Arbitrating ISDA Disputes: A Bright Future for Derivative Markets

[Saurav Roy is a final-year law student [V B.A.LL.B] at ILS Law College, Pune]

The International Swaps and Derivatives Association (“ISDA”) is the go-to trade organisation for participants in the over-the-counter (“OTC”) derivatives market. The ISDA Master Agreement (“Master Agreement”) is a standardised agreement which allows participants to enter into these derivative transactions. Although the Master Agreement is preliminarily viewed as a useful tool for banks and financial institutions, it has found usage in several transactions entered into by counterparties (entities which normally have some exposure to financial risk).

What makes the Master Agreement useful is that it sets out standard terms that will apply in each set of transactions between the parties, thus eliminating the need for re-negotiation of terms at the onset of a transaction. This is made abundantly clear in the Agreement itself.[1]

Arbitrating Disputes under the Master Agreement

It has been over five years since the ISDA published its Arbitration Guide, which contains a general guidance on arbitration, along with a selection of model arbitration clauses that may be incorporated into the Master Agreement. ISDA’s lengthy consultation with stakeholders, coupled with the intent to include arbitration clauses in their documentation, showcases a broader trend towards more widespread acceptance of arbitration in financial markets.

Moreover, parties prefer arbitration owing to the ability to appoint arbitrators who have experience with complex financial products, and a working knowledge of ISDA documentation. Additionally, what gives arbitration an advantage over any national court process is the freedom to appoint industry and product-specific experts, who can effectively assist the adjudicatory process in highly technical derivative disputes, an option which may not always be readily available in court.

A few relevant points pertaining to arbitrating derivative disputes should be considered:

a. Enforcement mechanisms

Courts in European jurisdictions (United Kingdom, Germany) have traditionally been preferred for derivative disputes. In fact, in a bid to cement their position as a preferred forum, English courts have created a special ‘Financial List’ that is dedicated to handling disputes arising out of financial markets.

The New York Convention has been ratified by various countries, and provides for an easier option in terms of enforcement of awards, as compared to parties entering into agreements relating to cross-border enforcement of orders arising out of their disputes. In cases of emerging markets (such as the derivatives market), the choice of arbitration vis-à-vis other dispute resolution mechanisms is a better one, owing to ISDA’s increasingly diverse membership in terms of counterparties and jurisdictions both.

b. Limited grounds for appeal and procedural flexibility

In most jurisdictions, the grounds on which an award can be appealed are fairly limited, and this helps in providing finality to the adjudication of the dispute between the parties. Moreover, arbitration provides parties with a greater amount of exposure when it comes to determining how the dispute will be resolved. This can be extremely advantageous when deciding an approach towards disclosure of information, as the process can be made less onerous for parties or institutions that will not have to face the burden of extracting, analysing, and eventually releasing documents.

c. Lack of binding precedent

One potential downside of opting for arbitrating disputes pertaining to financial markets is that, as compared to litigation, arbitration does not tend to give rise to persuasive precedent, which may be used by parties for their commercial and legal stances. Most awards are not publically available, and this could be a major issue for parties that enter into several Master Agreements, leading to them having to arbitrate the same point multiple times against different counterparties.

The 2018 Arbitration Guide

ISDA has recently released the 2018 ISDA Arbitration Guide (“2018 Guide”), which can be termed as an enhancement of the original version (released in 2013). It has been revamped in order to reflect the changes in the arbitration space globally. The changes to the Arbitration Guide are summarised below:

– There has been an addition to the model arbitration clauses, with a London Court of International Arbitration (“LCIA”) Rules clause, which can be used with a Dublin seat when used by the Master Agreement governed by Irish law, in light of Brexit. Also, the new Guide includes model clauses for the following additional institutions: Stockholm Chamber of Commerce Rules (Stockholm seat); Dubai International Finance Centre – London Court of International Arbitration Rules (DIFC seat); and Vienna International Arbitration Centre Rules (Vienna seat).

– The 2018 Guide addresses the issue of summary judgements, which has found a place in some institutional arbitration rules.[2] In a famous English case,[3] an arbitral tribunal summarily dismissed certain fraud-based claims to a guarantee, indicating that tribunals and courts are now willing to support the use of such summary procedures. It is pertinent to note that the 2018 Guide states that as summary procedures can affect rights of parties relating to due process of law, applicants must satisfy a very high threshold to succeed in a demonstration that a claim should be summarily dismissed.

– The 2018 Guide includes a revised section on multi-party and multi-agreements, recognising that certain transactions which take place under a Master Agreement may also involve parties that are not parties to the Master Agreement, thus not binding them to the arbitration agreement therein.

Concluding Observations

Disputes under a Master Agreement often raise complex and difficult questions, and the Arbitration Guide has been fairly successful in facilitating parties to come up with drafting that is market-standard, owing to an increased usage of international arbitration. The issue of a lack of jurisprudence could lead to increased uncertainty, and some parties may prefer a body of case-law which can assist them in the interpretation of the Master Agreement and other ISDA documentation. For such cases, parties may agree to publish their awards (or a redacted version of the award), as is facilitated by the P.R.I.M.E Finance Rules (Panel of Recognised International Market Experts in Finance). Also, the Arbitration Guide has sparked relevant academic discourse on the choice of seat and arbitration institution in matters which are becoming increasingly cross-border in nature.

Saurav Roy

[1] Section 1(c) of the Agreement states: “All transactions are entered into in reliance on the fact that this Master Agreement and all Confirmations form a single agreement between the parties … and the parties would not otherwise enter into any Transactions”.

[2] See Singapore International Arbitration Centre Rules, art 29.

[3] Travis Coal Restructured Holdings v Essar Global Fund [2014] EWHC 2510 (Comm).

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