Lessons from the Front Lines: Insights from a Financial Dispute Arbitration

The current turmoil in the financial markets reminds me of an interesting arbitration case in which I represented an investor a few years ago. I learned a lot from that arbitration, particularly the following (in no particular order):

(1) Sole Arbitrator vs. Arbitral Tribunal

Of course, there are certain advantages to having a dispute decided by a sole arbitrator as opposed to an arbitral tribunal of several arbitrators, namely a significant cost advantage. However, this is offset, in particular, by the fact that three brains simply see more than one brain. This manifested itself very clearly in the arbitral proceedings I mentioned. The sole arbitrator, who otherwise conducted the proceedings very well, completely misjudged a central aspect of the relevant dispute in his award.

The point in dispute was, in essence, the question of how to legally assess a party’s failure to send a margin call through all the contractually agreed channels. To the surprise of all the parties’ counsel, the sole arbitrator made the completely wrong finding in his award that the message in question should not have been sent before, but only after, the forced sale. In the end, the sole arbitrator’s error of judgment was not decisive because his assessment of other claim requirements was reasonable. But it was sobering to see such a serious error of judgment, which I am sure a three-member arbitral tribunal would not have made.

This experience has strengthened my conviction that whenever it can be reasonably justified financially, one should recommend that clients agree on arbitral tribunals of (usually) three arbitrators and advise against a sole arbitrator.

(2) Document Production

There is a lot of complaining about document production in arbitration, and it is true that this phase of the proceedings gets out of hand in some arbitral proceedings. But there are cases in which document production can decide a case. This was the case in the arbitration I mentioned.

My client had, in a very compressed form, made the argument that he would not have sold his relevant positions if the margin call had been made in accordance with the contract. It was then, obviously, very problematic that it could be proven by means of document production that my client had sold the same or similar positions at the same time with other contractual partners… Once this was introduced into the proceedings, my client’s case was basically dead.

This experience has confirmed two lessons learned. First, there are very often more or less big surprises in disputes (both in arbitration and in litigation) regarding the instructions originally received from clients. It is advisable to take this into account when making an early assessment of the chances of success of a client’s case. Second, document production is not always an unnecessary exercise, but can, under certain circumstances, even decide a case. In this sense, it can also be seen as an advantage that in arbitral proceedings, more documents can be produced and thus, under certain circumstances, more justice can be done than in Swiss civil proceedings, which are very restrictive in this respect.

(3) Large Legal Teams

Some parties, of course only if they can afford it, use large teams of lawyers as a weapon or at least as a method of intimidation. In the arbitral proceedings in question, the opposing party was represented by two large law firms and various lawyers, and the combined cost note submitted to the sole arbitrator by these firms was beyond good and evil. It then takes an experienced and strong arbitrator to put a stop to such abusive claims for compensation. Fortunately for my client, the sole arbitrator in question did just that.

The lesson in relation to this point: arbitrators have considerable discretion in determining and allocating costs. This discretion can be exercised under certain circumstances to prevent an unfair and unreasonable cost burden on the unsuccessful party in the arbitration. It is to be welcomed when arbitrators have the experience and authority to exercise this discretion available to them.

(4) Clients Seeking Thrills

There are clients who seek thrills not only on exchanges but also in arbitral proceedings. After a very long settlement negotiation in which an attractive settlement proposal was ready to be signed for my client, he decided to roll the dice anyway, despite my emphatic requests, even pleas, for him to settle the dispute. Well, ultimately, the client is, of course, king, and as a lawyer you follow client instructions as long as you can reconcile them with the law, professional ethics and your convictions. There are instances where this is no longer the case, but this would be a topic for another post…

PHH, Zurich, 9 April 2025 (www.haberbeck.ch)

The information contained in this post is for general informational purposes only and is not intended to constitute legal advice. Readers of this post should not take any actions or decisions without seeking specific legal advice. Any mandate is subject to the full execution of an engagement letter.

Rechtsgebiete: Bank- und Finanzmarktrecht