The overwhelming majority of ISDA Master Agreements entered into by counterparties located in the EU (European Union)/EEA (European Economic Area) are governed by English law and they submit to the jurisdiction of the English Courts. Both for netting and collateral arrangements, English law has had no meaningful rival since the publication of the first ISDA in 1987. Among the many changes attendant upon whatever form Brexit finally takes, English legal dominance may be challenged by two new forms of documentation.
In recognition of potential Brexit complications for companies wishing to continue trading within the EU’s jurisdiction, ISDA have introduced French and Irish governing law Master Agreements. The jurisdictions have been chosen as representatives of both common and civil legal systems; French for the civil code and Ireland as the largest common law system among the remaining twenty-seven EU Member States. Counterparties can submit to the jurisdiction of either the French or Irish courts; as France and Ireland are still members of the EU/EEA their judgements will be automatically recognised and enforced throughout the area. ISDA is of the opinion that, “both legal frameworks also support the feasibility of ISDA protocols, which allow multiple agreements between adhering parties to be modified in an efficient and scalable way.” ISDAs intention isn’t to supplant English and New York law, but rather to increase the choice of Master Agreements available, allowing companies to trade “under whatever agreement best meets their needs”. Katherine Tew Darras, ISDA’s General Counsel, said: “An English law Master Agreement won’t become any less valid in the EU post-Brexit, irrespective of the outcome of the Brexit negotiations. There will be good reasons for EU/EEA counterparties to continue using the English law Master Agreement, and there will be good reasons for them to start using the French and Irish law versions. This is all about providing choice to the market and allowing counterparties to choose the option that best suits their needs”.
The development of the new Agreements does not imply any special insight into Brexit’s final form. However, in ISDA’s uncontroversial view, Brexit “does potentially mean more expense, more uncertainty, and more red tape”. Use of the new agreements obviates potential questions with respect to recognition of English law, EU-wide enforcement and dispute resolution. Both agreements have been drafted to be used in conjunction with other existing ISDA Documentation.
Despite significant numbers of relocations to both Ireland and the mainland EU, the question remains as to whether this is a solution in search of a problem. The excellently-surnamed Judith Lawless, a partner at Irish law firm McCann FitzGerald said: “Obviously ISDA is not in the business of going out and producing documentation unless there has been member demand for its availability”. Not entirely obvious – ISDA are entirely capable of creating products for which there is negligible demand – the 2017 VM protocol being the most recent example.
The differences between the English and Irish Master Agreements are unsurprisingly minimal. However, a number of changes have been made in the French version:
Key Changes in the French-law Master Agreement from the English-law governed Master Agreements
- Section 2(a)(iii) – Flawed Assets Arrangement
- Civil law does not have an equivalent version to the ‘flawed asset arrangement’, but the new French Master Agreement does provide for the suspension of performance and a conditional element.
- Section 2(c) – Payment Netting
- A small amendment has been made to obviate the possibility that payment netting might qualify as a novation.
- Section 3 – Sources of Law
- “Equity as a source of law” has been removed, because it is not a source of law under civil law. However, “equity” has been retained as an aid to the interpretation of intent.
- Section 9(f) – No Waiver of Rights
- Inclusion of a 5-year contractual limitation period.
- Section 13(a) – Governing law
- Unsurprisingly, French law is the governing law of the Agreement.
- Section 13(b) – Jurisdiction
- Disputes are to be submitted to the Paris Commercial Courts and the Paris Court of Appeals jurisdiction.
- Parties can choose whether the jurisdiction is to be exclusive or non-exclusive.
- Both jurisdictions have specialised international chambers to handle cases relating to international trade and cases on master agreements.
The new ISDA is offered against the background of changes to the French judicial system intended to make it less parochial, broadening its appeal as a legal venue of choice. These changes could see proceedings in the Paris Commercial Court and Court of Appeal heard in English as well as all documentation being submitted in English without a French translation. Specialised judges will be selected to sit on these international chambers and these judges will be able to hear parties, witnesses and experts. Specific procedural rules will enforce a schedule to help speed up the dispute process.
Although, there is little to object to in increased provision of choice, there is no obvious reason to suggest that the new Agreements are necessary. Recent negotiations on the Withdrawal Agreement indicate that EU counterparties will still be able to use English Courts and submit to their jurisdiction even after the hardest of Brexit’s. As concluded by an earlier post, in all likelihood, judicial cooperation and recognition will not be significantly impacted. The legal community is not famed for its eagerness to embrace change and innovation. Additionally, there is no case history in either France or Ireland regarding ISDA Master Agreements, whereas the English Law agreement has been extensively tested, interpreted and clarified. London’s concentration of legal specialist infrastructure and knowledge is also unlikely to be replicated in Europe in any time soon.
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