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ISDA drafts model arbitration clauses for use with Master Agreements

The International Swaps and Derivatives Association (ISDA) (advised by Allen & Overy LLP) has published six alternative model arbitration clauses for use with the 1992 and 2002 ISDA Master Agreements, along with guidance about incorporating an arbitration clause successfully into a Schedule to a Master Agreement. If you would like to discuss these model clauses with us, please let us know.

Growth in the use of arbitration in the financial sector

ISDA’s model clauses reflect a growing trend towards using arbitration to resolve disputes in the financial sector. Historically, finance parties have preferred to litigate disputes, but recent years have seen an increasing use of arbitration. Although a number of factors have contributed to this growth, most of all it has been driven by the greater ease of enforcing an arbitral award, as opposed to (say) an English or New York court judgment, in many jurisdictions. Specifically, an arbitral award rendered in one signatory state to the New York Convention is (in theory at least) enforceable in any of the other 149 signatory states, subject to limited exceptions. No such global regime exists for the enforcement of court judgments (although an effective regional regime is provided in the EU by the Brussels Regulation).

Lack of arbitration provisions in existing ISDA documentation

The 2002 and 1992 ISDA Master Agreements both provide for the jurisdiction of the English or New York courts. This standard works well in developed economies but does not reflect the preference for arbitration in Asia and emerging markets, where it can be difficult to enforce a judgment of the English or New York courts.
Consequently, parties have been incorporating arbitration clauses into derivatives transactions for some time. However, difficulties have arisen. The classic error has been to include an arbitration agreement in the Schedule but fail to exclude the jurisdiction clause in Section 13(b) of the Master Agreement. On an unsympathetic interpretation, this would create parallel jurisdiction and arbitration clauses, and a risk of the arbitration clause being regarded as ineffective. Parties have sometimes also failed to appreciate the need to amend the service of process and waiver of sovereign immunity provisions in Sections 13(c) and (d).

In January 2011, ISDA launched a consultation process about the use of arbitration in connection with ISDA documentation. The feedback that it received was in favour of ISDA producing model arbitration clauses for use with the Master Agreement, and associated guidance.

ISDA’s model arbitration clauses

As a result of the feedback that it received, on 17 April 2013 ISDA published six alternative model clauses, with associated guidance. The model clauses offer various combinations of the applicable arbitral rules, seat and governing law:

  • ICC Rules, London seat and English governing law;
  • ICC Rules, New York seat and New York governing law;
  • LCIA Rules, London seat and English governing law;
  • HKIAC Rules, Hong Kong seat and an option of English or New York governing law;
  • SIAC Rules, Singapore seat and an option of English or New York governing law; and
  • AAA-ICDR Rules, New York seat and New York governing law.

The model clauses are drafted to be incorporated into the Schedule of a new ISDA Master Agreement. However, some simple amendments would enable a model clause to take effect as an amendment to an existing ISDA Master Agreement. 
The model clauses provide basic arbitration provisions and make the essential amendments to Sections 13(b), (c) and (d) of the Master Agreement that are needed to reflect the use of arbitration rather than court litigation. ISDA reported that the feedback from its consultation showed little appetite for more complex alternatives, such as:

  • an "optional" arbitration clause (ie where one or both parties can choose either to litigate or arbitrate a dispute after it has arisen). This is perhaps unsurprising in the light of recent court decisions in Russia and France see Complex jurisdiction clauses – risks and options (January 2013 Client Publication) and The end of the optional jurisdiction clause in Russia? (October 2012 Litigation Review); and
  • a "fast-track" arbitration clause, providing for an accelerated procedure.

ISDA has explained that the combinations set out above reflect the preferences of ISDA members. There is nothing to prevent parties from amending the model clauses to create further combinations. For example, there is no model clause providing for arbitration under the rules of P.R.I.M.E. Finance see New Dispute Resolution Panel for Finance Disputes: P.R.I.M.E Finance begins work (January 2012 Litigation Review). P.R.I.M.E. Finance has published its own model arbitration clauses for use with a Master Agreement: one providing for a London seat and English governing law, a second clause providing for a New York seat and New York governing law; and a third clause providing for a Hong Kong seat and Hong Kong governing law. ISDA has acknowledged P.R.I.M.E. Finance’s model arbitration clauses and invited ISDA members to provide further feedback on the desirability of ISDA preparing a model clause for arbitration under the P.R.I.M.E. Finance rules.

Comment

ISDA’s model clauses satisfy a need in the market for basic arbitration clauses that can be inserted into ISDA documentation. In particular, they should enable parties to avoid the problem of competing dispute resolution provisions, and the frustrating disputes that can ensue about whether the court or an arbitral tribunal has jurisdiction. By contrast, the model clauses do not provide draft wording for more complex arbitration provisions. Such provisions may be suitable for a particular transaction, but obtaining specialist advice is recommended.
Members’ feedback is unlikely to result in significant amendments to these clauses. Nevertheless, the final model clauses and guidance are expected to be finalised and published after June 2013.

Further information

This case summary is part of the Allen & Overy Litigation Review, a monthly update on interesting new cases and legislation in commercial dispute resolution.  For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 (0)20 3088 3710. ​

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