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The International Swaps and Derivatives Association (ISDA) Master Agreement is a standardised contract for over-the-counter derivatives transactions. It sets out various terms and conditions such as counterparties’ obligations and events that may affect those, payment and deliveries, contract termination, dispute resolution, and a number of other provisions that help create an effective and robust contract. It is designed to provide clarity and reduce risk in the financial markets by offering a comprehensive set of provisions.
Common disputes under the ISDA Master Agreement include disputes in relation to a party’s capacity or authority to enter into the relevant transactions, the suspension of payment obligations, close-out procedures and the calculation of early termination payments, notice provisions and mis-selling claims.
Historically, ISDA Master Agreements have tended to contain jurisdiction clauses conferring jurisdiction on the English or New York courts, these being the options provided for in Section 13 of the 1992 and 2002 ISDA Master Agreements.
Recent developments in ISDA arbitration
Recently, however, there has been a noticeable increase in the use of arbitration. This is a method of dispute resolution by a privately constituted tribunal, typically made up of one or three arbitrators, which culminates in a binding arbitral award.
Some benefits of, for example, an English seated arbitration include privacy (i.e. the proceedings are not public) and the support given to enforcement of arbitral awards internationally by the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
Privacy can be attractive to commercial parties with long standing relationships particularly where a dispute involves a counterparty default or otherwise raises sensitive issues. Resolving disputes by way of private arbitration may help avoid irreparable damage to commercial relationships and a public fallout. Arbitration may also be preferable where there is a need to avoid the risk of setting a legal precedent which binds the wider market. Confining the dispute, and subsequent findings, to the parties would avoid wider market disruption in circumstances where the peculiarities of particular case may require the tribunal to adopt a position which runs contrary to the common understanding of ISDA terms in the market and/or would require significant operational changes to implement in the wider market.
As to the enforcement of arbitral awards, the New York Convention provides a (near) global regime for the cross-border enforcement of arbitral awards under which contracting states accept obligations to recognise and enforce arbitral awards subject to limited exceptions. Currently, it has over 170 contracting states. This is a significant attraction for using arbitration in cross-border transactions, particularly where enforcement in emerging markets may be required (where it can be more difficult to enforce a foreign judgment).
As disputes involving the construction of ISDA Master Agreements often involve little, if any, contextual evidence other than the ISDA User’s Guides, arbitration which is procedurally more flexible than litigation and can result in greater efficiency in terms of saving time and costs.
Arbitration allows the parties to choose a neutral forum and tribunal. For instance, where one of the parties is a State, or State entity, then may refuse to submit to the courts of another State as a matter of principle. Arbitration in a neutral venue may be the only alternative to litigation in the courts of the State
What might an arbitration arising out of an ISDA Master Agreement look like?
The agreement to arbitrate
To support users, ISDA has introduced an Arbitration Guide which provides guidance on the use of arbitration clauses with ISDA Master Agreements and includes model arbitration clauses for a large number of arbitration institutions (for example, the LCIA, ICC, SIAC and HKIAC) and seats around the globe. The model arbitration clauses provided are intended to be inserted into the Schedule to a Master Agreement and so to form part of that agreement.
Institutional arbitral rules provide a procedural framework for the arbitration, often in the form of powers at the tribunal’s discretion, and involve administrative back-up from the relevant institution. The institution itself will not decide the dispute; rather its role is to assist with the appointment of the tribunal (including selecting arbitrators where a party fails to exercise a right to do so, or where the parties are unable to agree), and the administration of the proceedings (for example, taking deposits on account of the arbitration costs and fixing the arbitrators’ fees).
How is an arbitration run?
The specific steps in commencing an arbitration proceeding will depend on the chosen arbitration rules; but let’s assume the LCIA clause in the Guide has been used.
In such a case. the arbitration is commenced on the date the LCIA Registrar receives the Request for Arbitration (RFA) provided that the LCIA has received the registration fee. There is generally no standard form, or required length, for a Request, but in practice Requests are less extensive than particulars of claim, unless the Claimant intends to elect in due course that its Request stands as its Statement of Case. The RFA typically includes details about the dispute, the parties involved, and the relief sought. The respondent(s) must deliver its Response to the RFA within the stipulated period along with any counterclaims.
Under the LCIA Rules, if the parties have opted for three arbitrators in their arbitration agreement, and (as is the case in the LCIA clause in the Guide) their agreement calls for party nominations, then these are made, respectively, in the RFA and Response. Nomination of arbitrators is important as these individuals will decide the case including, in the derivatives context, technical issues in dispute such as disputed close out amounts. Criteria for selection often include expertise in the relevant field of the dispute, impartiality, and availability. Parties can challenge the appointment of an arbitrator if circumstances exist that give rise to justifiable doubts regarding their impartiality or independence.
Once the tribunal is constituted, it usually contacts the parties and may schedule an early procedural hearing to agree upon a timetable for the proceedings failing which the tribunal itself sets the timetable and to deal with other procedural issues (for example, whether or not proceedings against another party such as a counterparty’s guarantor should be consolidated into the same arbitration).
In arbitration there is generally no remedy equivalent to default judgment, but the LCIA Rules provide other ways to speed up proceedings, such as expedited formation of the tribunal, or early determination of meritless arguments.
The procedural timetable lists significant stages, such as dates for meetings and hearings, deadlines for filing written submissions, document production, witness statements and expert evidence. Witness statements and documentary evidence are often required to be submitted together with written submissions. The LCIA Rules permit for a flexible approach to document production, ranging from extensive disclosure to limited discovery.
The parties may agree in writing for a documents-only arbitration or oral hearing. Oral hearings typically involve cross-examination of witnesses and experts, as well as oral submissions by counsel. In complex cases, there may be post-hearing submissions before an award is issued.
27 June 2024
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