Introducing P.R.I.M.E. Finance – The Hague Based Dispute Resolution Facility for Financial Market Disputes

There has been growing interest in arbitration in the financial markets, and no doubt both concerns about litigating financial market disputes in many jurisdictions, particularly emerging market jurisdictions, and certain enforcement advantages of arbitration may have contributed.

P.R.I.M.E. Finance stands for a Panel of Recognised International Market Experts in Finance, and its list of experts currently includes a group of nearly 100 senior legal and financial market figures drawn from around the world and representing, collectively, more than 2,500 years of relevant experience. Conceived against the backdrop of the financial market crisis, P.R.I.M.E. Finance is a new and innovative complement to global regulatory reform. The institute aims to assist judicial systems in the settlement of disputes on complex financial transactions in both developing as well as matured financial markets.

P.R.I.M.E. Finance’s core activities include dispute resolution services such as arbitration and mediation, expert opinions, determinations and risk assessment, as well as education and judicial training, and setting up a library and database of relevant cases. The key asset of the organisation is its Panel of Experts, and the commitment and spirit of cooperation that exists among them. The P.R.I.M.E. Finance Experts include sitting and retired judges, central bankers, regulators, academics, representatives from private legal practice and derivative market participants. It is a diverse and international group drawing on a wide variety of backgrounds in respect of its geographical representation, market and jurisdictional experience, linguistic skills and nationalities. This distinguished group of individuals has been carefully vetted and is committed to the goals of the organisation, including its independence.

By Professor Jeffrey Golden, Chairman of the Management Board of the P.R.I.M.E. Finance Foundation, and Camilla M.L. Perera-De Wit, Registrar, P.R.I.M.E. Finance (Reference: CapLaw-2013-5)

1) The Need for P.R.I.M.E. Finance

Financial market litigation certainly seems to have increased since 2008. It is often complicated. Just as the transactions and markets have become more complex, so have the disputes involved. And, partly because of standard contracts and terms, and the volume of trading covered by these, wrong decisions threaten systemic risk.

Although the idea of setting up a special subject matter dispute resolution facility for disputes between parties in the financial markets was first raised before the financial crisis, the need for such a facility was confirmed by the crisis, in view of the considerable number of financial market disputes it generated.1 To date, national courts and ad hoc arbitration have been unable to produce a settled and authoritative body of global law in this particular field. Particularly troublesome is the fact that a serious difference in views has been expressed by the English and New York courts more than once recently on the same subject matter, and after long and protracted litigation.

All this is not necessarily surprising given the often technical nature of the subject matter yet the absence, in many jurisdictions, of dedicated financial courts. After all, we have special subject matter courts for everything from family law and juvenile crime to tax, insolvency and IP. Why not a specialised resolution center for finance? There is a lot at stake, and the markets have a justifiable interest in having important cases decided by experts. The remedies in the derivatives markets, for instance, are very different from the remedies of the loan and bond markets, even though the contemplated cash flows may be similar. The cases, as a result, may be especially challenging for judges without considerable familiarity with the relevant industry contracts. Global market facts and trade usage are highly relevant, and need to be understood and accounted for. Judges need both an appetite for and experience of comparative law and practice and international finance.

Inspired by all this and a recognition that better regulation was only part of the answer, a roundtable meeting took place in The Hague in October 2010, following the G20 summit of finance ministers and central bankers in Korea, to explore the feasibility of P.R.I.M.E. Finance. The meeting was chaired by the former Lord Chief Justice of England and Wales, Lord Woolf, who was joined by 60 finance experts including lawyers, judges, market representatives, CLOs, regulators and central bank officials, and many of the founding fathers of the derivatives and structured finance industries. The market need for this initiative has been further identified through expert meetings in 2010 and 2011 with lenders, dealers and “buy-side” market participants, jurists and financial market regulators in various financial centers of the world, including Dubai, Moscow, London, New York, Frankfurt, Paris and Dublin.

With the support from the Dutch authorities and the enthusiastic commitment of its experts, P.R.I.M.E. Finance, a Dutch not-for-profit foundation, officially opened for business in January of 2012. Its first case and fee quickly followed. Through its service of developing specialised derivatives and arbitration programmes for the judiciary, both in advanced and developing economies, P.R.I.M.E. Finance, together with collaborating entities, provides training, issues supporting expert advice and engages in relevant research. Judicial training programmes are currently being developed on four continents, while an award for “Best Newcomer” at the GAR arbitration awards ceremony in Stockholm and nominations for several innovation awards have also been achieved. And a “P.R.I.M.E. Finance Fellowship” has now been created at the Netherlands Institute for Advanced Study (NIAS) to promote research in the field of law relevant to the activities of P.R.I.M.E. Finance.

2) Growing Interest in Arbitration in the Financial Markets

By virtue of the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention); P.R.I.M.E. Finance arbitral awards can be enforced in more than 140 jurisdictions. The New York Convention is considered to be one of the key advantages of international arbitration. This was also confirmed by an International Swaps and Derivatives Association (ISDA) working group on arbitration, which provided further insight into the use of arbitration in the derivatives markets.2 The working group indicated that the increase in the use of arbitration in the financial sector is driven primarily by a combination of the unattractiveness of litigating such disputes in the courts of many jurisdictions, particularly in emerging markets, and the considerable advantage of international enforcement of arbitral awards under the New York Convention. Agreements relating to cross border financial documentation increasingly contain arbitration clauses, for reasons mentioned above or sometimes because parties wish to resolve the dispute behind closed doors or because they would like to choose their own expert arbitration panel, qualified to settle the dispute effectively and promptly.

The P.R.I.M.E. Finance Arbitration Rules were prepared in consultation with P.R.I.M.E. Finance’s Panel of Experts, and have been particularly adapted for disputes arising in financial markets. The P.R.I.M.E. Finance Arbitration Rules are based on the well-tested UNCITRAL Arbitration Rules 1976 (as revised in 2010). The UNCITRAL Rules are designed for ad hoc arbitration, arbitration proceedings without the involvement of an arbitration institute. Therefore, P.R.I.M.E. Finance had to institutionalize the UNCITRAL Rules and as such the P.R.I.M.E. Finance Secretariat has been built in as the body administering the arbitral proceedings. Under the UNCITRAL Rules, as adapted for P.R.I.M.E. Finance, the Secretary General of the Permanent Court of Arbitration, also based in The Hague, may act as appointing authority for P.R.I.M.E. Finance in cases where the parties cannot agree on the appointment of arbitrators. The Secretary General of the Permanent Court of Arbitration has agreed that, if a request to him for the selection of arbitrators is made under the Arbitration Rules of P.R.I.M.E. Finance, he will select arbitrators exclusively from P.R.I.M.E. Finance’s expert list. In addition, the P.R.I.M.E. Finance Arbitration Rules include certain provisions and annexes that reflect further particular needs of dispute resolution in the area of complex financial products. For example, special provisions on fast-track proceedings, comprising expedited proceedings, emergency proceedings, and referee proceedings, have been built in.

The P.R.I.M.E. Finance model arbitration clause is specifically drafted for cross-border finance documentation. A well-drafted arbitration clause is of the utmost importance, to avoid enforceability issues amongst others, where arbitration is the parties’ preferred basis for the resolution of their contractual disputes. A form of Amendment Agreement incorporating the arbitration clause for use in conjunction with ISDA Master Agreements is also being finalised.

Furthermore, P.R.I.M.E. Finance can look forward to the fact that its host jurisdiction, the Netherlands, already an arbitration-friendly country, has a new flexible and forward looking Arbitration Act currently before the Dutch Parliament. P.R.I.M.E. Finance was invited to review and has commented on the drafts of this new Act.

3) Conclusion

A distinctive feature of arbitration compared with litigation is the potential for nearly universal enforcement of arbitral awards under the New York Convention. In addition, and as an example, the borrower and key witnesses may be in a jurisdiction far removed from the lender’s jurisdiction, and there may be unnecessary costs and considerable linguistic and logistical challenges associated with litigating such a case in a foreign court. This may be of particular concern when the borrower’s home jurisdiction is an emerging market and the local courts may be lacking relevant experience of global financial market practice. Litigation may similarly be of concern, whatever the jurisdiction, when there are matters at issue in a dispute of a highly technical nature, and, because of industry standard contracts and terms, a wrong decision may have unintentional adverse consequences in the wider marketplace. In such instances, and with an aim to mitigate systemic risk, promote legal certainty and to foster an authoritative and settled body of financial market law, it may be preferable to have such a case heard by a specialist panel now that a uniquely qualified, diverse and international cadre of experts has been formed and stands ready, willing and able to help.

Professor Jeffrey Golden (j.b.golden@lse.ac.uk)

Camilla M.L. Perera-De Wit (c.perera@primefinancedisputes.org)