Following extensive consultation with its members, in September 2013 the International Swaps and Derivatives Association (“ISDA”) published seven model international arbitration clauses (the “Model Arbitration Clauses”) for optional use with swaps and derivatives contracts using ISDA’s 2002 Master Agreement and 1992 Master Agreement (Multicurrency-Cross Border)(each a “Master Agreement”). The Model Arbitration Clauses can be found in the 2013 ISDA Arbitration Guide (the “Arbitration Guide”) which supplements and amends the corresponding guidance in the ISDA User’s Guides.

ISDA’s decision to provide optional arbitration clauses for use with the Master Agreement, alongside historically popular English and New York court jurisdiction clauses, reflects the increasing importance of emerging markets in international finance as well as the advantages that arbitration can offer. This OnPoint reviews the Model Arbitration Clauses. The potential advantages of arbitration in resolving international financial disputes, including those arising out of the Master Agreements, are discussed in more detail in Dechert’s Financial Transactions and Arbitration.

ISDA Arbitration Consultation: Demand for Model Arbitration Clauses

Between 2011 and 2013 ISDA conducted a wide-ranging consultation of its members regarding the use of arbitration for disputes arising out of its Master Agreements1. As noted in the Arbitration Guide, it was evident from ISDA’s consultation process with its members and other industry participants - including Dechert LLP - that there was strong demand for an arbitration option for use with the Master Agreements.

Relevantly, ISDA noted the following reasons why arbitration, rather than the historically preferred English or New York court litigation, of swaps and derivatives disputes is likely to continue to increase:

  • In recent years, there has been a surge in the frequency with which arbitration clauses are included in a range of financial contracts, and in the number of financial disputes referred to arbitration.
  • Arbitration is being increasingly used in relation to privately negotiated or over-the-counter ("OTC") derivative transactions entered into under master netting agreements, such as the Master Agreements.
  • Arbitration is increasingly popular in Master Agreements involving parties established or operating in emerging market jurisdictions.
  • Arbitration benefits from a much more comprehensive regime for the cross-border enforcement of arbitral awards than exists for court judgments. As ISDA noted, “[s]ucceeding on the merits of a dispute may prove to be a pyrrhic victory if it is not possible to enforce the resulting judgment.”
  • Because many counterparties in emerging jurisdictions are increasingly reluctant for disputes to be resolved in the English or New York courts, arbitration is often a more (or the only) acceptable alternative.
  • Regulatory pressure for the development of clearing mechanisms for OTC derivatives may also encourage the use of arbitration. The clearing rules of most of the world’s clearing houses (for securities and commodities trading, exchange-traded futures and options, and now many OTC derivatives) provide for disputes to be resolved by arbitration.

Not only is more business being transacted by western financial institutions in the emerging and frontier markets, intra-emerging market financial markets also now play a significant role in the world economy and will only continue to grow in importance. This globalisation of financial markets introduces important considerations for market participants when choosing the appropriate dispute resolution mechanism in their Master Agreement (and cross-border transactions generally).

Critically, court judgments - even those from London and New York - are not enforceable everywhere (or at least not easily). Yet market participants need to be able to collect their debts: pyrrhic victories are valued little, if at all. The “enforcement premium” offered by arbitration is that over 140 countries have ratified the 1958 UN Convention on Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”), which provides for the streamlined recognition and enforcement of arbitral awards in those jurisdictions (subject to limited exceptions). Moreover more U.S. and non-U.S. counterparties (such as public pension plans and state-owned or controlled enterprises) - perhaps with more bargaining power than ever - may simply reject English or New York litigation. Confidentiality and the procedural advantages of arbitration, such as forum neutrality and the finality of arbitral awards, are also increasingly favored.

The result is that the use and necessity of arbitration as a dispute resolution mechanism in financial transactions has increased markedly (particularly in the international arena).

Model Arbitration Clauses

These realities are reflected in ISDA’s recent publication of a range of optional arbitration clauses, which are intended to form part of the Schedule to a Master Agreement.

English and New York law have historically been the governing law of choice for international financial agreements and, reflecting feedback from ISDA members, the Model Arbitration Clauses continue to favour English and New York law. The seat (or place) of an arbitration is also a critical feature of any arbitration agreement and similarly the Model Arbitration Clauses provide multiple options for London and New York seated arbitration, together with Paris, Zurich/Geneva, The Hague, Hong Kong, and Singapore, alongside the leading arbitration rules (including ICC, LCIA, AAA-ICDR, HKIAC, SIAC, Swiss Arbitration, and P.R.I.M.E. Finance, as defined below). Key preliminary features of each of the Model Arbitration Clauses include the following:

  • The clause contains a “governing law” provision specifying the governing law of the Master Agreement and the Model Arbitration Clause. The clause implements the Governing Law clause in the Master Agreements (Section 13 (a)) and the Schedules thereto.
  • The clause eliminates the Jurisdiction clause of the Master Agreement (Section 13(b)) and replaces it with the Model Arbitration Clause. As the Arbitration Guide notes, the jurisdiction clauses in Section 13(b) of the Master Agreement must be removed; otherwise the Master Agreement will contain both jurisdiction and arbitration clauses—which can risk making ineffective the arbitration clause.
  • To reflect the choice of arbitration, the clause amends the Process Agent (Section 13(c)) and Waiver of Immunities (Section 13(d)) clauses and definition of "Proceedings" (Section 13 (b)).

Several of the Model Arbitration Clauses have additional elections to be made within them (such the seat or governing law). The Model Arbitration Clauses provide for use of the leading institutional arbitration rules, and continue to reflect the demand for English and New York governing law and London and New York as preferred seats for disputes arising out of the Master Agreement. The following combinations of arbitral rules, governing law, and seat are offered:

  1. Rules of Arbitration of the International Chamber of Commerce (“ICC”)

(Arbitration Guide, Appendix A)

  1. Governing law: English law; Seat: London
  2. Governing law: New York law; Seat: New York
  3. Governing law: English or New York law; Seat: Paris
  1. Arbitration Rules of the London Court of International Arbitration (“LCIA”)

(Arbitration Guide, Appendix B)

  1. Governing law: English law; Seat: London
  2. International Arbitration Rules of the American Arbitration Association—International Centre for Dispute Resolution (“AAA-ICDR”)

(Arbitration Guide, Appendix C)

  1. Governing law: New York law; Seat: New York
  1. Administered Arbitration Rules of the Hong Kong International Arbitration Centre (“HKIAC”)

(Arbitration Guide, Appendix D)  

  1. Governing law: English or New York law (arbitration clause expressly governed by Hong Kong law); Seat: Hong Kong
  1. Arbitration Rules of the Singapore International Arbitration Centre (“SIAC”)

(Arbitration Guide, Appendix E)  

  1. Governing law: English or New York law (arbitration clause expressly governed by Singapore law); Seat: Singapore
  1. Swiss Rules of International Arbitration (“Swiss Arbitration”)

(Arbitration Guide, Appendix F)  

  1. Governing law: English or New York law; Seat: Zurich or Geneva
  1. Panel of Recognised International Market Experts in Finance Arbitration Rules (“P.R.I.M.E. Finance”) (Arbitration Guide, Appendix G)
  1. Governing law: English law; Seat: London
  2. (Governing law: New York law; Seat: New York
  3. (Governing law: English or New York law (arbitration clause expressly governed by Dutch law); Seat: The Hague

ISDA is careful to note that the Model Arbitration Clauses were a response to member feedback, and inclusion in the Arbitration Guide is not an endorsement of the clauses (or combinations of rules, governing law, and seats). Parties are free to choose other arbitral rules, governing laws, and/or seats, or to continue to use the Jurisdiction and related clauses in the Master Agreements. Indeed, the Model Arbitration Clauses are to provide guidance only and parties are free to modify the Model Arbitration Clauses as they devise and negotiate. As the Arbitration Guide notes, whether the Model Arbitration Clauses are adopted or market participants negotiate their own terms, in all cases parties should seek appropriate legal advice to select the appropriate dispute resolution mechanisms for their circumstances.

Read more: Financial Transactions and Arbitration (PDF)