Syndicated Loans and Arbitration
Introduction
Syndicated loans undoubtedly hold a significant position among global financing models[1]. In 2023 alone, 3,655 syndicated loans were provided to companies in the US, with their total value reaching USD 2.4 trillion. In Europe, the transaction volume amounted to USD 679 billion across 1,186 syndicated loans, highlighting the widespread use of this financing method[2]. However, the large-scale and multilateral structure of syndicated loans gives rise to various legal disputes. This article outlines syndicated loans and the arbitration of disputes arising out of syndicated loans.
Overview of Syndicated Loans
Syndicated loans involve a process where multiple banks convene to form a consortium to provide a loan to a third party, sharing the rights of the loan. This financing model, which includes various lenders, is commonly used to fund large-scale projects, particularly in sectors such as energy, healthcare, transportation and infrastructure, and real estate.
In the process of arranging the loan, lenders come together at the request of the borrower to form a syndicate. Lenders work through a common set of documents and, under the leadership of a lead bank, collectively provide the borrower with a large loan, subject to various terms and conditions.
According to Article 48 of the Banking Law numbered 5411, syndicated loans are not classified as a specific type of loan. Instead, syndicated loans represent a particular form of credit extension. In legal doctrine, there are two main opinions regarding the legal nature of syndicated loans: one views them as an ordinary partnership agreement, while the other classifies them as a sui generis agreement. The dominant opinion is that a syndicated loan constitutes an ordinary partnership agreement, supported by rulings of the Court of Cassation[3].
Process
The core process in syndicated loans begins with the selection of a leading bank, followed by the negotiation of the loan terms with the borrower, and the signing of a mandate letter. Invitation letters are then sent to other financing institutions. A consortium is formed, and all participating banks sign a consortium agreement. Then the terms of the loan agreement are negotiated with the borrower, loan and guarantee agreements and fee letters are signed between the borrower and the banks.
Types
Syndicated loans can be categorized in several ways. One distinction is between “real syndicated loans” and “non-real syndicated loans”, based on the rights and legal status assumed by the lead bank within the consortium. In real syndicated loans, the loan procurement and management are centralized under a single entity, while in non-real syndicated loans, loan management is decentralized. Additionally, in legal doctrine, syndicated loans are also classified into underwriting and best-effort syndicated loans, as well as primary and secondary syndicated loans.
Possible Disputes in Syndicated Loans
In syndicated loans, disputes may arise over various issues, including the formation of the syndicate, the lead bank’s responsibilities within the syndication, repayment terms, events of default, guarantees, and the refinancing process and conditions. Additionally, conflicts of interest among consortium members can lead to disputes, given the involvement of multiple lenders in the syndication.
Syndicated Loans and Arbitration
Model agreements published by the Loan Market Association (LMA) and the Loan Syndications and Trading Association (LSTA) are widely used in global syndicated loans. The model clauses published by the LMA designate English courts for dispute resolution, while the LSTA model clauses assign this authority to New York courts. However, in practice, it is also common to resolve disputes through arbitration instead of these national courts.
Advantages of Arbitration
Arbitration, first and foremost, offers a fast and equitable adjudication of disputes. Additionally, the significant economic value of syndicated loans poses the risk of influencing market dynamics in the event of a dispute. For this reason, maintaining confidentiality is often preferred. One of the key advantages of arbitration is that both the proceedings and hearings are confidential. Provisions on confidentiality may be included in the selected arbitration rules and arbitration agreements. Unlike national court proceedings, arbitration allows the parties to protect sensitive trade information, such as the loan amount in dispute, the borrower’s payment methods, and the transaction structure.
Another advantage of arbitration is that the parties can select the arbitrators, eliminating concerns over the impartiality of state courts. The choice of arbitrators with expertise in the relevant field ensures a more informed and effective evaluation of the dispute.
In arbitration proceedings, the decisions are final and there is no legal remedy against the decisions. Therefore, the proceedings are completed more quickly than in state courts.
Arbitrability
The key factor in resolving a dispute through arbitration is its arbitrability, which is determined by the discretion of individual states. Under Article 408 of the Code of Civil Procedure (“CCP”), disputes concerning rights in rem over immovable property and disputes that are not subject to the will of both parties are not arbitrable under Turkish law. In international arbitration proceedings with a foreign element, if the seat of arbitration is Türkiye, the applicable law is the International Arbitration Law (“IAL”). Article 1 of the IAL adopts the same rules in terms of arbitrability. There is no specific provision in Turkish law that explicitly states that syndicated loans are not arbitrable. In the jurisprudence of the Court of Cassation, disputes considered non-arbitrable typically involve rights in rem over immovable property, and issues relating to consumer disputes, labor law matters and lease agreements as these aim to protect the weaker party or involve public interest. In addition, the Court of Cassation recognizes that situations requiring public order intervention, corporate law disputes, and annulment of objection cases are not arbitrable. The Court of Cassation’s stance on corporate law disputes has faced criticism[4]. However, when considering the provisions of the CCP, the IAL, and the relevant case law, it should be concluded that syndicated loans are arbitrable.
Types of Arbitration
After choosing the arbitral proceeding, the parties must decide whether to proceed with institutional arbitration or ad hoc arbitration.
When institutional arbitration is chosen, the arbitration is conducted by the arbitration rules of the relevant institution. The institution plays an active role, in facilitating the appointment of arbitrators, managing notification procedures, and providing secretarial support.
In contrast, ad hoc arbitration operates independently of any institution. The rules regarding the arbitration process are determined by the parties. In practice, the UNCITRAL Arbitration Rules are generally applied. The parties decide on the process in complete freedom and liberty. However, there may be difficulties in appointing arbitrators and controlling their costs.
Arbitration Agreement
Arbitration is a voluntary dispute resolution method. The parties' will to arbitrate is embodied in the arbitration agreement. The arbitration agreement may be in the form of an arbitration clause or a contract. An arbitration clause is an arbitration agreement if there are provisions in the agreement stipulating that disputes arising out of the main agreement will be resolved by arbitration. On the other hand, an arbitration agreement exists if the parties agree to resolve the dispute through arbitration, either before or after the dispute arises. In institutional arbitration, the use of model arbitration clauses proposed by the institutions also prevents the invalidity of arbitration clauses.
The arbitration agreement must be in writing and the parties must have capacity. In the arbitration agreement, the dispute subject to arbitration must be identifiable. On the other hand, the dispute must be arbitrable. The arbitration agreement is independent of the main agreement between the parties. Even if the main agreement between the parties is invalid for any reason, the arbitration agreement is not affected by this invalidity. With the arbitration agreement, the parties also determine the procedural and substantive rules of law to be applied in the arbitration.
Seat of Arbitration
The seat of arbitration is, as a rule, chosen by the parties. The seat of arbitration is important in terms of the rules of procedural law to be applied. The rules of procedural law to be applied in arbitration proceedings should not be contrary to the mandatory rules of the law of the seat of arbitration. The competence of the arbitral tribunal, the determination of the competent court if the arbitrators are not competent, and the foreignness of the award are determined according to the law of the seat of arbitration. One of the most important functions of the seat of arbitration is the institution of the set-aside proceedings in the seat of arbitration. If the set-aside proceedings are prolonged in the seat of arbitration or if the set-aside proceedings are subject to strict public order intervention by the courts, then the benefits of arbitration are jeopardized. Therefore, the seat of arbitration should be chosen consciously and carefully.
Applicable Law
The law governing the substantive issues in arbitration proceedings can be chosen by the parties. The parties may opt for their national law or a foreign law, or the general principles of international law, the UNIDROIT Principles, or lex mercatoria to may be applied to the dispute. If the parties have not made a choice of law or are unable to agree on one, the arbitrators will determine the applicable law for the proceedings.
Concerns of Banks Regarding Arbitration
Banks are typically involved in a wide range of agreements. Most of these relate to their core activities, such as banking agreements, deposit agreements, general loan agreements, and syndication agreements. Others pertain to support services, like various supply contracts. For banks with a large workforce and numerous branches, employment agreements and lease agreements are also of significant importance.
Banks’ primary hesitation in submitting these agreements to arbitration stems from concerns about the arbitrability of disputes arising from them. As explained earlier under the topic of arbitrability, disputes arising from most of these agreements—particularly banking agreements, deposit agreements, general loan agreements, syndication agreements, and support service agreements—are generally arbitrable. However, the arbitrability of consumer disputes, as well as disputes related to employment and lease agreements, requires careful consideration.
Another concern for banks is the lack of established case law on arbitration disputes involving banks and the difficulty in accessing relevant decisions. This lack of jurisprudence reduces the predictability of dispute outcomes. Although many institutional arbitration awards, such as those from the ICC and ISTAC, are published anonymously, the development of a robust body of case law takes time. Increased use of arbitration by banks would help enrich jurisprudence in this area.
Undoubtedly, the greatest benefit for banks in opting for arbitration is the swift resolution of disputes by expert arbitrators.
Conclusion
While syndicated loans play a critical role in financing large projects, their multilateral nature and large financial volumes can also lead to legal disputes. Arbitration provides an attractive alternative to resolve these disputes, offering advantages such as speed, confidentiality and the ability to select expert arbitrators. The flexibility and impartiality offered by arbitration should be considered as an important alternative for resolving disputes related to syndicated loans.
Since many different agreements involving banks are arbitrable, opting for arbitration in these agreements will contribute to the growth and development of arbitration, as well as the enrichment of relevant jurisprudence.
- This newsletter is derived from the author’s presentation at the event organized by the Banks Association of Türkiye on October 3, 2024 within the scope of Prof. Dr. Seza Reisoğlu Memorial Meeting and Legal Conference.
- "LSEG Data Analytics- Global Syndicated Loans Full Year 2023" (https://www.lseg.com/en/data-analytics/investment-banking/lpc (Accessed on 23.09.2024).
- YHGK, 17.01.1990, 1989/457 E., 1990/2 K., “https://www.lexpera.com.tr/ictihat/yargitay/hukuk-genel-kurulu-e-1989-457-k-1990-2-t-17-01-1990”, Accessed on 13.10.2024.
- See also; Erdem, H. Ercüment: Milletlerarası Ticaret Hukuku, Updated and Expanded 3rd Edition, İstanbul 2024, par. 1696.
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