Financial services arbitration-the future

Arbitration analysis: Andrew Taplin, partner in Nabarro's dispute resolution team and Lexis PSL Arbitration contributor, and Nabarro associate Byron Phillips share their views on the 2013 International Swaps and Derivatives Association (ISDA) Arbitration Guide (the ISDA 2013 Arbitration Guide).

Background

ISDA website

ISDA is a trade organisation of participants in the market for over-the-counter derivatives. It is headquartered in New York, and has created a standardised contract (the ISDA Master Agreement) for use by parties entering into derivatives transactions.

ISDA 2013 Arbitration Guide

On 9 September 2013, ISDA published the 2013 edition of its guidance on arbitration in the context of disputes arising out of its documentation and model arbitration clauses. This development reflects a growing interest in arbitration in the financial services sector.

This article considers the potential for increased use of arbitration in cross-border financial services disputes, the reasons driving change and the implications for key stakeholders within the financial services sector.

A tradition of litigation over arbitration

Financial institutions have historically favoured litigation over arbitration for resolving disputes connected with complex financial transactions/products. This has been driven by a number of perceived advantages of litigation, notably:

  • the civil procedure rules of a number of jurisdictions (particularly England and Wales and New York) permit the courts to grant summary judgment in circumstances where a claim or defence has no real prospect of success, and default judgment where a defendant does not take part in the proceedings. Such procedures are not generally available in arbitral proceedings. Financial institutions have, therefore, traditionally perceived arbitration to be less efficient and cost effective for straightforward or nuisance disputes.
  • the courts (again, particularly in England and Wales and New York) take a strict approach to enforcing contractual obligations, seeking wherever possible to honour commercial bargains. They are also often perceived as 'pro bank'.
  • litigation creates precedent, often preventing disputes on the same issues arising in the future (or, at least, giving greater clarity as to the likely outcome).
  • the quality of judges hearing cases in, for example, the Commercial Court in London, is extremely high. As ISDA's guidance acknowledges, they have a wealth of experience in the sophisticated and complex financial products that are often the subject of dispute.

QMU/PWC Survey

Between 1 March 2012 and 31 December 2012, Queen Mary University and PricewaterhouseCoopers surveyed corporate counsel in the financial services sector on their experience of, and views in relation to, international arbitration (the QMU/PWC Survey). They found that litigation remains the 'clear favourite' method of dispute resolution for the financial services sector. However, it is noteworthy that arbitration was ranked as the 'most preferred' method of dispute resolution other than litigation. Indeed, 69% of those surveyed either strongly agreed or agreed that arbitration is well-suited to the financial services sector. This is, of course, still significantly less than in other industries, such as construction and energy.

Benefits of arbitration in the FS sector

Choosing to arbitrate your dispute may have certain advantages:

  • neutrality
  • finality: but, as discussed above, this can also be viewed as a weakness as compared to litigation.
  • procedural flexibility: arbitral proceedings can, under some institutional rules, provide for accelerated timelines (eg P.R.I.M.E., ICC and LCIA) which can provide comfort for those concerned by the unavailability of summary and default judgment.
  • confidentiality: while this feature of arbitration appears at first to conflict with the desire for clear precedential value (see above), a number of arbitral institutions are building up precedent banks of anonymised decisions. The aim being that banks and major financial institutions can avoid bad publicity from a dispute but still retain precedent value.

FS expertise

Arbitration affords parties the ability to choose a tribunal with specialist financial expertise to hear disputes. Given the complex nature of financial transactions and products, this may be a key advantage. Indeed, the QMU/PWC Survey found that in financial services, the number one benefit of arbitration 'is in the expertise of the decision maker'. The establishment of P.R.I.M.E. Finance (that centres its offering on the specialist expertise of its panel members) is indicative of the growing popularity of arbitration (and other methods of alternative dispute resolution) in the financial services sector.

Enforceability of awards

As financial markets are truly globalised and there is a prevalence of cross-border transactions (often involving emerging markets), enforceability of judgments is a key issue for financial sector stakeholders. The New York Convention (to which 150 countries are signatories) provides for the reciprocal enforcement of arbitral awards. Therefore, enforcing awards in different jurisdictions is often easier than enforcing foreign judgments.

The ISDA 2013 Arbitration Guide

Against this background, on 9 September 2013, ISDA published its 2013 Arbitration Guide.

The dispute resolution clauses of ISDA's Master Agreements have historically provided an option to choose arbitration over litigation to resolve disputes. The development of ISDA documentation from roots in the common law systems of England and Wales and New York in particular and the expectation of those operating in the market continues. English or New York law are the most commonly selected governing laws (and forums) for disputes. However, with publication of the Arbitration Guide, ISDA is reflecting the growing use and importance of arbitration in this sector.

The model clauses in the guide provide for arbitral seats in Paris, Hong Kong, Singapore, Geneva, Zurich and The Hague, jurisdictions for which particular interest was raised in the consultation. This reflects the growing importance of these centres for ISDA users. ISDA's consultation revealed that key stakeholders were interested in using arbitration in swaps and other derivatives disputes and that the publication of model arbitration clauses would be helpful.

Content

The ISDA 2013 Arbitration Guide contains an overview and explanation of arbitration and its suitability for swaps and other derivatives disputes, together with 11 model arbitration clauses (see table below).

ISDA model arbitration clauses

[table id=3 /]

Looking ahead-arbitration over litigation?

The model clauses are primarily designed for the 2002 Master Agreement, but may also be used in the 1992 Master Agreement. They have been drafted on the assumption that they will be used in new agreements but can also be inserted into existing agreements by agreement of the parties. Interestingly, and helpfully, the ISDA 2013 Arbitration Guide also contains an optional clause for parties to adopt in transactions. Essentially, it is a clause which allows one or both of the parties to choose between litigation and arbitration once a dispute has arisen, affording parties greater flexibility.

There is no doubt that arbitration is becoming more prevalent in the financial services sector, and ISDA's guide, at the very least, will raise the profile of arbitration amongst users of its documentation and lead those users to consider it as an alternative to the courts.

Ultimately, it is up to the contracting parties to determine which method of dispute resolution is best suited to their particular transaction at the outset (particularly taking into consideration issues such as the location of a counterparty and its assets). Many institutions will undoubtedly remain committed to the courts as the appropriate forum for resolving their disputes. However, confidence in using arbitration as an alternative is clearly increasing.

Filed Under: Arbitration

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