Legal Briefing

Specialised dispute resolution in cross-border financial disputes: mind the gap

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Finance | 20 October 2016

When drafting legal documentation pertaining to a sophisticated financial transaction, there is a lot to consider. The relevant agreements can be voluminous and the concepts reflected most certainly complex. Probably one of the more underestimated matters in this process is the jurisdiction clause.

With financial transactions becoming more global and increasingly complicated, it may make good sense for in-house lawyers to take another look at the jurisdiction clause included in the relevant (standard form) documentation. Why is that? To avoid the possibility of falling in a gap of long and costly proceedings that result in a decision that cannot be enforced where it needs to be: eg, in the counterparty’s home jurisdiction or in the jurisdiction where the assets are located. And now with certain counterparties located in certain jurisdictions, concerns about Brexit and the portability of judgments of certain courts may weigh in the balance as well.

Systemic risk – expert judgment

Financial disputes can involve highly complex products. They can also involve multiple parties and multiple contracts. We have seen an increase in these type of disputes emerge from the financial crisis in 2008. And because of the use of standardised documentation there can be considerable implications for third-party contracts also (systemic risk). A wrong result may have unintended and far-reaching consequences. All this prompts the thinking about how best to resolve these disputes. As was confirmed in Credit Suisse International v Stichting Vestia Groep [2014]:

‘I therefore allow Credit Suisse’s claim under the Master Agreement. The amount that they recover will depend upon the determination of the issues between the parties about the calculation of the Early Termination Amount. I ask that the parties consider how those issues can best be resolved (and no doubt they will consider whether they are more efficiently and satisfactorily determined by an arbitrator or an expert rather than a court hearing) [emphasis added]

Litigation and arbitration

When it comes to the resolution of complex financial disputes, parties can choose to have their disputes decided by a court, or through a different mechanism such as arbitration. Looking at factors that may play a role in deciding to opt for one mechanism over the other, one could think of (i) transparency, of its operations, decisions and awards (ii) independence, (iii) experience and expertise, in the subject matter brought before it (iv) efficient case management, and (v) an effective outcome (including enforcement).

Enforceability of decisions

In September 2013, the International Swaps and Derivatives Association (ISDA) published its first Arbitration Guide. Publication of this guide followed extensive consultations with ISDA members. Two memoranda drawing attention to the issue had previously been circulated. The ISDA working group involved with this project indicated that the increase in the use of arbitration in derivatives contracts (and in international financial transactions more generally) is driven primarily by a combination of challenges associated with litigating such disputes in the courts of many jurisdictions, particularly in emerging markets, and the advantages of international enforcement of arbitral awards under the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the New York Convention. Parties recognise that the assets against which awards or decisions may need to be enforced are increasingly located in countries, sometimes in multiple jurisdictions, where court decisions do not always travel well.

P.R.I.M.E. Finance

The need for a reliable path to sound decisions that can easily and effectively be enforced, a settled body of law, and speed of determination have led to innovative thinking. P.R.I.M.E. Finance, the Panel of Recognised International Market Experts in Finance, is a specialised financial dispute resolution facility located in the Peace Palace in The Hague, and is dedicated to promoting a more sophisticated approach to financial market dispute settlement, with a particular focus on issues arising over industry standard documentation, relevant comparative law and market practices for derivatives and other complex financial products. It offers dispute resolution services, including arbitration, mediation and expert witness services, judicial support (including sessions conducted in New York, London, Singapore, Moscow and Tokyo) and it is in the process of compiling a state-of-the-art database of international precedents and source materials. It has recently joined forces with the Permanent Court of Arbitration (PCA) in The Hague. The collaboration with the PCA brings together the expertise of P.R.I.M.E. Finance, which offers more than 100 of the most senior experts from the world of finance, financial markets law and dispute resolution, including some of the founding fathers of the ISDA Master Agreement, and the well-established institutional framework of the PCA, including the PCA’s 40 lawyers and case managers who undertake the administration of cases in arbitrations and mediations. This collaboration is an important step forward for parties who seek prompt and authoritative remedies, as it facilitates access to a well-developed specialised forum of decision-makers in the field of complex financial disputes.

Conclusion

In a complex financial transaction, particularly in a cross-border context, thinking through how to best resolve a potential dispute is crucial as it can save significant time and cost. There is a need to recognise the importance of addressing the complexity in this field. A specialised forum that has access to the most prominent specialists in the field as well as access to decision-makers with a generalist background, can offer parties cost-efficient dispute resolution with enforceable results.