ARBITRATING BANKING AND FINANCE DISPUTES - wHAT ARE THE BENEFITS?
Barbara Badertscher
While there has been some growth in the use of arbitration as a means of resolving disputes in the finance sector, court litigation is still by far the preferred-choice of financial institutions in Switzerland. At the SCAI Conference "Arbitrating banking disputes – Are there tangible benefits?" it was discussed how the wider use of arbitration in the finance sector can be promoted and encouraged. This blog post provides a short overview which kind of banking disputes may be suitable and what advantages choosing arbitration may have.
Which types of banking disputes are suitable for arbitration?
First, it is to be addressed for which areas of banking, arbitration could be a suitable alternative.
For a number of reasons, arbitration seems not a suitable choice for disputes with retail customers ("consumer disputes"). On the one hand, the amount in dispute often will be disproportionate to the costs of the proceedings. On the other hand, arbitral awards in such disputes may not be enforceable at the domicile of the customer due to national law providing for the mandatory jurisdiction of its courts. While Swiss law considers such disputes in an international context arbitrable, this does not hold true for some countries. For example, certain banking contracts with consumers such as future trades are not arbitrable under German law (§101 WpHG).
Moreover, there could be difficulties with satisfying the form requirements for an arbitration agreement. For example, including an arbitration clause in the general terms and conditions may raise issues of formal and substantive validity.
These concerns do not apply to contracts with institutional investors or high-net worth individuals providing for investment advisory services or asset/wealth management, agreements with outsourcing providers and vendors, interbank agreements and contracts with states or state-controlled parties. Accordingly, agreeing to submit disputes arising out of these contracts to arbitration could be a viable alternative.
What advantages does arbitration offer?
Arbitration may have significant advantages for Swiss financial institutions. This holds, in particular, true with customers, partners and providers in an international context.
First, an arbitral award is better enforceable than a Swiss court decision. 156 of 193 nations worldwide are member states of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Recognition and enforcement in these states may only be refused based on the limited grounds specified in the Convention. This is an important factor to consider if enforcement potentially would have to be sought in a state outside the EU with a restrictive approach or practice of recognizing and enforcing foreign court decisions.
Second, arbitration provides a higher degree of confidentiality. In contrast to court proceedings, the public and press are not entitled to be present at hearings. This significantly reduces the risk that the press becomes aware of the case. Considering the reputational damage negative or biased press coverage may have, this is a factor speaking strongly in favor of arbitration.
Third, arbitration may be the preferred choice for Swiss financial institutions if the customer or