitration clause. Under the agreement, the parties agree to resolve future disputes through arbitration.26 The SEC has statutory authority to ensure that the self-regulatory arbitration procedures are adequate and consistent with the Securities Exchange Act of 1934. The Uniform Code of Arbitration, which was adopted by the self-regulatory organisations in 1979-80, established a uniform system of procedures for all self-regulatory organisation arbitration. 27
24 Shearson/American Express INC. v. Mcmahon, 482 U.S. 220 (1987); see also the subsequent Court ruling, Rodriguez de Quijas et al. vs Shearson/American Express Inc., supra note 17.
25 Queen's Bench Division, Commercial Ct., 12 March 1999, Bankers Trust Co. and another v. PT Jakarta International Hotels and Development, [1999] all ER (D) 314, published in Lloyd's Law Reports [1999]
Vol. 1,p. 910-916 .
26 See Rule 3080 of the NASD Conduct Rules (NASD Manual p. 569) in connection with Article VII Sec. I (a) (iv) of the NASD By-Laws.
27 United States Securities and Exchange Commission, Office of Inspector General, Oversight of Self-Regulatory Organization Arbitration, p. 1 et seq.
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5.3 London
The Rules of the Stock Exchange do not contain an arbitration clause. The Investment Products Code, applicable to trading in the wholesale markets in Non-Investment Products (sterling, foreign exchange and bullion wholesale market) between professionals, provides for arbitration in the foreign exchange and the bullion market.28 The rules of the LIFFE (London International Financial Futures and Options Exchange) provide detailed Arbitration Rules in its Section 6: Disputes arising from or in relation to an exchange contract are subject to arbitration independent of whether or not the parties are members of the LIFFE. In connection with this, it is noteworthy that the parties to such an arbitration proceeding shall, in principle, not be represented by counsel or solicitor29, but as a consequence of the latter, by any other person. This reminds me of a decision of the Superior Court of the Canton of Zurich, where it stated the following:
"In the plaintiff's claim, this. was correctly stated at the beginning, however only until she procured a lawyer who changed her complaint. "30
The Financial Services Authority, being in charge of the supervision of the fmancial activities at the London market place, provides for an arbitration secretariat. Its work is focused on the Consumer Arbitration Scheme, which is only available to private customers and limits awards to£ 50,000.31
An interesting example of an arbitration body in financial matters used to be the
"City Disputes Panel" in London. Belonging to the FSA, it settled disputes in the Wholesale . Financial Services Industry.32 As part of the regulatory reform under the Financial Services and Markets Act, it was taken over in July 2002 by the Financial Ombudsman Service, a massive organisation that is responsible for handling complaints both by consumers and by firms.33
28 The Non-Investment Products Code, p. 4 and 24 et seq.
29 Section 6.4.5 (e) of the LIFFE-Ru!es.
30 ZR 90, Nr. 80.
31 The Securities and Futures Authority, Board Notice 407: The SFA Consumer Arbitration Scheme Revised Rules (18 March 1997), on: <http://www.fsa.gov.uk/pubs/additionaJ/407.pdt>.
32 See M. C. Boeglin, supra note 9, p. 26.
33 The Financial Ombudsman Service employs 450 staff and has an annual budged of£ 27 million. For more information see chapter 3 of the FSA handbook ,Complaint handling procedures of the Financial Ombudsman Service" on: <http://www.fsa.gov.uklhandbook/BL4DISPpp/DISP/chapter_3.pdt> and press release No. 6/2002 on: <http://www.fsa.gov.uk/pubs/press/2002/006.html>.
clause. The Brussels in September 2000. In Chapter 1.8 of its Harmonised Market Rules, it provides for settlement through arbitration with regard to ·disputes arising between Euronext and its members. Arbitration Panel, but a valid arbitration agreement is needed.34
Until the "demutualization", which is the transformation from an association into a stock corporation, in 2002 (which was done here in Geneva), the by-laws of SWX Swiss Exchange also contained an arbitration clause for litigation with and amongst members (art. 23). 35 This has been abolished.
According to art. 9 al. 1 of the SESTA in connection with art. 1 of the SWX Swiss Exchange Regulations for the Appeals Board, an independent appellate body is competent to decide appeals from decisions concerning admission, suspension and disqualification of participants, as well as decisions on admission, suspension and revocation of registration of traders within the meaning of the General Conditions;
and on appeals from decisions and preliminary decisions on listing, as well as on suspension of trading and cancellation of listing (de-listing) within the meaning of the Listing Rules.
Today, art. 6.3 of the General Conditions of the SWX Swiss Exchange provides for a comprehensive arbitration clause. The arbitration court is competent for matters concerning participants or issuers, but not in client matters:
34 M. Lanz, supra note 19, N I 0 with further citations; Kting/Huber/Kuster, Kommentar zum Borsengesetz II, ZUrich 1998, Art. 9 N 18 et seq.
35 Article 19 para. 3 of the By-Laws of the SWX Swiss Exchange provides for the competence of the Appeals Board in cases of appeals against the non-admission of a trader or an issuer and/or their debarment.
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,D;sputes between participants and SWX and disputes among participants arising from participation, especially those in connection with contractual penalties imposed, shall be settled exclusively and without right of appeal by a court of arbitration with its seat in Zurich. Where appropriate, the internal remedies available at SWX (Disciplinary Commission, Appeals Board) shall be exhausted before redress can be sought at the court of arbitration.
The court of arbitration shall consist of a chairman and two arbitrators, with both parties nominating one arbitrator each on a case-by-case basis. The chairman and his deputy shall be appointed by the president of the Swiss Federal Supreme Court for a period of four years.
The chairman may conduct oral mediation proceedings. The cantonal concordat on arbitration shall be applicable in other respects. "
Pursuant to art. 6.9 of the SWX Swiss Exchange Regulations for the Appeals Board, a dismissed decision may be brought before the arbitration panel pursuant to the above-cited provision of the SWX Swiss Exchange General Conditions. The SWX is also subject to arbitration in cases where the applicant is not a participant of the SWX (e.g., a company listed at the SWX).36
The above mentioned arbitration clause is, therefore, also applicable when the listing of an issuer or a security is at stake (art. 83 al. 3 of the Listing Rules of . the SWX Swiss Exchange) or (according to the words as an appeal) in cases of disciplinary sanctions against an issuer (art. 83a al. I of the Listing Rules of the SWX Swiss Exrhange).
In 2000 and 2001, no cases were brought before the SWX Board of Arbitration.
The regulation of arbitration at Eurex Zurich AG is congruent with that of the SWX Swiss Exchange.37 However, Eurex Clearing, situated in Germany, does not provide for arbitration.
Contrary to the wording of the above quoted arbitration clause, the court of arbitration does not have the right to settle disputes finally ("without any right to
36 Art. 6.9 para. 2 of the SWX Swiss Exchange Regulations for the Appeals Board. ·
37 See art. 2.2.4 and 2.3 of the Eurex Exchange Regulations.
wng participants arbitration cases38, provides for legal recourse from arbitration decisions before a state court. 39 A decision of the arbitration panel can be brought before the Supreme Court of the Canton of Zurich on the basis of the specified grounds.40 Provided that certain conditions are fulfilled, decisions of the Supreme Court regarding arbitration matters can even be appealed to the Federal Court of Justice.41 Thus, the arbitration clause of the General Conditions of the SWX Swiss Exchange is misleading with respect to the fmality of the decisions of the arbitration panel.
The initial draft of the SESTA for art. 9 provided for the applicability of the federal administrative law. After intensive discussions in parliament, the National Council introduced the Independent Appeal Body and, with reference to art. 6 of the European Convention on Human Rights, the possibility to file a claim with a civil court. The decisive factor for introducing an independent appeal body and a civil law judge instead of an administrative procedure were I) the qualification of the activities of the stock exchanges as activities under private law and not public law, 2) the consideration existing between self-regulation of stock exchanges and state interventionism and 3) the perception that specialised decisions should be left to specialists as state courts are permanently overloaded.42
b) CDB
I would also like to point out that the Swiss Convention on the Diligence of Banks (CDB), the seminal document of the know-your-customer-rule contains a true arbitration clause in the framework of the concordat (art. 13) that will not be changed in the 2003-version. Cases are rare here (I know of two only) because the incidents are settled by the Supervisory Board, whose pronouncements are, however, legally nothing other than mere expert opinions.43
38 See Art. 1 para. 1 of the Cantonal Concordat on Arbitration of27 March I 969.
39 Art. 31 and 41 in connection with art. 1 para. 3 of the Cantonal Concordat on Arbitration of 27 March 1969.
40 Art. 3, 36 and 41 of the Cantonal Concordat on Arbitration of 27 March I 969 in connection with art. 293 para. 2 of the Code of Civil Procedure of the Canton of Zurich of 13 June 1976. The remedies available are the nullity appeal and the revision.
41 Art. 84 para. 1 lit. b of the Federal Act on the Federal Administration of Justice of 16 December 1943 (,,Konkordatsbeschwerde'').
42 AmtiBull StR 1993, 1003, AmtlBull NR 1994, 1069 et seq.
43 H.-S. Walder, Die Sanktionsordnung unter der neuen Konvention, Wirtschaft und Recht 1987, S. 231.
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c) CRT
Arbitration might also be a means for exceptional circumstances. In relation to Switzerland, I would like to note the distribution of monies out of the banking settlement to Holocaust victims. On two occasions, institutional arbitrative bodies were founded: The first of these, the so-called Claims Resolution Tribunal, CRT-I, which had the task of distributing approximately 70 million Swiss francs uncovered in "dormant accounts," was set up in 1997 on the basis of an understanding between the Swiss Federal Banking Commission and the Volcker Committee. It finished its work in 2001, after having made over 9,000 rulings .
The second of these tribunals, the CRT-II, was founded on the basis of the Settlement Agreement between the Swiss Banks and several classes of claimants (victims of the Holocaust); the agreement was established in New York on 12 August 1998. The tribunal was set up in order to adjudicate USD 800 million out of the USD 1.25 billion paid by the banks, a task which, at the moment, is still not completed.
With regard to this matter, however, arbitration touched the edges of politics and such a use might not be an example for objective and neutral independence.
d) Banking secrecy in arbitration
On an additional note, it is important to consider that Swiss banks seem to have avoided suggesting arbitration in their General Conditions. The jurisdiction clauses usually give them the choice to sue at their place of business or at the domicile of the client. As a general principle, I note here that the prevailing doctrine does not see the banking secrecy as an obstacle for the banks to defend their interests in litigation. 44 The banking secrecy also does not provide for the financial institution's (i.e., its employees') right to refuse testimony or the editing of documents in connection with the proceedings against a client of the bank.45 This is sometimes felt by clients as a kind of shock. It has also been decided that the tax authorities may inspect court files.46 The choice of the bank is therefore sometimes
44 B. K.leiner/R. Schwob, in Bodmer/Kleiner/Lutz ( ed.), Kommentar zum schweizerischen Bankengesetz, Art.
47, N 91 with further citations.
45 Cf. art. 47 para. 4 of the Swiss Banking Act.
46 BGE 108 Ib 465; Decision of the Federal Court of8 February 2001 (I.A.308/2000).
mces. In relation arbitration proceedings for an actual litigation even proves cumbersome .
Germany
In Germany, a decision refusing admission to the stock exchange is deemed as an administrative act and may not be subject to arbitration.47 Arbitration clauses concerning future legal disputes arising out of securities services, supplementary securities services and fmancial transactions are only binding if both parties are merchants or public legal entities.48 Non-merchants may agree on arbitration only after their dispute has arisen.49 This is the situation after the changes of last year.
5.7 Master Agreements
In the more sophisticated field of the master agreements (centring around the derivatives business) we see some variations of clauses, but out of 16 agreements checked50, only three contain arbitration clauses. 51
Arbitration clauses are, in the ordinary course of fmancial transactions, still quite rare. Not even the ICC Uniform Customs and Practice for Documentary Credits contain suggestions as to introducing an !CC-arbitration clause.
47 C. Carsten, Bank- und Borsenrecht, second edition, Munich 2000, p. 459.
48 § 37h of the new German Securities Trading Act (Wertpapierhandelsgesetz; WpHG); see also P.
Leboulanger, supra note 16, p. 550.
49 § 37h of the German Securities Trading Act (WpHG) e contrario; see also the commentary ofF. Reuschle, -viertes Finanzmarktfoerderungsgesetz, Munich 2002, p. 195 (commentary to§ 37h WpHG).
50 I. International Swap Dealers Association, Inc. (ISDA): Multicurrency-Crossborder Master Agreement 2. International Swap Dealers Association, Inc. (ISDA): Local Currency-Single Jurisdiction Master
Agreement
3. Overseas Securities Lender's Agreement
4. International Securities Lenders Association (ISLA): Global Master Securities Lending Agreement 5. Master Equity & Fixed Interest Stock Lending Agreement
6. The Bond Market Association: Global Master Repurchase Agreement 7. The Bond Market Association: Master Dealer Agreement
8. The Bond Market Association: Master Securities Loan Agreement 9. The Bond Market Association: Master OTC Options Agreement
I 0. The Bond Market Association: Master Securities Forward Transaction Agreement I 1. Futures and Options Association (FOA): Master netting Agreement
12. European Banking Federation (FBE): European Master Agreement (EMA) 13. International Currency Options Market (ICOM) Master Agreement 14. International Foreign Exchange Master Agreement (IFEMA) 15. Foreign Exchange and Options Master Agreement
16. Cross-Product Master Agreement
51 I.e. the Overseas Securities Lender's Agreement, the Master Equity & Interest Stock Lending Agreement and the Master Dealer Agreement.
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5.8 Differences
It is noteworthy that in continental Europe, arbitration disputes in connection with transactions at stock exchanges usually take place between professionals only, whereas in the United States and the United Kingdom conflicts between investors and traders are also subject to arbitration. Arbitration proceedings are preferred in the interest of traders: they are not open to the public and the public juries are much more unpredictable than professional arbitrators as juries sometimes award unjustifiable amounts of punitive damages to investors. 52
6. NUMBERS
In the Commercial Court of Zurich during the year 2001, banking and fmance matters accounted for about 13%; in the ICC's International Court of Arbitration, banking and fmance matters took about 5% and in the London Court of Arbitration, 13% of the cases referred to banking and finance matters in the year 2001. Through November 2002, 7,087 new cases were filed with the NASD dispute resolution forum, 12% more than in 2001. The number increased every year, starting out in 1990 with 3,617 cases. About 25%
of the cases are closed by decisions of the arbitrators and 50% are settled by the parties directly or through mediation. 53 (Unfortunately, the American Arbitration Association and its International Centre for Dispute Resolution do not make any detailed statistical figures available).
I think that there would also be enough litigation for a specialised institution in
·Europe.