The emerging popularity of international arbitration in the banking and financial sector

201 Pages·2016·1.2 MB·English

The emerging popularity of
international arbitration in the
banking and financial sector – Is this a
fashionable trend or a viable
replacement?

By

Bahar Hatami Alamdari

Supervisor: Professor Mahmood Bagheri

Submitted in accordance with the requirements for the Degree of Doctor of
Philosophy

University of London

Institute of Advanced Legal Studies

April 2016
Declaration

This thesis is submitted to the University of London in support of my application for the
degree of Doctor of Philosophy. It has been composed by myself and has not been
submitted in any previous application for any degree.
The copyright of this thesis rests with the author. Quotation from it is permitted, provided
that full acknowledgement is made. This thesis may not be reproduced without prior
written consent of the author.
London, 27 April 2016
1
Abstract

There is no doubt that international arbitration has become one of the most favoured
dispute resolution mechanisms in national and international transactions. International
arbitration has evolved into a credible alternative replacement for traditional
litigation. International arbitration as a private neutral forum is gaining overwhelming
recognition in the world. The extent of this popularity varies in different commercial
fields and this dispute settlement mechanism is treated differently in various sectors
around the globe. For instance, in international construction contracts, arbitration
clauses are an integral part of the contract whereas in an international syndicated loan
agreement, incorporating an arbitration clause may seem rather unusual.
This trend is now changing and banking industry’s traditional loyalty towards
litigation and court jurisdictions is changing. According to statistics and market
practice, in the past recent years, popularity of arbitration has been growing in
banking and finance sector for various reasons.
Among the reasons are the unique characteristics that international arbitration has to
offer, characteristics such as global enforceability and worldwide recognition of
arbitral awards, which have contributed to this paradigm shift. Moreover, the
possibility of using knowledgeable finance and banking experts as arbitrators to
resolve disputes and conflicts in the banking and financial sector is another appealing
feature of arbitration. All the perceived advantages of international arbitration, which
are claimed to be the drive force of this change of trend, are scrutinised in this
research.
This research analyses the historical hesitation and reluctance to use arbitration in the
banking and financial sector, and elaborate the change of trend in this area and
reasons for this change of attitude. The focus is on arbitrability of banking and
financial disputes in the international sphere.
The practical benefits of incorporating an arbitration clause in banking and financial
transactions are considered in this research. At the end it is recommended that the
banking and finance sector will benefit from a wider use of international arbitration in
cross-border transactions and the wider use of this neutral independent mechanism
2
can led to a harmonised use of international arbitration in the aforementioned sectors.
This research underpins the use of international arbitration as a sensible dispute
resolution mechanism in international banking and financial transactions.
3
List of Abbreviations

AAA American Arbitration Association
ADR alternative dispute resolution
BaFin Federal Supervisory Authority (Germany)
Bank Bank of England
BIT bilateral investment treaty
CDP City Dispute Panel (UK)
CIETAC China International Economic and Trade Arbitration Commission
DIAC The Dubai International Arbitration Centre
DOCDEX Documentary Credit Dispute Resolution Expertise
EC European Community
ECB European Central Bank
ECT Energy Charter Treaty
EEA European Economic Area
EFTA European Free Trade Association
EU European Union
FCA Financial Conduct Authority
FET fair and equitable treatment
FPC Financial Policy Committee
FRB Federal Reserve Board
FOS Financial Ombudsman Services
FSA Financial Services Authority
FSMA Financial Services and Markets Act
4
HKIAC The Hong Kong International Arbitration Centre
ICC International Chamber of Commerce
ICDR International Centre of Dispute Resolution
ICLCA International Centre for Letters of Credit Arbitration
ISDA International Swaps and Derivatives Association
ICSID International Centre for Settlement of Investment Disputes
IP intellectual property
IPB international private banking
IPR intellectual property rights
ISDA International Swaps and Derivatives Association
LCIA London Court of International Arbitration
L/C letter of credit
LIBOR London Interbank Offered Rate
LLC limited liability company/corporation
MFN most favoured nation
MIT multilateral investment treaty
NAFTA North American Free Trade Agreement
NYC New York Convention
OECD Organisation for Economic Co-operation and Development
OTC over the counter
PRA Prudential Regulation Authority
P.R.I.M.E. Finance Panel of Recognised International Market Experts in Finance
RBS Royal Bank of Scotland
SIAC Singapore International Arbitration Centre
5
TBTF too big to fail
UCP Uniform Customs and Practice for Documentary Credit
UCTA Unfair Contract Terms Act 1997 (UK)
UK United Kingdom
UN United Nations
UNCITRAL United Nations Commission on International Trade Law
US United States
UTCC Consumer Contracts Regulations 1999 (UK)
WIPO World Intellectual Property Organization
6
Acknowledgment

I want to thank my supervisor Professor Mahmood Bagheri, who has guided me
throughout my thesis. Without his wisdom, help and support I would not be able to
complete this thesis.
I am also hugely appreciative to my dear friends Dr Nikoletta Kleftouri, Dr Michalis
Risvas and Sheelan Fatah for sharing their valuable knowledge with me.
On a personal note, I would like to thank my family for all their love and encouragement.
They are the most important people in my world.
For my parents who supported me both emotionally and financially; without their love
and support I could not have dreamed of all these. I am truly grateful to my father for
being a constant source of inspiration and sharing his vast legal knowledge with me.
My love and gratitude are plainly extended to my siblings Golnaz and Ehsan.
And most of all for my loving, supportive, encouraging, and patient husband Babak
whose faithful support during the final stages of this PhD made it possible for me to
complete what I had started.

7
Contents

Abstract ................................................................................................................................................................................. 2
Acknowledgment .............................................................................................................................................................. 7
Chapter One ...................................................................................................................................................................... 11
Introduction and Thesis Plan .................................................................................................................................. 11
1.1 Originality ........................................................................................................................................................ 20
1.2 Research Methodology .............................................................................................................................. 21
Chapter Two ..................................................................................................................................................................... 23
New Economic Trends and the Banking Sector ............................................................................................. 23
2.1 Introduction .................................................................................................................................................... 23
2.2 Overview of the banking system .............................................................................................................. 24
2.2.1 Central bank as regulator and supervisor of banking transactions .............................. 27
2.2.2 The Bank of England .............................................................................................................................. 28
2.2.3 European Central Bank ......................................................................................................................... 30
2.2.4 International banking and international banking supervision ....................................... 31
2.3 Banking regulation and supervision....................................................................................................... 32
2.3.1 Bank regulation ........................................................................................................................................ 33
2.3.2 Bank supervision ..................................................................................................................................... 37
2.3.3 Rationales for bank regulation and supervision ..................................................................... 38
2.4 Development of the regulatory frameworks in UK banking ...................................................... 39
2.5 Free banking ....................................................................................................................................................... 41
2.6 Banking structure and internal governance ....................................................................................... 42
2.7 Private banking law ......................................................................................................................................... 43
2.8 Conclusion ............................................................................................................................................................ 45
Chapter Three.................................................................................................................................................................. 47
The Place of Arbitration and New Economic Trends .................................................................................. 47
3.1 Introduction ........................................................................................................................................................ 47
3.2 The world of arbitration and ADR ........................................................................................................... 48
3.2.1 Conflict management in global sphere ......................................................................................... 50
3.2.2 What is arbitration?................................................................................................................................ 52
3.2.3 Legal theory of international arbitration .................................................................................... 53
3.2.4 Institutional arbitration and ad hoc arbitration ...................................................................... 57
3.2.5 Arbitration agreement .......................................................................................................................... 58
3.2.6 Multiparty arbitration ........................................................................................................................... 60
8
3.2.7 New York Convention and global enforceability: economic globalisation and
expansion of international commercial arbitration .......................................................................... 62
3.3 Examples of the use of international arbitration in other controversial commercial
areas 65
3.4 Globalisation and privatisation of justice (the greater role of private law and private
arrangements, including private justice) ..................................................................................................... 72
3.5 Nature of the investor–state arbitration (investment arbitration) ................................... 74
3.6 Main factors affecting choice of arbitration over litigation in banking transactions 77
3.6.1 Confidentiality and privacy ................................................................................................................ 78
3.6.2 Speed and cost ........................................................................................................................................... 81
3.6.3 Expertise ...................................................................................................................................................... 83
3.6.4 Party autonomy ........................................................................................................................................ 84
3.6.5 Global enforceability .............................................................................................................................. 85
3.6.6 Neutrality ..................................................................................................................................................... 89
3.6.7 Finality .......................................................................................................................................................... 90
3.7 Conclusion........................................................................................................................................................ 91
Chapter Four .................................................................................................................................................................... 93
Dispute Settlement Trends in Banking Transactions ................................................................................. 93
4.1 Introduction ........................................................................................................................................................ 93
4.2 Banking transactions .................................................................................................................................. 95
4.2.1 The bank-customer relationship ..................................................................................................... 97
4.2.2 Duties and obligations owed by a bank to its customers and vice versa..................100
4.3 Doctrine of freedom of contract and the rationales behind it ............................................103
4.4 Evading/qualifying the doctrine ........................................................................................................106
4.4.1 Exclusion clauses or exemption clauses ....................................................................................107
4.4.2 Paternalism ...............................................................................................................................................107
4.4.3 Doctrine of inequality of bargaining power .............................................................................108
4.4.4 Public policy .............................................................................................................................................110
4.5 Disputes involving banks and possible ways to settle them – dispute resolution
clause in banking contracts ...............................................................................................................................111
4.6 ADR in UK banks .........................................................................................................................................115
4.7 Conclusion......................................................................................................................................................117
Chapter Five ...................................................................................................................................................................119
Compatibility of Arbitration for Banking Dispute Resolution .............................................................119
5.1 Introduction: Contemporary role of arbitration in banking and financial sector –
change of landscape ..............................................................................................................................................119
9