ISDA

1 The International Swaps and Derivatives Association (ISDA) has been an effective proponent of Alternative Dispute Resolution (ADR) for more than three decades.[1] Since 2007, ISDA has considered potential benefits of the use of arbitration in disputes arising from the ISDA Master Agreement for OTC-derivatives. Even before the start of the financial crisis, the German Arbitration Institute (DIS) began to consider these issues and held its Autumn 2007 conference entitled "Arbitration in Financial and Capital Market Transactions" [2]. In light of changed market circumstances, especially the rising number of cases related to the financial crisis and the fact that not only banks but also increasingly businesses represented by the ISDA were counterparties to derivative master agreements, banks have been forced to reconsider their decades-long aversion to arbitration. In March 2009, representatives of ISDA participated in the "Roundtable Discussion Regarding Banks and Arbitration", organized by the DIS. Thereafter, there were further contacts between ISDA and DIS.

2 A first result of ISDA's internal reflections was a modification of the March 1, 2010 Islamic Finance-Version of the ISDA ("ISDA/IIFM Tahawwut Master Agreement"), which was issued by the global standard organization of Islamic money and financial market operations "International Islamic Financial Market" (IIFM) and was largely identical to the 2002 ISDA Master Agreement. Its Section 13 (c) now offers parties the opportunity to have disputes arising out of this Tahawwut Master Agreement be decided not by a state court, but rather by a tribunal that operates under the ICC or any other arbitration rules agreed by the parties [3]. The same applies to ISDA's Mubadalatul Arbaah (Profit Rate) Swap Product Standard.

3 In January and November 2011, ISDA consulted its members in more than 180 countries that use the ISDA Master Agreement on the general advantages and disadvantages of agreeing to resolve disputes by arbitration. So far, Section 13 (b) (i) of the ISDA Master Agreement 2002 provides for the exclusive jurisdiction of the state courts of England or New York, depending on whether the parties have stated that English law or New York law is applicable. In practice, however, even before the 2011 consultation, there were cases where the parties had agreed to the jurisdiction of an international tribunal for the resolution of disputes arising under the Master Agreement [4].

4 In April 2013, as a further result of consultation with its members, ISDA published designs for six model arbitration clauses, each presented in combination with a specific seat and corresponding applicable substantive law [5]. After it had received feedback from its members on these clauses, ISDA published its "2013 ISDA Arbitration Guide" (Version 1.0) on September 9, 2013. The model arbitration clauses recommended in the Guide are primarily drafted for use in the 2002 ISDA Master Agreement. However, the Guide contains additional language which allows to use them also with the 1992 ISDA Master Agreement. The Guide emphasises that the choices of seats and arbitral institutions have been determined on the basis of members' comments as to which to prioritise, that inclusion in the Guide thus does not constitute an official endorsement by ISDA of these seats or arbitral institutions and that the list contained in the 2013 Guide is not closed, i.e. that ISDA does not exclude that model clauses for other reputable seats or arbitral institutions will be included in future versions of the Guide. 

5 In December 2018, ISDA released its updated "2018 ISDA Arbitration Guide" (Version 2.0). The ISDA Guide contains the following model arbitration clauses, whose text has been adjusted to the seats and arbitration rules referred to in these clauses:

6 The arbitration clauses are intended to for use in the "Schedule" of the 2002 or 1992 ISDA Master Agreement. It is, however, important to ensure that the forum selection clause of Section 13 (b) of the 2002 Master Agreement is actually replaced by the arbitration clause, such that it does not result in the simultaneous and contradictory agreement of jurisdiction clause and an arbitration clause in the same Master Agreement. This can happen, for example, when an arbitration agreement is inserted into the addendum of the Master Agreement, but the jurisdiction clause already contained in Section 13 (b) of the Master Agreement is not simultaneously deleted. In such a case, a dispute concerning the question of whether the state court or an arbitral tribunal is competent to resolve the dispute arising out of the Master Agreement would be inevitable. The traditionally arbitration-friendly English courts have indeed held that the concurrence of an arbitration and a jurisdiction clause in one and the same contract is to be resolved in favour of the arbitration clause [6]. It is, however, by no means certain that the courts in other countries would arrive at the same conclusion. The model arbitration clauses for the 1992 and 2002 Master Agreements, as published by P.R.I.M.E. Finance as well as the ISDA Guide, therefore, expressly provide that the jurisdiction clause contained in Section 13 (b) of the Master Agreement must be deleted "in its entirety" and replaced by the sample arbitration clause chosen by the parties. The ISDA Guide emphasises the necessity to delete Section 13 (b) together with the choice of one of the model arbitration clauses recommended in the Guide to avoid confusion as to the true intentions of the parties with respect to the method of dispute resolution selected by them. Even the option clauses previously occasionally encountered in financial contracts and approved by U.S. and English courts [7] that state that only the plaintiff bank has the choice between the initiation of arbitration or court proceedings should be avoided – especially in light of court decisions in France and Russia [8] and the strict requirements of German law concerning general terms and conditions [9].

 

[1] Golden, ISDA and ADR: A Brief History of a Long Relationship, Stockholm Arbitration Yearbook 2020, 11 et seq.

[2] Compare the articles by Berger, Balzer, Gillor, Quinke, and Wiegand in DIS (Ed.), DIS Materialien XIV (2008), Schiedsgerichtsbarkeit in Finanz- und Kapitalmarkttransaktionen, 2008.

[3] If the parties have chosen English law as the substantive law governing their contract, the seat of arbitration should also be London. If, on the other hand, they have chosen New York law, the seat of the arbitration should, likewise, be New York. This connection is not binding, since the parties can freely choose the seat of the arbitration, without reference to the substantive law governing the contract. Compare Berger, RIW 1993, pp. 8 et seq.

[4] Even the Master Agreements of the European Federation of Energy Traders (EFET) for the delivery and acceptance of gas and electricity were highly influenced by the ISDA Master Agreement. They refer to the arbitration rules of the London Court of International Arbitration (LCIA) or to the DIS, depending on whether the parties have selected English or German substantive law to govern their contract. Section 22 of the EFET Framework Convention for the Delivery and Acceptance of Electricity (Option A or Option B, respectively), the supplementary documentation ("Annex and Election Sheet") considers an additional option to § 22 that leaves room for the selection of a court ("Neither Option A nor Option B shall apply and the following provisions shall apply in respect of governing law and dispute resolution: …"), but provides no textual suggestions. If the parties have neither within the Framework Convention nor within the supplemental documentation made a choice for either option, the supplementary document explains that the option in the Framework Agreement that stands for the use of an arbitral tribunal as a means of resolving the dispute will be selected. Section 20.1 of the Master Agreement for the Trade of Liquefied Natural Gas, LNG, on the other hand, provides that this depends on the parties choice of the jurisdiction of the London High Court or an ad-hoc arbitral tribunal in England pursuant to the Arbitration Act of 1996.

[5] See Footnote 2.

[6] Compare AXA Re v. ACE Global Markets Ltd. [2006] EWHC 216 (Comm); Paul Smith Ltd. v. H&S International Holding Inc. [1991] Lloyd's Law Rep. 127 [2006], pursuant to which it was held that the forum selection clause contained in the same contract as the arbitration clause had a merely declaratory effect, confirming the jurisdiction of the English courts at the seat of the arbitration for measures and decisions during (e.g. in the taking of evidence) or after (e.g. setting aside of the award) the arbitration.

[7] Sablosky v. Edward S. Gordon Co., 535 N.E.2d 643 (N.Y. 1989); Law Debenture Trust Corp. Plc v. Elektrim Finance BV [2005] EWHC 1412 (Ch.); Mauritius Commercial Bank Ltd v Hestia Holdings Ltd and Another [2013] EWHC 1328 (Comm). 

[8] Compare Cour de Cassation, Première Chambre Civile, Nr. 983, Decision from 26.9.2012, Banque Privée Edmond de Rothschild; Resolution of the Presidium of the Supreme Arbitration Court of the Russian Federation No. 183/12 dated 19 June 2012 in relation to a dispute between Russian Telephone Company as plaintiff and Sony Ericsson Mobile Communications Rus as defendant.

[9] Cf. German Federal Court of Justice, NJW 1999, 282. According to this judgment, a choice of jurisdiction clause declaring, at the user's option, certain public courts or an arbitral tribunal competent disadvantages the other party to the contract disproportionately (section 307 subsection 1 German Civil Code), since the other party (claimant), which cannot bring the case before the arbitral tribunal, at the moment the case comes before the public court does not know whether the beneficiary of the choice of jurisdiction clause (respondent) will exercise its option. The claim brought before the public court would become inadmissible if the beneficiary were to raise the objection that the parties had agreed to arbitration. Such a clause is only valid if it contains an additional part obliging the user, on demand of the other party, to exercise the option in advance of the initiation of proceedings.