Finance professionals, business owners, family offices and other investors face an increasingly diverse choice when it comes to their investment options, common products include stocks and bonds, as well as other products offered through real estate, private equity and hedge funds. Increasingly the options offered include multi-jurisdictional elements, giving many of the products in today's market an international flavour. When engaging in cross border deals, investors must always consider the means available to mitigate their risk. One such risk is the possibility of disputes relating to the investment made. While most would agree it is crucial to anticipate and protect against this risk, often it is not well understood how best to do this. This begs the question, should investors be considering arbitration or litigation as their favoured dispute resolution mechanism?
Litigation is the traditional form of dispute resolution where a dispute is settled in the national courts of a country by state-appointed judges. Arbitration, on the other hand, is an alternate form of dispute resolution where the dispute is resolved by a third party tribunal appointed by the consensual agreement of the parties. The decision, or award, of the third party tribunal is final and binding on the parties. When deciding which form of dispute resolution is most suitable, it is important for investors to compare the two forms of dispute resolution in order to be able to make an informed choice.
Litigation in state courts may have significant disadvantages for international investors. Investors will often have an interest in protecting the confidentiality of their portfolio and the nature of their investment strategy. Naturally, this interest is likely to intensify if disputes arise in relation to particular investments, as generally it will be more commercially beneficial to have disputes resolved out of the public eye in a private and confidential forum. Litigation in court would not serve this purpose as third parties can attend court hearings and potentially access commercially sensitive documents submitted during the court proceedings. Arbitration however is conducted in private, and offers the parties confidentiality not only in respect of the dispute, but also the transaction out of which it arises. This serves the interests of financial institutions and investors alike who will have significant interest in protecting the terms and structure of the financial products, as well as the identities of the parties involved.
Another factor which often leads investors to prefer arbitration, is its suitability for the resolution of disputes of a highly complex or technical nature. Litigation may be less expedient in these circumstances as state-court judges are generally allocated according to availability and not because of any particular expertise or training they may have to enable them to understand the complexities of the transactions which give rise to investment-related disputes. Arbitration on the other hand gives parties the freedom to appoint arbitrators with a background in the relevant industry sector or have expertise in relation to a particular type of financial product which can greatly assist the speed and quality of the decision making process. This is of particular importance as the expertise of the decision maker was described as the “number one benefit” of arbitration by respondents from the financial services sector in a 2013 survey of corporate choices in international arbitration conducted by PwC.
Time is of essence where investments are concerned and in this context litigation can be a spoiler. The backlog of cases in courts, appellate review and cumbersome evidentiary procedures such as discovery and disclosure can delay the resolution of disputes for years. This length of time involved in court litigation can also significantly drive up costs for the parties. Arbitration is generally considered to be a faster mode of dispute resolution. Not only can parties choose more flexible procedures that can, for example, limit the possibility of discovery and disclosure, unlike a court judgement which can be appealed, the award of the arbitral tribunal is final without appeal, removing the otherwise time consuming appeals process. If parties choose an institution, such as the Hong Kong International Arbitration Centre (HKIAC), to administer their arbitration, the average length of time taken to resolve a dispute is between 9 and 16 months. Interestingly, to reduce costs and time for the parties, HKIAC has an expedited procedure under its rules by which an award has to be rendered by the tribunal within 6 months. Depending on the value and complexity of the dispute, financial institutions and investors may find this unique feature particularly appealing to fast track arbitrations saving both time and money.
HKIAC has, with the agreement of the parties, used such expedited arrangements to administer high value financial arbitrations very quickly. A case in point is a recent HKIAC administered arbitration between two international parties. The dispute arose out of loan agreements and the value of the dispute was approximately 400 million US dollars. In their arbitration agreement, the parties had agreed that any resultant disputes were to be resolved in an expedited manner with an award to be rendered within 3 months of the commencement of arbitration. A dispute arose between the parties who commenced arbitration on 29 May 2013 in Hong Kong, the sole arbitrator was appointed by the HKIAC on 4 June and the award was rendered on 8 August. The time taken from commencement of the arbitration to rendering the award was less than 2 and half months. With high stakes at issue in what may be volatile markets, efficient resolution of disputes can be a key concern for investors and choosing an institution such as the HKIAC to administer arbitrations can alleviate these concerns.
A final key feature of arbitration which recommends its selection for use by investors is the enforceability of awards against assets in foreign jurisdictions. Court judgements are not subject to a global enforcement regime, making it difficult to enforce a domestic court judgement in any place other than where it was rendered. Arbitral awards by contrast are much easier to enforce in foreign countries. This is enabled by the global enforcement regime created by the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards. This Convention binds its member countries – which number 150 around the world today – to recognise and enforce foreign arbitral awards in their jurisdiction. Thus an arbitral award has more global transportability than a court judgement and will greatly benefit any investor seeking to recover monies it is owed in other countries.
A comparison of arbitration and litigation comes down clearly in favour of arbitration as the more effective dispute resolution mechanism for finance-related transactions arising out of cross-border investments. When considering methods to minimise their risk, finance professionals, business owners, family offices and other investors will be well advised to consider its suitability for inclusion in their transaction documents.
Chiann Bao is the Secretary General of the Hong Kong International Arbitration Centre, a long time organization with nearly 30 years of experience.