September 13, 2019

Introducing Arbitration for Resolution of Commercial Finance Disputes

Banks and other commercial lenders are no strangers to arbitration.  They typically include arbitration clauses for the resolution of disputes under their employment agreements. However, when it comes to loan agreements, intercreditor agreements, participation agreements and third party agreements such as landlord or warehouse waivers, they tend to shy away from alternative dispute resolution proceedings.  It is rare to find arbitration clauses in such documents.

The debate of whether to use arbitration (in lieu of litigation) in borrower documents is taking ground and lenders are more receptive to utilizing arbitration.  In addition to assuring confidentiality in the event borrower pursues a claim against a lender that might cause the lender discomfort in the market place, there are other benefits to induce a lender on insisting upon arbitration.  Their arbitration clause, if drafted correctly, can provide for a speedy resolution of the dispute, minimize discovery, which, too often, exacerbates the cost of litigating a dispute, and allow the disputing parties to select their own neutral(s) who will determine their fate.

Unlike litigation where the process is run by a judge, with each judge having his or her own set of rules imposed upon the litigants, the parties control the arbitration process.  Yes, the parties pay the arbitrator where the judges are paid by your tax dollars.  However, proper planning should reduce the cost of resolving the dispute.  The American Arbitration Association provides a free online program, ClauseBuilder®, to assist drafters in formulating their arbitration clause. This program is a good start for the drafter but the drafter can then supplement and further modify the clause created by the user-friendly program.

The Loan Syndication & Trading Association, the leading professional association advocating for the U.S. syndicated loan market, has ventured into arbitration.  LSTA now requires that parties must submit certain non-performing party disputes to arbitration before a three member panel randomly selected from members of its board of directors. 

In addition, several years ago, the LSTA began to tackle the expansion of its existing suite of documents so that they could be used in certain cross-border transactions. The project was launched in response to LSTA members’ requests to standardize certain language in credit agreements governed by New York law for loans made to borrowers located outside the US (in particular, in Latin America) and to create trading documents tailored for trading those loans. In response to those requests, the LSTA published Model Credit Agreement Provisions for Latin American Cross-Border Transactions, a Par/Near Par Trade Confirm for Cross-Border Trades (the “LatAm Confirm”), and a Participation Agreement for Par/Near Par Cross-Border Trades. Those publications addressed issues which arose when the borrowers were located in Chile, Colombia, Mexico, or Peru.  Because of the uncertainties of how, and the speed with which, disputes in those jurisdictions would be handled, the LSTA included arbitration provisions in the trading documents. Unlike the LSTA’s Confirm for domestic borrowers, the LatAm Confirm includes a “check the box” option on the face of the confirm for parties to select “Arbitration Applicable”. If selected, any controversy or claim arising out of or relating to the transaction or the confirm shall be determined by arbitration administered by the ICDR in accordance with its International Arbitration Rules.  The Confirm provides that parties may choose either NYC or Miami for the arbitration location with the default location being NYC.

The International Chamber of Commerce Task Force on Financial Institutions and International Arbitration  recently issued two reports of interest to the lending community: A Consolidated Summary Of The Work Of Various Task Forces Covering Specific Topics In The Financial And Banking Sectors   and   Supplementary Materials to the ICC Commission Report Financial Institutions and International ArbitrationThese reports indicate a clear preference for litigation over arbitration while  indicating a growing trend toward arbitration, especially in transactions arising out of Latin America, the former Soviet Bloc countries and Africa.

These topics will be more fully addressed during the panel discussion to be held at the ABA Business Law Section’s 2019 Annual Meeting.  The panel will feature Bridget Marsh, Deputy General Counsel of the Loan Syndication and Trade Association, Richard Gray, a well-known independent arbitrator and Jeffrey Zaino, Vice President, Commercial Division, American Arbitration Association.

This program will explore the use of arbitration to resolve disputes arising in and around commercial loans and will cover such topics as comparisons of the costs of litigation and arbitration, drafting of arbitration clauses, the introduction of arbitration in Latin American syndicated loans, discussion of the International Chamber of Commerce Report on Financial Institutions and International Arbitration, case studies of and review of domestic commercial finance arbitration clauses and a round table discussion on the advantages, disadvantages and misconceptions surrounding the use of arbitration in commercial finance disputes.

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