This article was written by Alex Baykitch AM and Edmund Bao.
The use of arbitration in disputes involving International Swaps and Derivatives Association (‘ISDA’) Master Agreements have increased in recent years. This was especially since the publication of the ISDA Arbitration Guide in 2013 (‘Guide’), which sets out a number of model arbitration clauses to be inserted to the ISDA Schedule. The effect of these clauses was to replace the jurisdiction clause under section 13(b) of the relevant ISDA Master Agreement with a specifically tailored arbitration agreement clause.
In the five years since publication of the Guide, there has been further developments in general international arbitration law and practice. These are important to understand in drafting arbitration clauses for ISDA Master Agreements and we set them out below.
Additional seats for ISDA arbitration
The 2013 Guide currently includes model ISDA arbitration clauses relating to the International Chamber of Commerce (London, New York and Paris seats), the London Court of International Arbitration (‘LCIA’) (London seat), the American Arbitration Association – International Centre for Dispute Resolution (New York Seat), the Hong Kong International Arbitration Centre (Hong Kong seat), the Singapore International Arbitration Centre (‘SIAC’) (Singapore seat) as well as the Swiss Arbitration Rules (Zurich and Geneva seats) and the rules of P.R.I.M.E. Finance (London, New York and Hague seats). Among the current model clauses, the two choices of governing law are New York or English law.
Since publication of the Guide, the German Arbitration Institute (Frankfurt seat) and the Stockholm Chamber of Commerce (Stockholm seat) have also published model clauses for use with ISDA Agreements. There is also the possibility of ISDA arbitration conducted under the DIFC-LCIA Arbitration Centre in Dubai.
Parties opting for arbitrations in these jurisdictions may wish to look outside the recommended model clauses. Considerations of which institutional rules to adopt will require an evaluation of the jurisdictions under which the arbitration is likely be brought and the nationalities of the parties.
Recourse to emergency or interim arbitral relief in ISDA arbitrations was not contemplated by the model clauses in the 2013 Guide. Emergency arbitration procedures grant arbitral relief prior to the constitution of the arbitral tribunal. In respect of financial disputes, interim measures may be necessary, for example when seeking asset freezing orders against a third party (such as a bank).
In the context of arbitrations arising from ISDA Master Agreements, parties may wish to consider including emergency arbitration procedures as an alternative to interim relief under national courts. The advantages of emergency arbitration include the preservation of confidentiality as well as increased efficiency.
Parties should also keep in mind the enforceability of emergency arbitration awards. In some jurisdictions, a court ordered interim measure will provide greater certainty, especially in the case of ex parte applications.
The recent decision of the English High Court in Gerald Metals SA v Timis & Ors  EWHC 2327 held that where arbitral interim relief is available under institutional procedures (in this case, the emergency arbitration provisions of the LCIA), parties have no recourse to equivalent relief from English courts. This decision confirmed the applicability of section 44(3) of the UK Arbitration Act which states that a court will only act to the extent that the arbitral tribunal has no power or is unable to act.
Parties wishing to rely on domestic interim measures for disputes that involve assets in the UK will therefore be assisted by expressly carving out recourse to emergency procedures in the ISDA arbitration agreement.
Fast track procedures for disputes under ISDA Master Agreements were also not contemplated by the model clauses in the 2013 Guide. In general international arbitration practice, it is often the case that for disputes below a certain monetary threshold, parties will adopt expedited procedures for the determination of their dispute. The ICC, LCIA, AAA, SCC, SIAC and HKIAC institutions all contain fast track or expedited procedures for small value claims, usually below US$3 million.
Parties considering adopting a fast track procedure into their ISDA Master Agreement should first check that their choice of institution provides for such expedited procedures. Other considerations include the suitability of the dispute for fast track procedures; they may not be appropriate for highly technical and fact specific disputes relating to derivative transactions. This is in addition to the fact that expedited arbitrations are usually heard by a sole arbitrator.
Summary procedures for arbitrations conducted under the ISDA Master Agreements were not set out in the 2013 Guide. In recent years, arbitral institutes have adopted such procedures to counter a perceived weakness of arbitration’s lack of summary procedures compared to domestic court processes. For example, SIAC’s institutional rules in 2016 adopted a summary procedure for early dismissal of claims that are manifestly without merit or otherwise outside the jurisdiction of the Tribunal (SIAC rule 29).
In this respect, choice of arbitration institutions that provide for summary procedures in the ISDA arbitration clause may be of assistance to the parties. On the other hand, parties should keep in mind that dealing with arbitrations summarily is an inherent part of the tribunal’s discretionary powers. Parties may therefore wish to consider the necessity of summary procedures where both sides are sophisticated financial entities.
Financial instruments and ISDS
In circumstances where one party to an ISDA Master Agreement is a sovereign state, there arises the possibility of the agreement being protected as an investment under the Investor State Dispute Settlement (‘ISDS’) mechanism of an international investment treaty. Many such treaties refer investment disputes to international arbitration under the International Centre for the Settlement of International Disputes (‘ICSID’).
The ISCID decision of Deutsche Bank AG v Democratic Socialist Republic of Sri Lanka (ICSID Case No. ARB/09/2) considered whether a hedging agreement could fall under the definition of an investment (and thus was protected) under the Germany-Sri Lanka Bilateral Investment Treaty (‘Treaty’).
The Tribunal considered the meaning of ‘investment’ under the Treaty, which was defined as ‘including every kind of asset’ and in particular, ‘claims to money which have been used to create an economic value’. The Tribunal held that a hedging agreement fell into the category of an investment, as it was a claim to money which has been used to create an economic value (para 284 to 286 of the Award).
It is therefore likely that ISDA Master Agreements, as a form of derivative agreement, will be treated by ISCID Tribunals in a similar fashion. Parties entering into ISDA Master Agreements who have suffered loss as a result of the arbitrary actions of a host state should therefore bear in mind potential recourse to arbitration under ISDS mechanisms.
Disputes in the financial sector have typically been litigated in New York and London courts for reasons of efficiency and the certainty of established precedent. However, given the increasing involvement of emerging markets in financial transactions, arbitration, with its advantages of neutrality, enforceability, finality and confidentiality provides for an attractive alternative.
The 2013 ISDA Arbitration Guide is likely to be revised in the near future with the possible inclusion of the considerations discussed above. Parties will need to keep in mind the flexibility of tailoring the arbitration agreement to the particular transaction, and the need to make an independent assessment as to the suitability of each arbitral measure prior to their inclusion in the ISDA Schedule.