The International Swaps and Derivatives Association (ISDA) has revised its Guide to Arbitration (the Guide). First published in 2013, after considerable stakeholder consultation, the Guide includes an explanatory memorandum which provides an overview of arbitration for parties to derivatives transactions, and includes a broad choice of model arbitration clauses (and guidance notes) for use with both the ISDA 1992 Master Agreement and the ISDA 2002 Master Agreement. The model clauses can be included in new Master Agreements or can be included when amending an ISDA Master Agreement.
The new version of the Guide is best described as an enhancement, rather than a wholesale revision. It reflects developments in the field of arbitration since the Guide was first launched in 2013, such as the increasing availability of emergency arbitration, and the possibility of early dismissal of claims and defences. The Guide also now features model arbitration clauses for various additional institutions, including the German Arbitration Institute (DIS) Rules clause to which Herbert Smith Freehills contributed (see here for further information).
As discussed below, arbitration offers a number of procedural features which may be attractive to parties to derivative transactions. Further, there are certain considerations relevant in derivatives disputes in particular which the parties may wish to bear in mind when including an arbitration clause in their contractual documents.
As the International Chamber of Commerce (ICC) confirmed in a report on Financial Institutions and International Arbitration, arbitration has been steadily growing as a chosen method of dispute resolution in derivatives contracts, particularly as the participants entering the market of traded derivatives become more diverse (see here for further information). ISDA’s continued support for arbitration is likely to encourage parties in the derivatives market to consider arbitration for their transactions and to facilitate the inclusion of workable arbitration clauses in ISDA Master Agreements and related contracts.
Summary: Changes to the Guide
a) Model arbitration clauses and drafting
Further to feedback during a period of consultation, the new Guide includes model clauses for the following additional institutions: Stockholm Chamber of Commerce (SCC) Rules (Stockholm seat); DIS Rules (Frankfurt seat); Dubai International Finance Centre – London Court of International Arbitration (DIFC-LCIA) Rules (DIFC seat); and Vienna International Arbitration Centre (VIAC) Rules (Vienna seat). The other clauses remain (ICC Rules, London, Paris or New York seat; LCIA Rules, London seat; American Arbitration Association – International Centre for Dispute Resolution (AAA-ICDR) Rules, New York seat; Hong Kong International Arbitration Centre (HKIAC) Rules, Hong Kong seat; Singapore International Arbitration Centre (SIAC) Rules, Singapore seat, Swiss Rules, Zurich or Geneva seat), and P.R.I.M.E. Finance Rules, London, New York or the Hague seat). A number of the clauses are also drafted to be used with a particular choice of governing law. ISDA’s approach provides parties with a considerable amount of information to assist them in their drafting, without ISDA favouring any one institution or seat of arbitration over another.
The Guide also now includes an LCIA Rules clause with a Dublin seat for use with the Irish-law governed Master Agreement developed by ISDA in the context of Brexit, as well as a cross reference to clauses intended to be used with the ISDA/International Islamic Financial Market Tahawwut Master Agreement and the ISDA 2002 Master Agreement that is governed by French law.
In addition to the model clauses, the Guide highlights a list of matters which parties may wish to add or modify in the model clauses, such as to add provisions on: evidential matters as to the scope of document production; multi-party disputes; and confidentiality.
b) Developments in arbitration
The Guide has been updated to refer to a number of developments in the field of international arbitration, some of which are reflected in changes to the administrative rules of various international arbitration institutions.
Summary judgment: Of particular interest is the more recent addition in some of the institutional arbitration rules of a provision empowering the tribunal to dismiss unmeritorious claims or defences on a summary basis. Some derivatives claims may lend themselves to early dismissal (for example, where it is undisputed that a party owes sums following termination of an ISDA Master-related derivative contract). However, as is noted in the Guide, summary procedures can affect due process rights and therefore the applicant must overcome a very high hurdle to demonstrate that the claim should be dismissed summarily. A defendant may therefore be able to defeat the application by raising complex arguments of dubious merit. The same consideration applies to summary judgment applications in the courts and, as ISDA points out, the possibility of obtaining summary judgment in the courts may at times be over-stated.
Multiple parties and multiple agreements: The Guide features a revised section on multiple parties and multiple agreements, recognising that transactions that take place under an ISDA Master Agreement may involve parties which are not party to that ISDA Master Agreement and may not be bound by the arbitration agreement therein. Whilst the revisions introduce more clarity to this section of the Guide, it is noted that specialist advice may be required in multi-party and multi-contract scenarios to ensure that all relevant parties are bound to an arbitration agreement and to enable disputes under related agreements to be resolved together.
Key aspects of arbitration relevant to derivatives transactions
A detailed discussion of the use of arbitration in the context of financial disputes can be found here. The salient features of arbitration relevant to the resolution of derivatives disputes include:
- Party-nomination of arbitrators: allowing parties to select a tribunal with, for example, experience in transactions involving complex financial products, and a working knowledge of ISDA documentation;
- Use of party-appointed experts: in highly technical derivatives disputes the parties may regard this as a considerable advantage over any national court process which does not feature expert evidence in this way; and
- Enforcement of international arbitration awards in 159 jurisdictions under the New York Convention 1958: the relative ease of enforcement is relevant in the context of the expansion of the derivatives market to participants in emerging market jurisdictions. Further, reciprocal enforcement of arbitration awards is unaffected by Brexit.
There are other points on which parties in the derivatives market may wish to reflect when considering arbitration, including:
- Privacy affecting the development of jurisprudence: some participants in the derivatives market may be concerned that, due to the private arbitration of disputes, important case law on the interpretation of the ISDA Master Agreements relevant in particular in common law jurisdictions may not be publicly available. The implications could be felt on a macro level in the sense that a public body of consistent case law on ISDA Master-related issues contributes to certainty, and on a micro level in situations where the same party has disputes with multiple unrelated parties concerning the same issue. If this is a concern, parties may agree in their arbitration agreement to the publication of awards (including in a redacted way). Such a consideration is reflected in the P.R.I.M.E. Finance Rules.
- Interest and the currency of the award: parties who are familiar with the approach of a particular national court may wish to reflect further on the breadth of the tribunal’s discretion with regard to both the award of interest and the currency in which the award is made. Both of these factors can make a material difference to the net outcome of an arbitration. Again, the parties may wish to reach an agreement as to the scope of the tribunal’s powers on these issues at the time the derivatives contract (and arbitration agreement) is concluded.
To discuss the suitability of arbitration for resolution of derivatives disputes, please contact Nicholas Peacock, Partner, Mathias Wittinghofer, Partner, Tilmann Hertel, Senior Associate, Hannah Ambrose, Senior Associate or your usual Herbert Smith Freehills contact.