Skip to content

Section 13 of the ISDA Master in the Spotlight

This month, we are lucky enough to have Richard Firth[1] contribute as a guest to the DRS blog.  Richard discusses the choice of arbitration or litigation within the context of the derivatives markets, suggests a number of practical points for consideration by those involved in this area and identifies where help can be found for those in need.


Like the characters Dougal and Zebedee in “The Magic Roundabout”[2], each Section in the ISDA Master Agreement gets its turn under the spotlight.  Yesterday it was on the withholding provisions in Section 2(a)(iii), today the focus is on the dispute resolution mechanisms in Section 13.

This blog considers:

  • To arbitrate or litigate: that is the question
  • Why are these questions being asked now?
  • The big issue
  • Seven practical points to consider
  • P.R.I.M.E. Finance

To Arbitrate or Litigate: That is the Question

In practical terms the questions are:

  • When on-boarding new counterparties, should your Schedule to the ISDA MA now stipulate for arbitration rather than litigation in the English or New York courts, thereby overriding the existing printed language of Section 13?
  • Does the same logic apply to ISDA MAs already in place, i.e. should they now be amended? and
  • What provisions for dispute resolution should there be in  “long-form” confirmations (“LFCs”) which are being signed to “paper” a deal when there is no ISDA MA in place?

Why are These Questions Being Asked Now?

There are three main reasons why these questions are being asked now in the markets:

1. Practice is changing in respect of dispute resolution in the financial markets generally. Whilst even as recently as 2008, a leading textbook could correctly comment “Unlike ordinary commercial contracts, arbitration is almost never used in financial contracts, especially bank loan agreements or bond issues”[3] that is now no longer the case.

For example, in September 2012, the UK Loan Market Association issued its recommended form of facility agreement for pre-export finance transactions which contains optional language for arbitration under the Arbitration Rules of The London Court of International Arbitration (“LCIA”).  The impetus to this change has been the “globalisation” of the financial markets – particularly, an increased focus on transactions with counterparties from Asia-Pacific.  This is so because arbitration awards are enforceable in many of the developing countries in Asia-Pacific whereas judgements of the English or New York courts are not.

Enforceability is the Single Biggest Driver in Favour of Arbitration.

2. As Michael Beaton noted in his blog in September last year, after an extensive industry consultation process, ISDA released the 2013 ISDA Arbitration Guide[4].  The Guide achieves two things.  First, it has a succinct (and most useful) explanation  of  the strengths and weaknesses of  arbitration.  Secondly, it provides language to amend Section 13 of the ISDA Master Agreement.  It has a range of model arbitration clauses enabling parties to appoint one of a number of institutions from around the globe (including the LCIA and the prestigious Hong Kong International Arbitration Centre (“HKIAC”)).

3.  The regulators have started to underline the contribution of dispute resolution to stability in the financial markets.  For example, the Secretary-General of the International Organisation of Securities Commissions (“IOSCO”) commented recently that “financial markets risk fragmentation and rising costs because of “‘manifest weaknesses” in the tools for resolving cross-border disputes.”[5]

The Big Issue

The fundamental issue for an institution is to determine its overall strategy.[6]

It is quite clear that the answer should be to elect for arbitration if the alternative is either:

  • to litigate in England or New York but a judgement from those courts would not be enforceable in the counterparty’s jurisdiction of incorporation; or
  • to litigate in your counterparty’s local court in its jurisdiction (in respect of which  there may be a perception of “home team” advantage, etc.).

Even if neither of those points apply, arbitration may still be the right answer.  Advantages of arbitration include:

1.  There is the ability to choose a specialist tribunal: if not litigating in London or New York a party may be more comfortable with hand-picked arbitrators than judges.  Note that dispute resolution lawyers advise that sole arbitrators should be avoided.  As Alex Chater of Credit Suisse put it at a seminar in March 2014: “….More comfortable with three party panels. You get your own appointment in line with your view of issues, you understand that the other party will do the same.  It’s important to have confidence that the arbitral body has the depth and experience to appoint an appropriate Chairman, mindful of the nature of the dispute and the issues…”

2.  Greater procedural flexibility /efficiency.

3.  Narrower document production than common law courts – this is a positive feature of arbitration.

But there is unlikely to be a costs advantage – that’s the impression I have from talking to a leading silk and a leading arbitrator in London and I have heard the same views out here in Hong Kong. Further, the confidentiality advantage can be blown by an appeal to the courts (if there are grounds to do so).

There can be disadvantages to arbitration. For example:

  • In some cases, there is lack of interim relief; and
  • Limited appeal rights.

Bottom line: it is very much a case that one size does not fit all.

Seven Practical Points to Consider

1.  Have any “time-bombs” been “hard-wired” into your existing portfolio of agreements?

It may be appropriate to check now as to whether by oversight or commercial pressure, any “time-bombs” have been hard wired into documentation which are ticking away, waiting to explode when there is a dispute.  As long as a counterparty is friendly and solvent, there may be possibility to fix potential problems by using the industry accepted arbitration language in the 2013 ISDA Arbitration Guide.

Two areas that could be looked at which could lead to frustrating enforcement of your rights, causing cost or delay, or even worse:

  • Submission to the jurisdiction of the local courts in the developing markets where there may be issues of neutrality or lack of expertise because for, example, the jurisdiction lacks dedicated commercial courts or existing local laws and regulations pre-date current commercial practices; and
  • “free-verse” non-standard negotiated arbitration clauses which may not be of the right quality.

2.  Getting dispute resolution recognised in your institution as a key business term

Culturally, it may be appropriate to introduce what might be a “step” change into your institution by stipulating that dispute resolution is to be one of the items specifically and authoritatively focused on both  during the “sign-off” processes for new products (“NPSOs”) and also in relation to derivative transactions which carry elevated legal or reputation risk.[7]

3.  Promoting efficiency and risk management in the counterparty “on-boarding” process

There are two related – but in terms of day-to-day-practice – distinct points here:

(A) Negotiation of 1992 and 2002 ISDA Master Agreements: whilst the documentation initiatives from ISDA are not always quickly taken up by market participants, there is good authority that the 2013 ISDA Arbitration Guide is already being used and so the issue is likely to be raised in negotiations, even if not by you.

In practical terms, it is worth checking that your institution has in respect of dispute resolution:

  • Written policies, tolerances and guidelines for the negotiators of ISDA and other derivatives documentation;
  • Clear escalation process, including the sign-off of in-house dispute resolution (DR) specialists; and
  • Consistent templates for the various in-house permutations of the ISDA Schedule, and the like.

(B) A related issue is to ensure that appropriate policies are applied to “long-form” confirmations.

4.  Introducing a protocol within your house for the handling of derivatives disputes

A starting point could be the issues identified by the in-house respondents in the Queen Mary University of London and PwC 2013 International Arbitration Survey entitled “Corporate choices in international arbitration”[8].  The points raised included:

  • Choice and role of outside counsel, experts and arbitrators;
  • Internal decision making whilst preparation is in hand for the proceedings;
  • Use of after-the-event insurance to provide cover in respect of an adverse costs award; and
  • The impact of third party funding costs.

5.  Conflicts of interest

A related issue concerns the policies you would like to apply if one of your “panel” law firms asks for permission to represent an opponent in an arbitration.  In many institutions, there is a distinction between non-contentious business – where having a good firm on the other side may expedite a transaction – in contrast to contentious proceedings where an institution may be highly aggrieved if a “panel” firm acts against it.

6.  Would training in arbitration be useful?

For example:

P.R.I.M.E. Finance holds an annual conference – the most recent was in January this year at The Peace Palace in The Hague – at which both derivatives industry product experts speak (eg:  Robert Pickel and Peter Werner from ISDA; Habib Montani from Clifford Chance, Simon Firth and Chin-Chong Liew from Linklaters) as well as dispute resolution experts including judges from Delaware, Japan ,New York, Russia and Singapore.

Other bodies are also putting on courses-both for documentation specialists and arbitrators (eg HKIAC)[9].

7. Would training in the (dark) arts of persuasion be worthwhile?

It could be a good expenditure of time and money to provide training for Front Office, Legal and others in the art of negotiation as being effective can make a significant contribution to the bottom line.  For example, in the 2013 PwC and Queen Mary University of London International Arbitration Survey referred to above, the respondents said that:

  • 57% of the disputes which they handled were settled;
  • 32% were referred to litigation or arbitration; and
  • (not expressly stated but implied) 11% continued in limbo (or purgatory) as work-in-progress ( or “WIP”)[10].

These figures justify training in negotiation techniques – there may be some “low-hanging” fruit.

The observations made by one commentator relating to dispute resolution in respect of oil and gas in the United Kingdom Continental Shelf (“UKCS”) may also be relevant to our industry: “It is often assumed that managers and lawyers will be good negotiators, without any attention to the facts underlying the assumption”[11].

P.R.I.M.E. Finance

Any discussion of this topic would be incomplete without a reference to P.R.I.M.E. Finance (based in The Hague)[12]. Its founding chairman is Jeffrey Golden, a former senior derivatives partner at Allen & Overy.

It is independent of ISDA although there is an inevitable overlap in dramatis personae, because of the relatively small pool of specialists in this field. For example:

  • Jeffrey Golden was at Allen & Overy, ISDA’s UK counsel;
  • Several senior past and present officers of ISDA serve on P.R.I.M.E. Finance’s panels; and
  • Many of P.R.I.M.E. Finance’s experts have served as special country counsel to ISDA.

In summary P.R.I.M.E. Finance has:

(1) A panel of over 100 legal and financial markets experts who can provide members for an arbitral panel for resolving complex financial disputes and can also provide mediation, expert opinions, determinations and risk assessment;

(2) Very successfully put on  a number of training programmes for judges both in the developing and mature markets. These have sometimes been presented in conjunction with others such as the European Bank for Reconstruction and Development and the International Bar Association; and

(3) Commenced work, in conjunction with Lexis-Nexis, in compiling an authoritative database of relevant law.

There is a strong commitment to publishing about the field e.g. there is an upcoming book edited by Jeffrey Golden and Carloyn Lamm (advertised at P.R.I.M.E. Finance’s Annual Conference but no further details to hand), articles by Jeffrey Golden, Joanathan Ross, article by Gerard Meijer and Camilla Perera De Wit on “Fostering Stability and Confidence in the Financial Markets –A Global Affair: P.R.I.M.E. Finance” in  the most recent (2012) Hague Yearbook of International Law, and so on.


When setting up a new business line, participants in the OTC derivatives markets typically spend much time and money in researching that opportunity, soliciting the views of senior stakeholders and detailed planning.

Bearing in mind the high stakes, the same thoroughness is justified in relation to the selection of the  optimum tools for dispute management as it is for setting up a new business or complying with new regulations – otherwise come a dispute you may be forced to invoke help from The Magic Roundabout’s resident wizard, Zebedee!

[1] Richard Firth has recently retired as a consultant at Linklaters LLP, Hong Kong.  He is an English solicitor who during his career worked at several of the world’s leading financial institutions including Citigroup and Barclays where for 10 years he was Global Head of Commodities Legal.  He can be contacted at

[2] “The Magic Roundabout” story is known in France as  “Pollux, le manège enchanté” and in North America as “Doogal”.

[3] Philip Wood, Law and Practice of International Finance, University Edition, Thomson Sweet& Maxwell (2007)

[5] Financial Times,November 24th, 2013

[9] For example: 8 April 2014: P.R.I.M.E. Finance side meeting,hosted by Clifford Chance,at the ISDA Conference in Munich on “New opportunities and challenges that are at the heart of derivatives disputes”.  20 March 2014: Hong Kong International Arbitration Centre: Industry Series: Finance disputes-Derivatives In Asia

27-28 January 2014:Annual Conference of P.R.I.M.E. Finance held at The Peace Palace, The Hague.

6 December 2013: International Bar Association Asia-Pacific Arbitration Group Inaugural Meeting “Pacific Currents-Asia-Pacific Arbitration”

29 October 2013:London Shipping Law Centre:”Effective dispute resolution in the emerging markets”

[11] The quotation is from Chapter 16 (Dispute Management and Resolution) by Margaret Ross in Gordon and Patterson (eds) “Oil and Gas Law Current Practice and Emerging Trends”(2007) Dundee University Press.

There has since been a new edition of this most useful book:

Contact Us
Press enter or esc to cancel