On 9 September 2013, ISDA published its 2013 Arbitration Guide (the Guide), featuring a range of model arbitration clauses for use in ISDA Master Agreements in place of clauses referring disputes to English or New York courts.  The Guide reflects the increasingly global nature of swap and derivative transactions and the need for legal certainty in cross-border transactions. Arbitration improves legal certainty primarily because foreign arbitral awards have significantly greater prospects of cross-border enforcement than foreign court judgments.  Arbitration also allows parties to choose in advance how disputes will be resolved, including the governing law to be applied and whether the dispute will be private.  

Why arbitration?

 The 2002 and 1992 ISDA Master Agreements refer disputes to English or New York Courts (as a matter of practice in Australia, it is common to change this to a reference to an Australian court, together with the governing law).  Referring ISDA disputes to these courts has generally been adopted as a preferred means of dispute resolution when the parties and their assets are located in jurisdictions with similarly developed legal systems.

However, now there are frequently parties to ISDA Agreements which are located in jurisdictions that do not have similarly developed legal systems, and whose courts are unlikely to recognise foreign court judgments.  In these circumstances, arbitration improves enforcement prospects by providing access to the global regime for cross-border enforcement of arbitral awards under the New York Convention. This regime provides a means for enforcement of arbitral awards in approximately 150 countries.  

Other benefits of arbitration include the ability to have the dispute resolved privately, to select the arbitrators who will resolve the dispute, a neutral jurisdiction to hold the hearing and preferred procedural and evidential rules. With the ability to adopt specialist arbitrators and rules, arbitration has long been a preferred means of resolving contractual disputes routinely involving complex technical factual questions (e.g. shipping, construction and industrial relations).

The Guide

 The Guide and model arbitration clauses are a product of a two year consultation with ISDA members and interested parties. The range of model clauses reflects members’ feedback regarding preferred “seats” and rules of arbitration and is not intended to be an exclusive list of options.

The Guide contains eleven variations of the model clauses, allowing users to choose between the following seventeen different combinations of arbitral rules, “seats” of arbitration and governing laws:

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With the exception of P.R.I.M.E Finance, the range of clauses is derived from international arbitration rules and institutions commonly used for resolution of commercial disputes. P.R.I.M.E Finance is a specialist financial dispute resolution institution. Its procedural rules closely follow the UNCITRAL Arbitration Rules, but it also has a panel of experts and arbitrators experienced in financial markets and disputes

Current use of arbitration in ISDA agreements

 Prior to introduction of the Guide, many large financial institutions were already using arbitration as the means of dispute resolution in ISDA agreements when dealing with parties in emerging economies or in locations with less reliable court systems. Parties in Mainland China were routinely incorporating arbitration as the dispute resolution clause in ISDA agreements for cross-border transactions, with London and Hong Kong the preferred seats, the exception being transactions with Hong Kong parties given the reciprocal arrangement between Hong Kong and the P.R.C for enforcement of court judgments. To some extent, therefore, the Guide codifies market practice. However, the Guide is also a recognition of arbitration’s advantages more generally and its importance for cross-border transactions.  

Use of arbitration is likely to increase

When using the ISDA Master Agreement, parties are now prompted to consider the pros and cons of arbitration compared with litigation. In doing so, besides improved enforcement prospects, parties should also consider the following ‘pros’ of arbitration: (1) the ability to have disputes resolved by recognised experts such as those on P.R.I.M.E Finance’s panel. This may be more important in jurisdictions such as Australia, where disputes concerning complex financial products like derivatives arise less frequently and may be less familiar to the judiciary; (2) it can be private and confidential; and (3) it can lead more quickly to a final result which cannot be appealed.

These advantages are significant in most commercial disputes (even those which are not cross-border), but will be particularly valuable if any dispute arising out of an ISDA agreement is publicly controversial.  These ‘pros’ of arbitration have led to increased use of arbitration generally, and can be expected to have a similar result in respect of ISDA agreements. In particular, the market is closely watching the emergence of P.R.I.M.E Finance as a specialist finance dispute resolution institution. The technical expertise offered by P.R.I.M.E Finance is considered a significant advantage over other dispute resolution options.

Conclusion – a jurisdictional survey

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