The number of international disputes is rising, and counsel in financial services companies are increasingly choosing international arbitration over other methods, such as litigation, in their rulings. Ermelinda Beqiraj, partner at PricewaterhouseCooper Forensics, reports on the findings.
The landscape of international arbitration is changing and businesses are moving with it. Findings from PwC’s recent joint research into corporate counsel’s views on the matter highlight some interesting trends in cross-border disputes and how corporations manage and resolve them.
The period preceding the 2008 financial crisis was characterised by a high volume of cross-border transactions and investments. Inevitably some of those investments and transactions turned sour, often triggered by the after-shocks of the financial crisis.
Feedback from our own business relationships and other anecdotal evidence suggests that the volume of cross-border disputes has increased since the financial crises. Our study, entitled Corporate Choices in International Arbitration, conducted with the School of International Arbitration at Queen Mary University, London, confirms this with empirical evidence: the financial crisis resulted in a noticeable increase in international disputes for more than a third of respondents. This mirrors what is happening in the real world; where firms are facing more disputes but tighter spending budgets, and in-house legal teams find themselves under ever greater pressure to achieve better results from disputes while spending less to resolve them. The infamous Catch 22 situation.
And it’s these pressures that are defining some interesting trends in corporate practices in dispute resolution. The survey gathered the views of legal counsel at more than 100 major corporations around the world. In a study usually undertaken every two years, this time the focus was on the impact across industries including financial services, energy and construction. The findings unearthed showed that over the past five years, corporations had settled a majority of their disputes (57%) through direct negotiation or mediation. Interviewees reported in particular an increase in the use of mediation since the financial crisis, due to increased pressure on legal budgets. Inevitably, the uncertainties (both in terms of cost and outcome) of referring disputes to litigation or arbitration also play a role.
Where international disputes are not settled through direct negotiation or mediation, international arbitration remains the preferred dispute resolution mechanism. One of the clear advantages of it is that it gives parties much greater flexibility and control over the process than litigation, especially litigation involving multiple jurisdictions. There are however, some differences between corporations in different industries when it comes to how they resolve international disputes.
In PwC’s exploration of industry perspectives on the use of international arbitration we saw that while overall respondents stated arbitration was their preferred method for cross-border disputes, its popularity clearly varies between industries. Of the three industries surveyed, respondents from the construction industry seem to have the strongest preference for international arbitration. Nearly 70% of respondents from that industry prefer international arbitration over litigation and other forms of dispute resolution for cross-border disputes, compared to 56% of energy respondents and 23% of financial services.
On the financial services feedback it was clear that many respondents still express a clear preference for litigation over international arbitration, but this balance may be shifting. Historically, most financial services disputes have arisen in long-established financial centres with sophisticated legal systems, able to deal with those disputes promptly and fairly. Global financial services organisations therefore are likely to have had less experience of international arbitration as a dispute resolution mechanism than their counterparts in construction or energy. The latter are more likely to be facing disputes arising from investments, such as infrastructure or energy projects, in high-growth regions, but with perhaps less sophisticated legal infrastructure, making arbitration a much more suitable choice.
We saw that 69% of respondents from the financial services sector thought that arbitration was well-suited to resolving cross-border disputes in their sector. Many businesses opt for arbitration for international disputes due to its speedier process and private nature. There is usually no appeal process and the final decision is binding, unlike litigation. It will be interesting to see how this trend develops over time, especially as new financial centres of gravity emerge and organisations, such as PRIME Finance, whose purpose is to assist in the settlement of complex financial disputes, become more established.
International arbitration is a preferred and well suited mechanism for resolving cross border disputes, but it can only remain relevant if it continues to adapt to the changing needs of its users.