Rethinking the Use of Arbitration Clauses by Financial Institutions

Abstract

In 1995, this journal published an article considering the use of arbitration clauses in the area of banking and finance, which was observed to be ‘practically non-existent’ at the time. In the two decades that have followed, financial institutions have gradually increased their use of arbitration clauses. However, arbitration has yet to become the norm in resolving international financial disputes, and there is a gap between the use of arbitration in the field of banking and finance and in the general commercial sphere. This article explores the justifications provided for this gap – in particular, financial institutions’ traditional preference for litigation – to argue that many of these justifications are in fact misconceived. The article also highlights fundamental characteristics of arbitration that make it highly appropriate for use in the financial context. In particular, four widely used financial transactions are identified as being highly suited to arbitration. The article then considers two case studies of current efforts being made to promote the use of arbitration clauses. Finally, three suggestions are proposed to further facilitate the increased use of arbitration clauses by financial institutions.