The overlooked asset - Why banks should rethink their dispute clauses

By Priyesh Daya, partner; Brittany Leroni, senior associate; and Caitlin Leahy, associate at Webber Wentzel

The International Chamber of Commerce's (ICC) Commission Report on Financial Institutions and International Arbitration[1] found that many financial institutions surveyed had limited arbitration experience and no formal policy governing when it should be used. Yet as transactions become more international, the choice of dispute resolution mechanism increasingly affects enforcement, cost and recovery. Arbitration should not replace litigation, but it may offer important advantages when selected for the right transaction and supported by careful drafting. This article explores where arbitration adds value and what banks can do to use it more effectively.

For decades, banks and other financial institutions have favoured litigation in established financial centres such as London, New York, Frankfurt and Hong Kong. That preference made sense. Courts in these centres offer established precedent and efficient debt-recovery procedures. They also have powers that arbitral tribunals do not, including powers relating to insolvency, disclosure by third parties and direct enforcement against assets. For a straightforward payment claim against a solvent counterparty, litigation may therefore remain the quickest and most effective route to enforcement.

Many financial transactions, however, are not that simple. A cross-border financing may involve several lenders, assets in multiple jurisdictions or a borrower linked to a sovereign state. If a dispute arises, a judgment obtained in one country may have little practical value if it cannot be enforced where the relevant assets are located.

Newer areas of finance present further complications. Disputes involving digital assets, ESG-linked funding or transition finance may cut across several legal and regulatory systems, sometimes with limited court precedent. In these circumstances, the question is not simply whether the bank can establish its claim. It is whether a successful outcome can ultimately be converted into recovery.

International arbitration can help address that problem. The ICC Commission Report indicates that arbitration remains underused in the financial sector, with relatively few institutions maintaining an internal framework for deciding when it should be selected. This may represent a missed opportunity. Arbitration will not suit every financial dispute, but it deserves consideration where cross-border enforcement, neutrality, specialist expertise or confidentiality matters.

Cross-border enforcement: Arbitration gives you more routes to recovery

For a bank with international exposure, obtaining a favourable decision is only part of the exercise. The practical question is whether that decision can be enforced where the counterparty and its assets are located. A judgment obtained in London or New York may have limited value if the relevant jurisdiction does not readily recognise it. Arbitral awards, by contrast, benefit from the international enforcement framework established by the New York Convention. In many cross-border disputes, this may offer a wider and more predictable route to enforcement than a foreign court judgment. For transactions involving borrowers or assets in developing countries, it was also reported that independent credit-rating agencies viewed transaction documents containing an arbitration agreement more favourably than those containing a court jurisdiction clause.

That advantage should not be overstated. Enforcement remains subject to local procedures and may be affected by the Convention’s refusal grounds, questions of arbitrability, public-policy considerations and immunity arguments. Arbitration may expand a bank’s enforcement options, but it does not guarantee recovery. Its value may be particularly significant where borrowers, guarantors or assets are in jurisdictions in which foreign judgments are not readily recognised or local proceedings may be slow or unpredictable. Arbitration allows the parties to select a neutral seat and may produce an award capable of recognition in several jurisdictions.

The bank should nevertheless consider at the outset where enforcement is realistically likely to take place, whether interim relief may be needed and whether local proceedings could be used tactically. The choice between arbitration and litigation should be informed by those practical questions rather than by a standard institutional preference.

Sovereign counterparties: How to protect your position when you cannot litigate on home ground

Arbitration may be especially useful where the counterparty is a state, state-owned enterprise or public instrumentality. A bank may be reluctant to litigate in the sovereign’s own courts while the sovereign may be unwilling to submit to the bank’s preferred forum. Arbitration provides a neutral process to which both parties may be prepared to agree. This is reflected in the ICC Commission Report, which found that 67% of surveyed institutions were more likely to choose arbitration when dealing with a sovereign counterparty. The institutions identified neutrality, enforceability, procedural flexibility, confidentiality and access to appropriately experienced decision-makers as reasons for that preference. That preference is also translating into practice, with arbitration being available in 18 of the 92 sovereign bonds reviewed by the ICC Task Force, representing 20% of the sample.

An arbitration clause alone, however, is not enough. It should be supported by carefully drafted waivers of jurisdictional and execution immunity, covering the arbitration, related court proceedings and, to the extent legally permissible, enforcement against state assets used for commercial purposes. The wording must be tailored to the transaction, the nature of the state entity, the governing law, the arbitral seat and the likely enforcement jurisdictions. Otherwise, a bank may obtain an award but remain unable to enforce it against sovereign assets.

Arbitration will not necessarily be preferable for every sovereign debt claim. Where the dispute concerns straightforward non-payment and assets are situated in jurisdictions that will readily recognise the chosen court’s judgment, litigation may be more efficient.

The position may differ where the dispute concerns restructuring, discriminatory treatment or regulatory intervention. In appropriate circumstances, commercial or investment-treaty arbitration may provide additional avenues of recourse. Certain financial instruments have, in some cases, been treated as protected investments. Whether treaty protection is available will depend on the applicable treaty, the nature of the instrument, the investor’s nationality, the circumstances of the investment and any relevant exclusions. It should therefore be investigated rather than assumed.

Specialist decision-makers: Choosing arbitrators who understand your transaction

Not every financial dispute is a conventional debt claim. A dispute about repayment differs from one involving derivatives valuation, project-finance structures, Islamic-finance principles or an asset-management mandate. These disputes may require an understanding of both the governing law and the relevant instruments, valuation methodologies and market practices.

Arbitration allows the parties to influence the composition of the tribunal. For example, a close-out netting dispute under the 2002 ISDA Master Agreement may involve detailed questions about valuation and market practice. A tribunal familiar with derivatives documentation may require less background explanation and engage more quickly with the issues. The 2018 ISDA Arbitration Guide reflects the relevance of arbitration in this context by providing model clauses for disputes under its Master Agreements. This does not mean arbitration will suit every derivatives dispute, but it gives parties an established starting point where arbitration is appropriate.

The parties should avoid defining arbitrator qualifications too narrowly. An overly specific requirement may reduce the available pool and generate appointment disputes. It will usually be more practical to require relevant banking, finance or industry experience in broad terms.

Confidentiality: Protecting sensitive information and managing reputational risk

For banks, confidentiality is often a commercial necessity. Financial disputes routinely involve proprietary trading strategies, client data, regulatory correspondence and market-sensitive information. If any of that material enters the public domain through court proceedings, the consequences may extend beyond the dispute itself.

Confidentiality should not, however, be assumed. ICC arbitrations are private but the extent to which the proceedings and related materials are confidential will depend on the applicable rules, law and agreements between the parties. Where confidentiality matters, the clause should address it expressly, including the existence of the proceedings, submissions, evidence, hearing materials and the award. It should also allow for necessary disclosures to regulators, auditors, insurers, funders and group entities.

That protection, however, comes at a price. In markets that rely on standardised contracts, such as derivatives, syndicated lending and repurchase agreements, published decisions can provide commercially valuable guidance. Where awards remain confidential, the same issues may be argued repeatedly without the resulting reasoning entering the public domain. Selective publication of suitably anonymised or redacted awards could help build a shared body of market guidance. While the ICC already publishes certain awards through its partnership with Jus Mundi, ISDA and the Loan Market Association (LMA) could develop practical guidance on recurring issues concerning the interpretation of their standard-form documents.

Drafting matters: A generic clause may cost you; a tailored one may protect you

The most persistent objections banks raise against arbitration are time and cost, and those concerns carry particular weight in straightforward debt claims. Court procedures in centres such as London and New York are designed to deal efficiently with simple payment disputes. But arbitration can also be structured with efficiency in mind. The clause and applicable rules can provide for early determination of claims or defences that are manifestly without merit, limit document production and witness evidence, shorten procedural timetables and preserve access to emergency and interim relief. Institutional rules, including the ICC Rules, also provide mechanisms that can assist with consolidation, joinder and effective case management. The tools are available, but parties need to choose and provide for them carefully.

This is the article’s central practical point: the quality of the arbitral process will often depend on the quality of the clause that creates it. Consider a clause that says only: “Any dispute arising out of this Agreement shall be finally resolved by arbitration.” That sentence leaves open the institution, seat, number of arbitrators, language, scope of confidentiality, availability of early determination and mechanism for interim relief. Each omission creates scope for disagreement before the parties even reach the substance of the dispute. A properly considered clause will address those issues at the outset, specifying the number of arbitrators, providing for early determination, setting appropriate confidentiality protections, preserving access to emergency or interim relief and, where several related agreements are involved, allowing for consolidation or joinder.

For that reason, the dispute resolution clause should not be treated as a legal afterthought. It can affect whether the bank recovers, how quickly the dispute is resolved, what information remains confidential and what leverage the bank has in settlement discussions. Getting the clause right is therefore not merely a matter of legal refinement. It is part of protecting the bank’s commercial position.

From default to deliberate: Five questions every deal team should ask

None of this is a case for abandoning litigation. Courts remain indispensable for insolvency proceedings, security enforcement requiring judicial intervention, straightforward non-payment claims and disputes in which published precedent has commercial value.

A more deliberate approach for banks starts with five questions that every deal team should ask before selecting a dispute resolution mechanism for a new transaction:

• Where are the counterparty's assets and will a court judgment be enforceable there?
• Is the counterparty sovereign or state-linked?
• Does the dispute involve complex instruments that would benefit from specialist decision-makers?
• Would commercially sensitive information be exposed in open court?; and
• Are there related parties or agreements that may require joinder or consolidation?

If the answer to one or more of these questions is yes, arbitration belongs on the table. Banks should also develop internal policies and model clauses appropriate to different transaction types. Those policies can identify preferred institutions and seats, suitable approaches to tribunal composition, required confidentiality protections and circumstances in which emergency relief, consolidation or joinder may be important.

Arbitration is becoming more relevant in the banking sector as finance becomes increasingly international, technical and enforcement-driven. It will not be the right choice for every transaction but where neutrality, cross-border enforcement, specialist expertise or confidentiality matter, it should be considered at the structuring stage rather than after a dispute arises.

The question is not whether arbitration is generally better than litigation, but which mechanism best protects the bank’s position in the particular transaction. Answering that question early allows the dispute clause to operate as an effective risk-management tool rather than an overlooked boilerplate.

Ends…

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[1]       International Chamber of Commerce (ICC) Commission on Arbitration and ADR, Financial Institutions and International Arbitration: Report of the ICC Commission on Arbitration and ADR Task Force on Financial Institutions and International Arbitration (ICC 2016).