Disputes 2016: Arbitration

2016 is likely to see increasing take-up of arbitration as the contractually agreed dispute resolution process in finance agreements. In a survey conducted jointly by Simmons & Simmons and Legal Business in 2015, 25% of in-house counsel at Financial Institutions said they expected to use the PRIME Finance experts panel for dispute resolution in the coming year, with 33% expecting to use other forms of arbitration. While these percentages may seem low, they represent rapid growth from a very low starting point only a few years ago.

As Financial Institutions increase their deal flow in emerging markets, it is not always proving possible to agree with counterparties, particularly sovereign ones, that the courts of an established commercial centre should have jurisdiction over any disputes. Even where this is an option, many have realised that an English or New York judgment is almost impossible to enforce in many parts of the world, making the more portable arbitral award far more valuable.

In late 2013 the International Swaps and Derivatives Association (ISDA) published its Arbitration Guide. This contains model arbitration clauses for use with the ISDA 2002 Master Agreement and ISDA 1992 Master Agreement (Multicurrency: Cross Border), in each case as an alternative to submitting to the New York or English courts. The ISDA model arbitration clauses allow for a variety of institutional rules to be adopted, as well as a choice of seat for each. The popularity of the model arbitration clauses is evidenced by the demand from users for additional arbitration clauses (providing for other institutions, such as those is Stockholm and the Dubai International Financial Centre) to be included in the guide.

As contractual disputes tend to follow some time after agreements are entered into, it is perhaps unsurprising that few disputes under ISDA arbitration clauses have yet been seen. However, 2015 did see a US$1.7bn credit defaults swap dispute determined by arbitration in New York on appeal from ISDA’s credit default swap determinations committee, among a handful of other claims.

That dispute was decided by a panel of three experts drawn from PRIME Finance, a body formed in 2011 to provide financial experts to resolve disputes through arbitration. As well as being an option as an institution under the ISDA model clauses, PRIME Finance has published its own forms of agreement designed to amend existing ISDA Master Agreements to incorporate arbitration clauses in place of the original jurisdiction clauses. In December 2015 PRIME Finance signed an agreement with the Permanent Court of Arbitration (PCA) in the Netherlands to enable the PCA to administer arbitrations under PRIME Finance rules, anywhere in the world across the PCA’s network.

Numbers of ISDA Master Agreements and other financial markets agreements specifying arbitration for dispute resolution are still small, but the growth is now undeniable. Expect to see more Financial Institution involvement in arbitration in 2016.