The U.S. Council on International Banking Inc., the Institute of International Banking Law and Practice Inc., and Citicorp have joined forces to offer alternatives to costly trade-finance court disputes.
They have formed a company called Center for International Letter of Credit Arbitration Inc., which they say will reduce the time and associated legal costs when banks and beneficiaries of letters of credit are at odds.
The new company is to provide "alternative dispute resolution," or ADR, sidestepping such problems with the judicial system as judges' and juries' unfamiliarity with letter of credit procedures, the center's sponsors said.
The center is to form panels of arbitrators with expertise in the highly technical letter of credit business.
Speaking at the U.S. Council on International Banking's annual conference in Hilton Head, S.C., Michael F. Quinn, a Citicorp vice president, said the center would be the banking industry's attempt to address the "problems" in resolving letter of credit disputes.
"The ultimate objective," he said, "is to provide a body of sound decisions which become predictable over time, available to all participants, and are able to be resolved by the participants themselves."
It's not a matter of "the competency of lawyers and the judicial system," he added, but of "people lacking the appropriate technical knowledge."
Citicorp has incorporated alternative-resolution terminology in its standard correspondence with business customers.
James G. Barnes, a lawyer at Baker & McKenzie, Chicago, said ADR addresses the fact that, in many technical cases, courts make flawed decisions that set precedents for future legal battles.
"The courts get it wrong about half the time," Mr. Barnes said. "The final decisions in these cases, a very high percentage of them, are seriously flawed."
In addition, he said, lawyers sometimes anticipate complexities of the issues involved and "exploit ignorance, just as they will exploit expertise in a case."
He added that judges and juries often take an unfriendly view of bankers in the courtroom, which also leads to bad decisions.
The letter of credit business generated $1 billion of revenues in the United States last year, the U.S. Council on International Banking estimated.
Disputes often arise among banks, corporate customers, and other beneficiaries when terms and conditions of trades are not met.
Dan Taylor, president of the international banking council, said that about 50 to 75 letter of credit judgments are handed down each year, but that there may be many more disputes. Through ADR and other means, banks increasingly tend to settle cases before they reach litigation.
Only about half of all letter of credit disputes are actually heard in court, Mr. Taylor said, because banks are reluctant to spend $1 million on a $100,000 lawsuit.
"Companies often initiate lawsuits even when banks are right," he said, "hoping that the bank will settle the case to avert court costs.
