Article by William W. Park
Lenders and borrowers traditionally have gone before judges rather than arbitrators to resolve controversies arising out of international loan agreements. Arbitration has been relatively rare, even ill-favored, in financial dispute resolution. Except with respect to performance guarantees and securities, arbitrators seldom decide controversies arising out of financial transactions. The disfavored status of arbitration in banking contrasts sharply with arbitration's position as the preferred adjudicatory mechanism in trans-border commercial relationships.
The banker's customary hesitation about arbitration should not be surprising. The financial muscle often exercised by international lenders has led to loan forum-selection clauses granting exclusive competence to courts of the banker's own jurisdiction. Hometown justice is always best—at least for the hometown boy or girl. Moreover, a court proceeding may be quicker and less expensive than arbitration when nothing significant is in dispute except the borrower's willingness or ability to make payment on a promissory note. It would be startling, for example, if an English bank did not prefer to sue a defaulting borrower before an English judge in London rather than to bring a claim before an arbitrator in Geneva.
Bankers also resist arbitration clauses because they may sometimes operate to bar the benefits of the summary procedures available to lenders under many national legal systems. The droit cambiaire of France, for instance, provides for court-ordered payment procedures that simplify the enforcement of commercial-paper obligations. Moreover, some jurisdictions may consider interim measures of protection (such as pre-award attachment of assets) as incompatible with arbitration agreements covered by the New York Arbitration Convention—at least if the parties are silent on the matter in their arbitration agreement.
Finally, bankers tend toward a herd mentality (not always unjustified) that sometimes leads them to fear the hex effect of innovation: “If it ain't broke, don't fix it.” Changes in old forms selecting courts that have worked fairly well in the past, so it seems, will likely bring bad luck.
Nevertheless, legal counsel in the financial services industry are increasingly aware that things are no longer so simple, particularly in international transactions. Several considerations occasionally impel the inclusion of an arbitration clause in a credit agreement: (i) difficulty in enforcing foreign judgments; (ii) the “act of state” and sovereign immunity defenses raised by foreign borrowers; (iii) developing countries' leverage in debt rescheduling and project finance; and (iv) the epidemic of “lender liability” litigation in the United States.
First, when bankers contemplate court adjudication, they presume enforceable judgments. But foreign judicial decisions are not always as easily enforced as domestic ones. Sometimes debtors have assets in jurisdictions that are not party to any bilateral or multilateral recognition-of-judgment treaty with the dispute-resolution forum. Arbitral awards, however, will usually benefit from recognition and enforcement in more than eighty countries under the 1958 New York arbitration Convention. Therefore, in some cases arbitral awards may be more enforceable than foreign court judgments.
Second, two peculiarly international defenses are increasingly invoked against enforcement of trans-border loans: sovereign immunity and the act-of-state doctrine. These defenses add a special dimension to international financial risks that requires a more nuanced analysis of the costs and benefits in arbitration of credit disputes. Recent statutory enactments reducing the sting of both defenses give arbitration a special raison d'etre in any loan implicating a foreign borrower. The Foreign Sovereign Immunities Act and the United States Arbitration Act were both amended in November 1988 to make arbitration awards more enforceable than court judgments. Bank counsel therefore can be expected to show greater sophistication in drafting forum-selection clauses when loans involve sovereign debt or borrowers in countries that may impose exchange controls.
Third, in some cases, borrowers may give the creditor no alternative to arbitration other than the courts of the debtor's country. Arbitration imposes itself faute de mieux when the size of a borrower's potential default, paradoxically perhaps, increases its leverage in rescheduling negotiations to the point that the lender's own courts are no longer an acceptable option for the choice-of-forum clause.
Finally, the American epidemic of “lender liability” actions against banks has led several major lenders to insert arbitration clauses in credit agreements in the hope of reducing the risk of excessive jury awards.
This Article will discuss each of these considerations in turn, and then will examine the impact of the International Monetary Fund Articles of Agreement on arbitration of transborder loan disputes. From a policy perspective, my modest conclusion is that the measure of financial arbitration's aggregate consequences—social, political, and economic—will be the extent to which the arbitral process increases the reliability of credit arrangements that promote world development. In a more practical vein, the costs and benefits of arbitration as compared to court litigation will depend on how the relative predictability of judges weighs in against the greater enforceability of arbitral awards in disputes implicating exchange controls, foreign assets, and sovereign borrowers. The only thing that seems beyond doubt is that for some time to come arbitration's role in financial dispute resolution will resist facile analysis.
About the Author
William W. Park. Professor of Law, Boston University; Director, Morin Center for Banking Law Studies; Counsel, Ropes & Gray, Boston. Yale, B.A.; Columbia, J.D.; Cambridge, LL.M.
Citation
65 Tul. L. Rev. 1323 (1991)