P.R.I.M.E. Finance
History
1 The idea of establishing P.R.I.M.E. Finance ("Panel of Recognized International Market Experts in Finance") was first presented in December 2007 by Jeffrey Golden, a former senior partner of an English City Law Firm and a member of ISDA. It was presented as a plan for the establishment of a "World Financial Court" for international financial disputes [1]. At the same time, the International Swaps and Derivatives Association (ISDA) and the German Institution of Arbitration (DIS) were considering the use of arbitration for the resolution of financial disputes between commercial customers. In the decentralized, unpredictable, and slow practice of national courts (whose decision-making was often disconnected from the necessary expertise related to the globally used standard contracts, upon which the litigation was based [2]), coupled with the fact that judgments of national courts lack a global enforcement convention and are, therefore, not globally enforceable, Golden perceived a systemic legal risk in international financial markets law. Ultimately, this risk is based on the divergence of the purported global standardization of the contractual practice on the one hand [3] and the risk of heterogeneous and decentralized decisions by national courts on the other [4]. This relationship is also highlighted by the English Commercial Court, in connection with the enforcement of an arbitration clause contained in an ISDA Master Agreement:
"This case concerns (a) an arbitration clause providing for international arbitration pursuant to the rules of one of the major international arbitration institutions [LCIA] in (b) a standard form master agreement of a global trade association [ISDA] whose forms are used extensively in international finance and international trade. If, …, now or in the future, in local markets, effect were not to be given to such an arbitration clause in such a master agreement, there is a real risk that the development and maintenance of an efficient and productive worldwide market in derivatives and swaps might be undermined."[5]
2 This threat to the purported standardization that was attempted to be achieved through the Model Contract and that was caused by the divergent decisions of national courts represents the classical problem in the field of international uniform law, where the regional or global approach to legal integration is often thwarted by decisions of national courts [6].
3 The financial markets' need for Golden's initiative to establish an international arbitral institution for financial disputes was discussed among representatives of the "Buy-Side", including market experts, lawyers, and regulators, at various regional conferences in The Hague, London, New York, Paris, Frankfurt, and Dubai in 2010 and 2011 [7]. On January 16, 2012, at an event at the Peace Palace in The Hague, P.R.I.M.E. Finance opened as a foundation under Dutch law.
4 In 2015, P.R.I.M.E. Finance entered into a Cooperation Agreement with the Permanent Court of Arbitration (PCA) in The Hague pursuant to which it was agreed that cases brought under the P.R.I.M.E. Arbitration Rules would be administered by the PCA. At that point, the rules were revised in various respects, essentially becoming institutional – with the PCA as that institution, but P.R.I.M.E. offering its panel of experts. This is a unique collaboration – and combination of expertise. As a consequence, the Head of Secretariat of P.R.I.M.E. Finance has an office in the Peace Palace as well as the title of PCA legal counsel.
Arbitration Rules
5 The P.R.I.M.E. Arbitration Rules correspond to the tried and tested UNCITRAL Arbitration Rules, which were revised in 2010 and adapted to the specificities of financial market disputes [8]. The highly experienced Secretary General of the PCA [9] acts as the Appointing Authority in situations where the parties need support from a third party (such as in difficulties with the constitution of the arbitral tribunal). Like the ICC Rules of Arbitration, the P.R.I.M.E. Arbitration Rules also allow the parties to shorten deadlines contained therein, in order to expedite the procedure. Parties may also call an Emergency Arbitrator before the constitution of the arbitral tribunal. The parties and the Appointing Authority are not limited to appointing only candidates of the P.R.I.M.E. list of experts. The parties can also freely select the seat of arbitration pursuant to the P.R.I.M.E. Arbitration Rules. Failing such choice, the arbitral tribunal is free to make such a choice. Thus, such arbitration proceedings can take place all over the world.
6 If the seat is set in the Netherlands, the parties can request that the arbitral tribunal adopt interim measures. Such a decision is possible pursuant to Art. 1043b of the Dutch Code of Civil Procedure (Wetboek van Burgerlijke Rechtsvordering). Pursuant to Art. 1043b (4) of the Dutch Code of Civil Procedure such a decision is deemed to be an arbitral award. It may thus be enforced in the Netherlands like any other award. However, because that provisional decision is not final, it may not be enforced outside the Netherlands under the New York Convention for the Recognition and Enforcement of Foreign Arbitral Awards of 1958. By unanimous request from the parties, the tribunal may decide to render a final award on the merits instead of a "preliminary award" (Art. 1043b (5)). That final award may then be enforced abroad under the New York Convention. To benefit from that enforcement system, the tribunal may, pursuant to Art. 1043b (6) and upon a unanimous request from the parties, convert a "preliminary award" into a final award.
Parties and Possible Causes of Action
7 Financial institutions of all kinds, funds, and other market participants on the "Buy Side", development banks, multinationals, medium-sized enterprises, and other financial institutions, including those in the context of OTC-Derivative Transactions pursuant to a Master Agreement, can be parties to arbitrations conducted under the P.R.I.M.E. Rules and administered by the PCA, as well as to mediation services offered by P.R.I.M.E. In furtherance of this, P.R.I.M.E. published the Model Arbitration Clauses for the 2002 ISDA Master Agreement that could replace the jurisdiction clause agreed to in Section 13 (b) of the Master Agreement in Spring 2013. It should be ensured, however, that the jurisdiction clause is actually replaced by the arbitration clause and that there is no application of a parallel jurisdiction and arbitration clause for the same Master Agreement (see also).
8 Such arbitration proceedings can cover disputes regarding the interpretation of standard contracts as well as cases of misrepresentation in the conclusion of such contracts. Disputes over contractual partners' claims resulting from "Close Out" in insolvency cases (i.e. regarding the calculation of a uniform final demand in favour of one side after determination of the amounts due to all contractual parties pursuant to an OTC-derivative transaction conducted within the framework of a Master Agreement in anticipation of insolvency) and the set-off of the resulting reciprocal claims on the basis of a close-out clause contained in the contract are also particularly meaningful. Such a provision is found in Section 6 of the ISDA Master Agreement 2002 [10]. In this context [11], complex economic issues concerning the valuation of derivatives traded in individual cases may be relevant [12].
9 In fact, the number of possible causes of action in legal disputes within the banking and financial market that could be subject to arbitration go far beyond the interpretation and application of Master Agreements and the P.R.I.M.E. Arbitration Rules are suitable for a wide range of financial disputes. For this reason, the "China International Economic and Trade Arbitration Commission" (CIETAC) has had the "Financial Disputes Arbitration Rules" since 2003. They were last revised in April 2008. Article 2 of the CIETAC Financial Disputes Arbitration Rules contains a broad – but by no means exhaustive – definition of disputes arising from "financial transactions" covered by the Rules:
"The term 'financial transactions' shall refer to transactions arising between financial institutions inter se, or arising between financial institutions and other natural or legal persons in the currency, capital, foreign exchange, gold and insurance markets that relate to financing in both domestic and foreign currencies, and the assignment and sale of any and all types of financial instruments and documents denominated in both domestic and foreign currencies, including but not limited to:
1. Loans;
2. Deposit certificates;
3. Guarantees;
4. Letters of credit;
5. Negotiable instruments;
6. Fund transactions and fund trusts;
7. Bonds;
8. Collection and remittance of foreign currencies;
9. Factoring; and
10. Reimbursement agreements between banks."
10 P.R.I.M.E. Finance has published its own model arbitration clauses for the 1992 and 2002 ISDA Master Agreement in the spring of 2013. Such specifically tailored model arbitration clauses for the ISDA Master Agreement have also been offered by other arbitration organizations such as the German Arbitration Institute (DIS).
[2] Compare the decisions of the English Court of Appeal from April 3, 2012, Lomas v. JFB Firth Rixson, Inc. [2012] EWCA Civ 419 to Section 2(a)(iii) of the ISDA Master Agreement 1992; also compare Pioneer Freight Futures Co Ltd v. Cosco Bulk Carrier Co Ltd [2011] 2 All ER (Comm) 1079; Pioneer Freight Futures Co Ltd v. TMT Asia Ltd [2011] EWHC 1888.
[3] Compare the "Mission Statement" of the LMA: "By establishing sound, widely accepted market practice, the LMA seeks to promote the syndicated loan as one of the key debt products available to corporate borrowers across the region."
[4] Compare in the context of internationally used Master Agreements Choi/Gulati, 104 Michigan Law Review 1129 et seq. (2006).
[5] English Commercial Court, Decision of March 21, 1999 Bankers Trust Co v. PT Jakarta Int'l. Hotels and Development [1999] 1 Lloyd's Rep. 910, 915-916 (per Judge Cresswell; Judge Cresswell added: "I add the following footnote. In my opinion it is highly desirable that the arbitration […] should be conducted as expeditiously as possible.").
[6] Compare Kropholler, Internationales Einheitsrecht, 1975, pp. 258 et seq.
[7] The work toward the development of P.R.I.M.E. Finance was conducted under the aegis of the Dutch foundation "World Legal Forum" (WLF), with its seat in The Hague and with the framework of the program supported by the Dutch government entitled "Hague Utilities for Global Organizations" (HUGO) for the creation of new institutions for international dispute resolution.
[8] Compare to the UNCITRAL Arbitration Rules Caron/Caplan, The UNCITRAL Arbitration Rules, A Commentary, 2. ed. 2012.
[9] Compare to the numerous activities of the Secretary General of the Permanent Court of Arbitration as Appointing Authority under the UNCITRAL Arbitration Rules from 1976 to 2006 UN Doc. A/CN.9/634 from 7.12.2006.
[10] Compare Firth, Derivatives: Law & Practice (loose leaf edition, status: November 2011), para. 12-043 et seq.; Dalhuisen, Dalhuisen on Transnational, Comparative, Commercial, Financial and Trade Law. Vol. 3, 2001, p. 347; from the perspective of German law, see Berger, Kölner Schrift zur Insolvenzordnung, 3. ed. 2009, pp. 325, 341 et seq.
[11] Compare the definition of "Close out Amount" in Sec. 14 (Definitions) of the ISDA Master Agreement 2002: "Any Close-out Amount will be determined by the Determining Party (or its agent), which will act in good faith and used commercially reasonable procedures in order to produce a commercially reasonable result."
[12] Compare Hull, Optionen, Futures und andere Derivate, 7. ed. 2009, pp. 255 et seq.; Rudolph/Schäfer, Derivative Finanzmarktinstrumente, 2. ed. 2010, pp. 239 et seq. (each for the valuation of share options).