Arbitration in the Securities Industry
Arbitration as an alternate method of dispute settlement has long been recognized as convenient, efficient and less expensive than the traditional lawsuit in court. These benefits have always been a significant reason for the success of securities industry arbitration. In the USA and many European countries arbitration is the primary means of resolving disputes in the securities market. Arbitration won that status because the public perception of its fairness was of paramount importance. The amendments to Ukrainian legislation introduced in 2009 might help local Ukrainian arbitration to find its niche as an alternative mechanism of dispute resolution in those industries where the benefits of arbitration are of the essence, in particular, on the stock market.
Although arbitration has been known as a dispute resolution mechanism for quite a long time, it was not until the special legislative act was adopted that arbitration became a widely used means of resolving disputes in Ukraine. Ukrainian MPs had for quite a long time been reluctant to introduce the distinct and effective regulations of an arbitration procedure. Finally, the On Arbitration Courts Act of Ukraine (the Arbitration Act) came into force in 2004. This Act triggered the idea of non-governmental arbitration that has taken root in Ukraine to date. The Arbitration Act specified that an arbitration court may be established, in particular, at stock exchanges and commodity exchanges as well as at self-regulatory organizations of the stock exchange.
In March 2009 the Ukrainian Parliament adopted the Act that introduced amendments to the Arbitration Act and other acts with the aim of narrowing the remit of arbitration courts. The On Amendments to Certain Legislative Acts of Ukraine on the Activity of Arbitration Courts and the Enforcement of the Awards of Arbitration Courts Act of Ukraine of 5 March 2009, which came into effect on 31 March 2009, specified that corporate disputes and disputes related to real estate and land plots, labor issues, cases about the recognition of facts as well as cases the awards in which may require any action of a state or municipal body or an official may not be referred to arbitration; such disputes may be decided only by Ukrainian state courts.
The above-mentioned Act was adopted in order to decrease corrupt practices in Ukrainian arbitration courts in the consideration of real estate issues and corporate disputes. Actually, after introduction of the amendments local arbitration courts now have the opportunity to become a fair instrument for resolving disputes. There are numerous benefits of arbitration that render it a more productive dispute resolution process for investors and professional participants of the stock market than litigation. Some of these benefits are further discussed below.
Specialization in Securities Issues
There are two major aspects of this benefit for arbitration in the securities industry. First of all the regulations of the stock market and issues which are usual for professional participants of the stock exchange are, let us be honest, beyond the competence of judges of state courts. Though the panel of an arbitration court may be composed of lawyers who are specialists in arbitration procedures and reputable participants of the market who have deep knowledge of the securities industry but no legal background, such a panel is able to consider the case and issue a competent award.
The second important matter is that the stock exchange arbitration court is able to apply the rules of the stock exchange, which a state court would normally use only as a subsidiary regulation. Let us also take into account that business customs and practice may play a large role in the rendering of an arbitral award; therefore, if companies are operating in conformity with customs and stock market practice, arbitration may be preferable.
Privacy
Arbitrations, unlike usual legal proceedings, are private. This is a very important issue for the participants of the stock market and those investors who do not need publicity or do not want their private financial affairs disclosed in public. Litigation, which is adversarial by nature, tends to destroy business relationships which the participants of the stock market and investors may wish to preserve for their on-going and future projects despite their current dispute.
Speed of Resolution and Finality
An important benefit of securities arbitration is the speed at which claims are resolved, due to the fact that the motions practice is rare in arbitration. Depending on the jurisdiction and the court in which it is filed, legal proceedings can take years to be resolved. At the arbitration court claims are usually closed within a shorter period of time. Because the rules usually applied by stock exchanges, in particular PFTS, require that arbitration awards be paid or otherwise fulfilled promptly, on pain of disciplinary proceedings against the broker, such arbitration has the advantage that it is sometimes easier to collect an arbitration award than a court judgment. Finally, the grounds for setting aside an arbitration award are extremely narrow, much narrower than the grounds for bringing an appeal against a judgment, which is another significant advantage for stock exchange arbitration. Arbitration is distinguishable from other methods of alternative dispute resolution such as mediation, which, although private and conducted before a neutral third party like arbitration, is typically not binding. Thus, the advantage of arbitration over mediation is arbitration’s finality.
Flexibility of the Process
Most arbitration courts do not stipulate any specific requirement for a formal submission of a claim similar to that required in court. Instead, a statement of claim may be filed in a simple letter format that explains what happened and what the claimant seeks to recover. The arbitration rules are available for the participants of the proceedings, and the procedural questions which may arise at any stage of the proceeding do not have the same importance as they have in court proceedings. In other words, the informal nature of arbitration proceedings is not as intimidating as the formal nature of courtroom litigation. In addition, arbitrators may use the progressive instruments elaborated by their colleagues in countries where arbitration practice is much more developed. For example, if the rules of an arbitration court allow this the arbitrator may use stipulations. There are frequently countless hours wasted in proceedings where parties attempt to prove facts that are really not in dispute, and which could easily be resolved by a stipulation. Stipulations entered into between the parties, as to factual matters not in dispute, can go a long way towards moving a hearing along, and can considerably shorten the presentation of evidence.
However, we should note that the Arbitration Act does not provide arbitration courts with the powers and the ability to force the parties and other persons to do something like those the state courts have. Certainly, in some ways, arbitrators have greater power than a judge (e.g., except for limited reasons, arbitration decisions cannot be overturned). At the same time, arbitrators have less power to maintain control over all arbitration conferences and hearings.
That is why proceedings in an arbitration court should be governed in detail by local rules allowing the arbitrators to discourage abuses of the process, such as: unreasonable requests for discovery, last-minute requests for recusation or procrastination in scheduling.
Cost of the Process
The costs of the arbitration process specified in the Arbitration Act may be divided into three groups: fees of the arbitrators, submission fees and costs. Although the submission fees and the arbitrators’ honoraria may seem a little bit higher than the state duties applicable in state courts, the total sum of expenses for an arbitration process is significantly lower than that for court proceedings. The arbitrator’s fees for large, complex cases that require multiple hearing dates can be quite high, as they can also be when a three-person panel, rather than a single arbitrator, is chosen.
Fairness and Impartiality
The key to an effective arbitration system is having capable, fair, and impartial arbitrators who hear and decide cases conscientiously. Arbitration is based on principles of impartiality and equity. There is no specific need to widely interpret this principle. However, it is worth mentioning that the arbitrators shall apply the strictest requirements as to the disclosure of conflict of interests so as to prevent any harm to the reputation of the particular arbitrator and the arbitration court. Arbitrators should realize that they are viewed by parties in an arbitration process much as a judge would be viewed in a court of law.
Certainly, recognizing that there are both advantages and risks associated with arbitration, companies should take many factors into consideration (including the type of contract, the company’s practices and the relevant law) in deciding whether arbitration would be preferable. Nonetheless, arbitration may become a highly attractive option for parties seeking a quicker, less formal and inexpensive form of alternative dispute resolution. After the above-mentioned amendments were introduced to the Arbitration Act, arbitration courts in Ukraine have the chance to cleanse their reputation. Actually, now we have the situation when the arbitration courts may function according to their original designation — as the fairest method for resolving disputes in specific industries, such as the stock exchange, banking sector, etc. The stock exchanges and the PFTS, as the largest exchange in Ukraine, have the capacity to ensure a level playing field for investors and professional participants of the stock market in the respective arbitration forum.