New arbitration institute
On January 16 2012 a new arbitration institute is officially due to open its doors and a new set of arbitration rules should come into force. The PRIME Finance Disputes Centre, which was established at the end of June 2011, will launch its arbitration services at the beginning of 2012. PRIME Finance is based in The Hague, Netherlands, and its goal is to provide, promote, enable and support alternative dispute resolution, with its main focus on disputes concerning complex financial products, such as derivatives. Its panel of experts includes some of the most eminent financial and alternative dispute resolution(1) experts in the world.
PRIME Finance consists of a secretariat, a management board and an advisory board, all of which will ensure that its financial, arbitration and other experts can provide the services offered by the centre. These experts can be engaged as mediators and arbitrators in disputes relating to financial instruments. Parties with a dispute about complicated financial products can turn to them for guidance on how to deal with issues raised by these products, the implications of which may not always have been fully contemplated. The experts can provide assistance by:
- acting as independent experts in court;
- training judges so that they obtain a better understanding of the dynamics, effect and logic of different financial instruments;
- mediating between parties; and
- acting as arbitrators where disputes cannot be resolved amicably.
At present, there is a plethora of industry-specific arbitration institutes.(2) In addition, there are arbitration institutes that deal with all types of dispute, such as the Court of Arbitration of the International Chamber of Commerce (ICC), the American Arbitration Association and the London Court of International Arbitration. However, none of these institutes are specifically aimed at resolving disputes in the international financial sector. As of 2012, PRIME Finance will fill that gap and offer arbitration services for arbitration predominantly involving financial instruments and contracts. Such arbitrations can be conducted under the centre's own regulations, which are yet to be made public. Parties to financial agreements (eg, swaps, securitisations and structured finance transactions) can choose to have any dispute settled by arbitration under the centre's rules and can appoint an arbitral tribunal from the list of experts maintained by the centre. The list is public and can be reviewed online at the centre's website (www.primefinancedisputes.org).
The establishment of PRIME Finance is topical. Complex financial instruments have been at the core of the economic crisis, and so have enjoyed increased prominence and tighter scrutiny. The consequences of derivatives and complex balance-sheet or tax-driven financing schemes are of such magnitude that the parties using these instruments and entering into such contracts want reassurance that any disputes that arise are handled by legal experts who understand these specific financial agreements. For that reason, the choice of law clauses of many agreements give the London or New York courts exclusive jurisdiction over any disputes that arise out of the agreement. Although these courts have judges who are specialised in financial disputes, judgments from these courts are not always easily enforceable in different countries if there are no treaties providing for the recognition and execution of foreign judgments (the European Brussels I Regulation,(3) applicable within the European Union except Denmark, being a notable exception). Furthermore, conflicting judgments of the US Bankruptcy Court for the Southern District of New York(4) and the UK Supreme Court(5) in cases regarding the rights of Lehman investors and derivatives counterparties have recently called into question the reputation of these courts and may have damaged the confidence of financial institutions in the court system as a whole. Doubt was cast as to whether judges fully understand the complexity of the financial instruments at issue and the implications of divergent interpretations. Due to the widespread use of standard documentation, such as the Master Agreement of the International Swaps and Derivatives Association, and the high financial stakes, uniform interpretation and application is considered of paramount importance.
PRIME Finance will cater to the need for professionalism, uniformity, legal certainty and ease of execution. The experience of the listed experts is impressive. Financial institutions should be comfortable when choosing the centre as their preferred arbitration institute. Indeed, the assurance that a possible conflict will be resolved by one or more of the listed experts rather than a panel of unknown judges, coupled with other advantages of arbitration (eg, confidentiality and the possibility of having an arbitral award recognised and enforced in over 140 countries) should soon lead to the first jurisdiction clauses referring to PRIME Finance. Whether the centre's own arbitration rules will be chosen as the rules governing the arbitral proceedings will depend on their content. Parties can always elect any of the existing rules with which they (and their legal counsel) are best acquainted to govern the arbitration.
Herein also lies the challenge for PRIME Finance. As the list of experts of the centre is publicly available, parties to a transaction may simply refer to that list to ensure that the arbitral tribunal has the required expertise, while using the United Nations Commission on International Trade Law rules or another arbitration institute and its rules. Therefore, in order to be competitive, the centre is expected to offer state-of-the-art arbitration rules and a best practice mix of the existing arbitration rules most commonly used.(6)
To maintain a high-profile list, the addition to the list of arbitrators of people who have proven to be experts in their fields or experienced arbitrators will to be needed. PRIME Finance must periodically review the list and ensure that it includes people who are available as trainers, mediators or arbitrators. With the currently listed dispute resolution experts being so prominent, they are likely to be involved in a number of time-consuming arbitrations at the same time. They may be required to attend day-long hearings on the other side of the world, take witness examinations and write awards, all within a reasonable period of time following a request for arbitration. Writing awards may be a new experience for some of the financial experts and they may not make good arbitrators. Thus, parties will want to appoint an experienced arbitrator as part of the tribunal. Therefore, the 19 currently listed dispute resolution experts may not be enough to handle the expected caseload. Furthermore, as a vast number of finance transactions are governed by English or New York law, experts from those jurisdictions may be appointed more regularly. In addition, some of the currently listed experts may be conflicted due to being affiliated with an international firm or institution. Their firm may have an interest in the dispute at hand due to its prior involvement in the setting-up of the transaction in question, or may otherwise have acted for or in some way be related to one of the parties involved. After all, the world of highly complex financial products is small.
As reducing legal uncertainty and fostering stability in the global financial markets are PRIME Finance's aims, it intends to publish extracts of the awards rendered under its auspices. In this way, arbitral awards can serve as precedents for disputes about the same type of agreements and thereby contribute to legal certainty for the market. It is not (yet) foreseen that the centre will scrutinise awards as the International Court of Arbitration of the ICC does,(7) because such review as to form and points of substance would require full-time staff with backgrounds in various jurisdictions and legal systems.
One of the key areas of concern for parties that enter into financial transactions is insolvency, which in many jurisdictions remains the domain of the courts. Therefore, it is likely that at least part of disputes about financial transactions that have gone awry will remain with the courts. Nonetheless, PRIME Finance will be a welcome addition to the arbitration landscape and should flourish thanks to a professional secretariat and well-known financial and arbitration experts, who can use their understanding of financial products to settle disputes involving large amounts of funds and interests.
For further information on this topic please contact Juliette Luycks or Floris van Hees at Clifford Chance LLP by telephone (+31 20 711 9000), fax (+31 20 711 9024) or e-mail ([email protected] or [email protected]).
(1) In the broad meaning of the term – that is, arbitration, mediation and other forms of alternative dispute resolution.
(2) In the Netherlands, such industry-specific institutions include the Court of Arbitration for Metal Industry and Trade, the Court of Arbitration for Construction, Transport and Maritime Arbitration Rotterdam-Amsterdam, the Foundation Dispute Resolution Automation and the Court of Arbitration for Graphic Industry.
(3) Council Regulation 44/2001/EC of December 22 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters.
(4) US Bankruptcy Court for the Southern District of New York, January 25 2010, Lehman Brothers Special Financing Inc v BNY Corporate Trustee Services Limited (In re Lehman Brothers Holdings Inc), 422 BR 407 (Bankr SDNY 2010).
(5) UK Supreme Court, July 27 2011, Belmont Park Investments PTY Limited v BNY Corporate Trustee Services Limited and Lehman Brothers Special Financing Inc,  UKSC 38.