Dispute resolution focus on legal risk prevention in financial markets

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The principle of good faith lives in the process of dispute resolution. Where a decision faces different choices, the choice that lets the party prevail in good faith should be picked

With the rapid development of the financial market, various legal risks have been embedded in the increasing number of transactions and changing regulations. According to the Legal Risk Index Report about Listed Companies in China (2017), the financial industry ranked first among all industries in terms of the legal risk.

As a result, dispute resolution institutions are also facing challenges. Beijing Arbitration Commission/Beijing International Arbitration Centre (BAC), for example, has experienced growth in financial cases in recent years. In each of the past five years, financial cases contributed to more than 50% of the disputed amount of all cases.

Zhang-Haoliang-Beijing-Arbitration-Commission
Zhang Haoliang
Division Chief
Beijing Arbitration Commission/
Beijing International Arbitration Centre

In addition, frequent disputes over new transaction structures, complex factual matters and difficult legal relationships are unveiling the legal risks embedded in the development of the financial market.

The authors believe that dispute resolution institutions could act on and safeguard the rules by reducing the uncertainty in transactions and in the process of dispute resolution, and thus resolve disputes and prevent future risk.

The function of risk prevention in the process of dispute resolution neither substitutes business risks control of financial institutions, nor substitutes regulatory precautions, nor prevents individual disputes. It is the implementation of each agreement properly and proportionally that makes laws and rules effective, and fosters a good business environment. Specifically, this should include the following elements.

Promote healthy development of the financial market. First, dispute resolution institutions are able to maintain a consistent and accurate application of laws and interpretation of transactions. A process of dispute resolution should preclude bias in expertise and thus balance interests, which helps in solving problems rather than just closing a case.

Second, it should be sensitive and consistent to industry regulations and rules. In terms of this sensitivity and consistency, dispute resolution institutions do not have a direct responsibility to regulate markets or transactions. However, in terms of executing regulation de facto, the outcome of dispute resolution should be in line with the regulative orientation by identifying such orientation and understanding the financial market and transactional expectations.

Promote the norms of financial industry. Industry norms are not only the source of law, but also an important guideline for transactional behaviour; they need to be applied repeatedly in dispute resolution practice, and be confirmed by laws. Adjudicative dispute resolution practice is one of the ways to establish industry norms through repeated verification and declaration in individual cases.

For example, although there is no clear stipulation on the VAM (value adjustment mechanism) clause under the current legal system of China, dispute resolution practice in the past few
years has seen judgments and awards repeatedly facilitating the consensus
of the VAM practice, and has substantially influenced and refined industry norms of the correlating transactions and arrangements.

Guide the innovation. Dispute resolution practice may leave room for financial innovation, which allows the development of the financial market. In the authors’ view, innovation can be neutral, but its results can be healthy or unhealthy. Leaving room for financial innovation is by no means endorsing any kind of innovative matters explicitly in dispute resolution. There is no one-size-fits-all approach to deciding on so-called innovative matters in their infant stage.

Dispute resolution practitioners should be self-restrained in making these decisions, and even allow disagreements. When the results of an innovation become clear, or the approaches of the dispute resolution have been exhausted, the decision on these matters becomes appropriate. For example, as an innovative way of investment, so-called debt investment in the name of equity investment (disguised debt) is neither clear in its format nor in its legal results. It is not good to make the same conclusion in deciding similar disputes in the current situation. The examination of individual cases will help clarify the pros and cons of the legal results of such an innovation.

Safeguard interests in good faith. Vibrant business activities rely upon interests in good faith. The application of transactional agreements or laws that have already deviated from the course of good faith encourages resistance or even rebellion, and thus diminishes the effectiveness of agreements, and laws
in general.

The principle of good faith lives in the process of dispute resolution. Where a decision faces different choices, the choice that lets the party prevail in good faith should be picked. Where the different values of law are conflicted, the decision that safeguards the interests in good faith should be made.

A responsible dispute resolution institution should ensure its practice adheres to the principle of good faith. For instance, if a party claims an unfair negotiation of a contract, the emphasis of hearings must be placed on the background and the negotiating process of the transaction, so as to help the tribunal apprehend the fairness in individual cases, make a decision to carry out the principle of good faith, and secure the right performance of a contract.

Dispute resolution practitioners are watchdogs of the healthy development of the financial market. Risks in the market may be challenging in the process of dispute resolution. Market, transaction and regulatory risks should be taken into account by the industry.

Ensuring that the parties concerned enter into contracts with a free and solid will of performing the contracts according to laws and the principle of good faith is what the process of dispute resolution can contribute to legal risk prevention in the financial market.

Zhang Haoliang is a division chief of Beijing Arbitration Commission/Beijing International Arbitration Centre (BAC/BIAC). BAC/BIAC’s case managers Liu Nianqiong and Yang Yufei also contributed to the article