By Yoon Byung-chol
Kim&Chang, Partner

Traditionally, financial institutions have preferred court proceedings as a method of resolving their disputes.

Among various reasons for this, a defendant in Korea, after receiving a complaint must submit a denial of such complaint, otherwise a default judgment can be rendered in favor of the plaintiff.

Further, in the case of a financial dispute between domestic parties, the court’s first decision can be executed immediately, whereas an arbitral award may need to be enforced by the courts which would make the procedure rather more complex.

However, the story becomes somewhat different when the financial dispute is not a part of our court’s jurisdiction and occurs with a foreign party.

Enforcing foreign court judgments in Korea or enforcing a Korean court judgment outside of Korea is generally difficult and time consuming. In comparison, enforcing an international arbitration award is much more straightforward due to the 1958 New York Convention on Recognition and Enforcement of Arbitral Awards.

With almost 150 signatories, from Rwanda to Romania, the New York Convention recognizes and enforces, with only a few exceptions, an arbitral award made in one signatory state to another signatory state.

Accordingly, international arbitration is the most suitable forum to settle a financial dispute with an international element as there is a much better chance of enforcing any such decision.

Further, financial institutions should be aware that arbitral institutions have recently been making a push to expedite resolution of arbitrated disputes by adopting expedited proceedings.

For instance, the Singapore International Arbitration Centre adapted the possibility of expedited proceedings in its revised rules in July 2010. When the decision for an expedited proceeding is made, the arbitration proceeding is conducted by a sole arbitrator and the arbitration award is granted only within 6 months from the date when the arbitrator is appointed.

A similar model has been adopted by the International Center for Dispute Resolution and other arbitral institutions such as the International Chamber of Commerce which would allow financial institutions the possibility of resolving its disputes quicker and more effectively.

Some financial disputes have been resolved by creative use of mediation and arbitration. In Hong Kong, financial authorities have chosen a way to resolve collective financial disputes through arbitration institutions.

At the time when Lehman Brothers applied for bankruptcy in September 2008, a large number of small investors had financial derivatives called Credit Linked Notes in their possessions and they filed a claim collectively against over 20 banks that sold this product to the Hong Kong Monetary Authority (HKMA).

In order to settle this situation, a provision was made by HKMA that the Hong Kong International Arbitration Centre (HKIAC) would be responsible for the mediation and arbitration of these disputes.

According to this provision, if an investor agrees to this, it must participate in a 5 hour mediation session within 21 days of agreement as the first phase. If a settlement cannot be reached, the dispute is then managed through a “documents-only” arbitration in the second phase. As a consequence, for one year thereafter, over 346 mediation requests were received.

In case a collective financial dispute occurs like the example above, a plan for a financial authority to allow for parties to choose mediation and/or arbitration in particular cases is a solution that is at least worth considering.

With more diverse and unique disputes in the horizon, our financial authorities and financial institutions must be able to act in a flexible and creative manner and learn from foreign precedents to resolve disputes in the most favorable manner possible.