Stock Exchange Arbitration


     By Cai & Lenard



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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 the arbitration is the primary means of resolving disputes in the securities market.

The arbitration won that status because the public perception of its fairness was of paramount importance. The amendments to the Ukrainian legislation introduced in 2009 might help the Ukrainian local arbitration to find its niche as an alternative mechanism of dispute resolution in the industries where the benefits of the arbitration are of the essence, in particular, on the stock market.

Although arbitration has been known as dispute resolution mechanism for quite a long time, it was not until the special legislative act was adopted that arbitration became widely used means of resolving disputes in Ukraine. For quite a long time Ukrainian legislator had been reluctant to introduce the distinct and effective regulations of an arbitration procedure. Finally, 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 so far. The Arbitration Act specified that an arbitration court may be established, in particular, at stock exchanges and commodity exchanges as well as at stock market self-regulatory organizations.

In March 2009 the Parliament of Ukraine adopted the Act that introduced amendments to the Arbitration Act and other acts with the aim to narrow the competence of arbitration courts. The Act of Ukraine “On Amendments to Certain Legislate Acts of Ukraine on the Activity of Arbitration Courts and the Enforcement of the Awards of Arbitration Courts”, dated 5 March 2009, which became effective on 31 March 2009, specified that corporate disputes and disputes related to the 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 the Ukrainian state courts.

The above mentioned Act was adopted in order to decrease corrupt practices in the Ukrainian arbitration courts in the consideration of real estate issues and corporate disputes. Actually, now after the amendments have been introduced the local arbitration courts have the opportunity to become the 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 of the securities industry arbitration. First of all the regulations of stock market and the issues which are usual for the professional participants of the stock market are, let us be honest, out of competence of judges of state courts. Though the panel of the arbitration court may be composed of lawyers who are specialists in the arbitration procedures and the reputable participants of the market who have deep knowledge of the securities industry but no legal background, such 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 the state court would normally use only as a subsidiary regulation. Let us take into account also 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

Arbitration, 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 publicly disclosed. Litigation, being adversary in 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 in 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 filed, legal proceedings can take years to be resolved. At the arbitration court the claims are usually closed within 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 appealing 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 to arbitration over mediation is arbitration’s finality.

Flexibility of the process

Most of the 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 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 have no such importance as they have in court proceedings. In other words, the informal nature of arbitration proceedings is not as intimidating as is the formal nature of courtroom litigation. In addition the arbitrators may use the progressive instruments elaborated by their colleagues in the countries where the arbitration practice is much more developed. For example, if the rules of the 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 the 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 the arbitrators have less power to maintain control over all arbitration conferences and hearings. That is why the proceedings in the arbitration court should be governed in details 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 for 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 amount of expenses for arbitration process is significantly lower than that one of court proceedings. The arbitrator's fees for large, complex cases that require multiple hearing dates can be quite high, as the arbitrators' fees can 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 to mention that the arbitrators shall apply the strictest requirements as to the disclosure of the conflict of interests 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 introduced to the Arbitration Act the 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 destination – as the fairest method for resolving disputes in specific industries, such as stock market, banking sector etc. The stock exchanges and PFTS as the largest one 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.

ABOUT THE AUTHOR: Konstantin Pilkov
Konstantin Pilkov, MCIArb is a Head of International Arbitration Practice, Managing partner at the Cai and Lenard law firm in Kyiv, Ukraine.

He is a member of the Chartered Institute of Arbitrators, the German Institution of Arbitration (DIS), the Austrian Arbitration Association, the Swiss Arbitration Association (ASA), the Ukrainian Bar Association and the European Arbitration Chamber. Mr Pilkov is listed as an arbitrator at the International Commercial Arbitration Court at the European Arbitration Chamber, the court of arbitration at the First Securities Trading Association (PFTS Association). Konstantin Pilkov is Vice-chairman of the Court of Arbitration at PFTS Association. Certified insolvency practitioner.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.