The ISDA Master Agreement has been altered to widen and encourage the use of arbitration in response to changes in international conditions with more participants looking for alternatives to having disputes resolved in the English or New York courts.
The financial sector has primarily used the English and New York courts for resolution of its disputes and the Master Agreement of the International Swaps and Derivatives Association (ISDA), for instance, has long adopted the default position that disputes should be resolved according to English or New York law. This reflects the traditional preference of the international banks as the major players in the financial markets. They have typically chosen the commercially flexible nature of these legal systems with judges who, because they operate in the world’s two major financial centres, have built up a huge amount of high quality expertise and have typically issued judgments that command international respect. Additionally, the similarity of the judges’ common law approach has increased the consistency of the judgments and this has helped meet the financial markets preference for certainty. A study from the London School of Economics identified that there have been 78 decisions involving ISDA documentation by the English courts alone between 2003 and 2011, of which nearly 50 were between 2009 and 2011 (reflecting in part the worldwide financial turmoil beginning in 2008).
The status quo is, however, changing. The financial markets have seen a widening of activities away from England and New York to the emerging markets and have also seen the parties in those markets giving jurisdiction to local courts, even if they may be less likely to yet have judges with extensive experience of the financial markets.
New areas of dispute have also arisen, driven by the geographical widening of the financial markets, the great increase in financial products and in their complexity. One important example is questions relating to whether valuations (for instance close out valuations) can be said to be commercially reasonable. Additionally, the particular features of Islamic finance, and the required compliance with Sharia law, have thrown up new challenges.
So, the financial markets have been faced with decisions from a wide range of courts, ruling on complex products, and with judges from different traditions who have sometimes moved away from the typical contractual approach of English and New York judges to introducing elements of administrative and even criminal law. Divergent views have also developed about the duties owed by parties to each other, including as to disclosure of material facts. All of this has increased uncertainty.
A survey of ISDA members in 2011 showed increased interest in arbitration for financial disputes. It is argued by proponents of arbitration that parties whose dispute has arisen thousands of miles away from the English and New York courts, for instance, may not be best served by the judges of those courts who may be unaware of local conditions and practices, and further, that they may not be best served either by the judges of their local courts. Additionally, judgments of any of these courts may not necessarily be enforceable across the international borders that may be relevant to the dispute.
The ISDA survey has led to the 2013 ISDA Arbitration Guide which provides a background explanation of arbitration and importantly contains model clauses that can be inserted into the ISDA Master Agreements in place of current provisions for the determination of disputes by litigation. The Guide contains a wide variety of arbitration clauses (11 in fact) and gives the parties a wide choice of arbitration fora, for instance, the London Court of International Arbitration, the International Chamber of Commerce and the Singapore International Arbitration Centre. Also included is the Hague based P.R.I.M.E. (Panel of Recognised International Market Experts in Finance) whose Rules are drawn from the UNICITRAL (United Nations Commission on International Trade Law) Rules.
It is argued that arbitration offers the parties a wider choice of “judge”, with the opportunity to appoint arbitrators with specific knowledge of particular markets and products and also with the parties having an involvement in determining the procedure which the arbitrators should use to decide the dispute. An arbitration award may also not face the same challenges about enforcement as can be experienced in enforcing judgments of national courts because the award will usually be enforceable in the more than 150 countries who have accepted the obligations for enforcement of awards in the New York Convention 1958. It is, however, already becoming clear that one of the challenges faced is that of there being sufficient arbitrators of the high calibre required, and also the potential for delay where there may be three arbitrators with busy diaries who are adjudicating upon a dispute rather than a single judge, and the consequent cost.
However, the delays of arbitration and also the cost are already well known and it is for the parties to decide when entering into their particular financial market contracts how they balance the advantages and disadvantages of adjudication before the courts of England and New York, or another national court, against the advantages and disadvantages of arbitration.