The International Swaps and Derivatives Association (ISDA) has published the 2013 ISDA Arbitration Guide, which sets out an overview of arbitration and includes a number of model arbitration clauses, designed to be used with the 1992 and 2002 ISDA Master Agreements. This follows a two year consultation with regard to the use of arbitration to resolve disputes under these agreements.
Historically, the 1992 and 2002 ISDA Master Agreements have provided for either the London or New York courts to take jurisdiction over disputes arising under the Master Agreement. The publication of this Guide reflects a growing willingness in the financial sphere to use arbitration. A key factor driving the increasing use of arbitration over court proceedings is the ability to enforce arbitral awards virtually worldwide in any of the 149 countries that are signatories to the New York Convention: in many cases enforcing an arbitral award can be more straightforward than attempting to enforce a foreign judgment, particularly in certain emerging markets jurisdictions.
The publication of this Guide follows a period of consultation with industry users, lawyers and arbitral institutions that began in January 2011 and involved a number of meetings with interested parties worldwide. A number of issues relating to the use of arbitration in the derivatives market were raised during this consultation process, including poorly drafted arbitration agreements, a perceived lack of arbitrators sufficiently familiar with derivatives products and a lack of jurisprudence on ISDA-related disputes. The publication of the model clauses addresses the first of these concerns.
The model clauses are designed principally for use with the 2002 version of the Master Agreement, but additional wording is included for adaptation to the 1992 version. The model clauses replace section 13(b) of the Master Agreement.
The clauses provide for arbitration under a range of arbitral institutions/rules:
- ICC (London, New York or Paris seat)
- LCIA (London)
- AAA-ICDR (New York)
- HKIAC (Hong Kong)
- SIAC (Singapore)
- Swiss Arbitration Rules (Zurich or Geneva)
- PRIME Finance Rules (London, New York or the Hague)
In each case the governing law of the Master Agreement is either English or New York law, in line with the existing provisions of the 1992 and 2002 Master Agreements. Where the governing law differs from the seat of the arbitration, a governing law of the separable arbitration agreement is also provided. For example, in the case of an English law Master Agreement providing for HKIAC arbitration it may be unclear which law is supposed to govern the arbitration agreement itself. In this case, the model clause expressly states that the arbitration agreement is governed by Hong Kong law. The same approach is followed for SIAC arbitrations (where Singapore law governs the arbitration agreement), ICC arbitration seated in Paris (where English or New York law applies) and PRIME Finance arbitrations seated in the Hague (where Dutch law applies).
The Guide notes that consideration was given to optional, or unilateral, arbitration clauses, which give one party the ability to nominate either arbitration or litigation once a dispute has arisen. They are often seen in finance documents and are popular with financial institutions. Given the uncertainty that exists in a number of jurisdictions about the validity of such clauses, however, the decision was taken not to include them in the model clauses in the Guide.
The publication of the Guide is a welcome step and reflects the growing use of arbitration in financial disputes. A clear set of model clauses will go a long way towards resolving the issue of poorly-drafted arbitration agreements identified during ISDA’s consultation process, although the specific features of any transaction will of course need to be considered and careful thought given to the most appropriate dispute resolution mechanism in each case.
As to the other issues raised during ISDA’s consultation process, the inclusion of the PRIME (Panel of Recognised International Market Experts) Arbitration Rules makes available a pool of financial experts from a number of jurisdictions to sit as arbitrators1. There is of course nothing to prevent parties from nominating any arbitrator with sufficient experience. As ISDA identified during the consultation process, it expects the number of arbitrators with derivatives experience to grow naturally as more derivatives disputes are referred to arbitration. As ever, parties will need carefully to consider their nominations.
The lack of jurisprudence on derivatives disputes remains an issue more generally, including in relation to litigation. In part this reflects an unwillingness among the financial community to litigate disputes wherever this can be avoided, and in part reflects the fact that reported decisions relating to the detail of derivatives products, at least in England, remain relatively rare. ISDA has previously raised the suggestion of releasing derivative-related arbitral awards in redacted form. This issue is not dealt with in the Arbitration Guide and it remains to be seen whether a workable body of derivatives-related arbitral jurisprudence can be established.
The ISDA Arbitration Guide is available here.