A new arbitral institution, the Panel for Recognised International Market Experts in Finance, or P.R.I.M.E. Finance is set to open its doors in early 2012. The organisation is based in the Peace Palace at The Hague and will focus on the resolution of complex financial disputes.
The founders of the new arbitral institution have reacted to a considerable demand for arbitration among financial players in recent years and the need for a specialised dispute resolution institution. In particular, they emphasised an increasing interest from businesses which have exposure to developing markets, including from CIS countries, Brazil, India and China.
The main idea behind P.R.I.M.E. Finance is to draw on the expertise and experience of its panel of over 80 experts. The panel comprises of professionals who have been extensively involved in structuring such transactions themselves or participated in the development of the market standard documentation widely used by financial market participants, such as the ISDA Master Agreement.
This seems to be a perfect mixture of practical financial and international arbitration experience. And a promising future could await P.R.I.M.E. Finance. However, only after a period of time will it be possible to say whether the new institution has achieved its aims and proved to be a viable novelty. Nevertheless, it is worth examining now if this institution could present interest for financial market participants and specifically for those from the CIS region.
Lex Contractus and Lex Forum
English or New York law governs most cross-border financial transactions. According to the Queen Mary SIA 2010 survey, 40% of the transactions were executed under English law and 17% under New York law. These laws are creditor-friendly and very flexible in accommodating the parties’ needs and in minimising any possibility for debtors to evade the performance of the financial contracts.
In practice, the choice of governing law essentially predetermines the choice of the appropriate forum for adjudication of disputes which could arise out of these contracts – namely, this would mean jurisdiction of either English or New York courts. Pursuant to the Queen Mary survey, the second most influential factor (46%) in choosing an arbitration seat is the law governing the substance of the dispute. Pursuant to the CIArb 2011 survey, the UK dominated the position as a preferred seat of arbitration in 28% of the cases.
Overall according to the CIArb 2011 survey, arbitrations in the UK were less costly than in Europe, and, according to the Queen Mary SIA 2008 survey, statistics indicated that the Netherlands Arbitration Institute considered fewer cases. The question may therefore arise, whether parties to financial contracts would incline to choose P.R.I.M.E. Finance with the seat in The Hague. Such a choice would inevitably imply that the lex loci arbitri would be Dutch law, and it would follow that it would be necessary to examine that law.
Some practitioners have asserted that “national courts and ad hoc arbitration have been unable to produce a settled and authoritative body of law”. According to a contrary view, courts of these jurisdictions have developed considerable jurisprudence on interpretation and application of contract law and finance law.
One may ask whether, along with its proclaimed strengths, P.R.I.M.E Finance could bring about a third view on this matter. And whether such a view might not be fully accessible to users of arbitration? This could happen due to peculiarities of international arbitration such as confidentiality.
To date, for instance, where important judgments relating to the interpretation or application of the ISDA Master Agreement were rendered by either US or English courts, the ISDA promptly published memorandums on the relevant legal matters. These memorandums have been highly beneficial for its members as they provided certainty in using the Master Agreement. In contrast, decisions of arbitral tribunals are not necessarily binding on other tribunals. As one tribunal put it:
Ultimately, the Arbitral Tribunal has not been entrusted, by the Parties or otherwise, with a mission to ensure the coherence or development of arbitral jurisprudence (Romak SA v. Uzbekistan, PCA Case No AA280).
Moreover, in arbitration where no strict precedent practice exists a successful party will have to re-litigate similar claims every time anew.
Major financial transactions usually involve multiple parties and multiple contracts (e.g. in most instances, derivatives transactions are collateralised). According to the ISDA 2010 Margin survey, around 70% of all OTC derivatives transactions were securitised. Very often collateral is provided by collateral providers who are domestic or foreign companies who are either the parent or a subsidiary.
In contrast to most laws on procedure in State courts, in arbitration most national laws and institutional rules do not provide for the tribunal’s right to join third parties or issue decisions binding on them without their consent. Absent parties’ agreement, neither the Netherlands CCP nor the Rules provide for a ready solution to that matter.
According to the P.R.I.M.E Finance arbitration rules, by default the arbitrators will be appointed by the appointing authority “exclusively” from the panel (Articles 8(1), 9(1)). The founders have chosen the Permanent Court of Arbitration in The Hague as an appointing authority (Art.6(1)).
The likely major constraint for the parties willing to choose arbitrators from the panel would be their availability. This is due to the well-known fact that most experienced and highly-regarded “super arbitrators”, who are also present on the panel are in high demand and often engaged in complex and lengthy arbitrations around the world. The secretariat of the new arbitral institution has promised to handle this important task carefully and believes there will be no shortage of experienced arbitrators.
Another concern, which is less noticeable and highly questionable, is that it is said that sometimes arbitrators “tend to render more equitable decisions than judges”. That may not be acceptable for a party considering its case to be well substantiated. Further, the Rules provide that in all instances in deciding a case the arbitral tribunal shall take into account “any usage of trade applicable to the transaction” (Art.35(3)). A considerable number of OTC derivatives transactions are tailor-made so as to meet the parties’ hedging needs. In the case of a financial dispute involving the interpretation of a contractual provision differing from standard market practice, this peculiarity of the P.R.I.M.E. Finance rules may undermine the parties’ arrangements.
Enforcement of arbitral awards
Participants in financial contracts are forced to insist on choosing arbitration as a method of resolving disputes primarily in several situations: firstly, when they deal with counterparties from jurisdictions in which judgments of the English or New York courts would not be recognised or easily enforced; secondly, when they deal with counterparties that have no assets in the United States or the European Union; thirdly, when confidentiality concerns are of high importance for one or both parties; and finally, in financial transactions involving States or other governmental bodies that are traditionally very reluctant to agree to foreign State courts having jurisdiction over them.
In the first two situations, arbitration would be an ideal solution as the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) provides a universal framework for the mutual recognition and enforcement of arbitral awards in 144 countries, including Brazil, China, India, France, Russia, the US and the UK. Furthermore, the New York Convention provides very limited grounds on which State courts, in which enforcement of an award is sought, can refuse to enforce it.
Arbitration may entail less rigid and stringent document disclosure than in US and English courts. This could be particularly attractive for businesses from civil law jurisdictions, not familiar with or opposing such procedures, and may encourage them to arbitrate rather than litigate their disputes. Hence, financial institutions which usually have to bear most of this burdensome obligation could choose arbitration instead because the Rules merely provide that each party shall bear the burden of proof and that the tribunal may request the parties to produce documents (Art. 27(1), (3)).
Another arguable reason to choose arbitration at P.R.I.M.E. Finance is confidentiality. Some prospective users of the new arbitral institution may be particularly attracted by the fact that arbitration is confidential and awards are not published. Although the institution has a right to publish excerpts from the arbitral decisions, this can be made only in anonymous form (Art.34(5)). This feature of arbitration generally has two facets. On the one hand, disputants would be able to avoid unnecessary and negative publicity, for example when wealthy individuals are involved. Further, confidentiality could protect sellers of financial products from “contagion claims”, in other words preventing the domino effect from occurring.
On the other hand, this peculiarity could create some tensions in relations between the disputants and their regulators as the latter would not have the possibility of making an early intervention into their dealings. This situation could further result in a lack of sufficient information about their affairs for their customers and shareholders, particularly of those companies listed on stock exchanges. Yet, publicly traded companies cannot exclude themselves from the disclosure requirements of a particular exchange or securities regulation where threatened and pending disputes should be disclosed to the public.
Cost of Arbitration
Finally, highly important for those who have to adjudicate their multi-million/multi-billion dollar disputes is the issue of costs. There is some certainty and predictability in this matter for parties when they opt for the New York or English courts – their filing fees are usually moderate and costs primarily comprise counsels’ fees.
In contrast, in arbitration parties will need to consider arbitrators’ fees which could run to highly excessive amounts. Although the founders of P.R.I.M.E. Finance claimed that their “ambition is to be highly cost-effective”, there are currently no particular rates, fees schedule or any other method of calculating arbitrators’ fees. The Rules only provide that the fees and expenses of the arbitrators shall be reasonable (Art.41(1)) and that an appointing authority will apply a schedule or particular method for determining arbitrators’ fees. Indeed, the arbitral tribunal has discretion to decide otherwise (Art.41(2)). In contrast, other well-regarded arbitral institutions (ICC, LCIA) provide more specific information on arbitrators’ fees.
As shown above, in certain situations the choice of arbitration as a method for adjudicating disputes arising out of financial transactions might be inevitable or beneficial. However, in other instances, for P.R.I.M.E. Finance to succeed in monopolising the resolution of financial disputes, it would be critical for tribunals under its auspices to be able to provide cost-effective and prompt services, and act promptly and flexibly in managing and resolving disputes. They should be prepared to take into account the parties’ expectations on document disclosure and avoid theoretical academic debates by limiting the use of party-appointed expert witnesses as discussed above.
Although the founders and other practitioners emphasised raising the importance of the dealings in emerging markets as a reason for the increasing demand for arbitration, unfortunately their panel of experts has no representatives from the CIS region.
Dmitry Vlasov, LL.M