In the first half of 2011, a new tribunal is to be
instituted in the Hague in the Netherlands to settle
international disputes relating to complex financial products.
This initiative was launched at the roundtable meeting
International Dispute Resolution Facility for the Financial
Markets held by World Legal Forum (WLF) on October 25 2010.
Standardised documentation has become commonplace in
financial markets, while the complexity of documentation and
the financial stakes involved are ever increasing. It therefore
stands to reason that legal certainty on a global scale is of
mounting importance. Fragmented national court decisions on the
interpretation of internationally standardised clauses can be
detrimental to efficient functioning of financial markets.
Local courts may, in some cases, lack knowledge of the
historic background of standard clauses developed on the
international financial marketplace.
An example of decisions by local courts giving rise to
upheaval in the financial markets is the Belgian court of
appeal's ruling on the pari passu clause in 2000.
The clause remains a permanent feature of the boiler plate
section of most international debt instruments and always reads
more or less as follows: "Each Obligor shall ensure that at all
times any unsecured and unsubordinated claims hereunder rank at
least pari passu with the claims of all its other
unsecured and unsubordinated creditors except those creditors
whose claims are mandatorily preferred by laws of general
application to companies".
In the Belgian case, the pari passu clause was
interpreted in a way that was unforeseen by market participants
worldwide. The pari passu clause under a Peruvian debt
contract, which was governed by New York law, was interpreted
by the Belgian court to mean that the bondholders must, even
outside of an insolvency event, be paid pro rata with other
unsecured debt of the issuer.
This novel ratable payment interpretation of the pari passu
clause led to many unsettled reactions (notably from L C
Buchheit and the Financial Markets Law Committee). The
generally accepted intent of the clause is merely to require
equal priority ranking of claims of the bondholders to claims
of other unsecured creditors. This case underlines the need for
an international approach to settling disputes on
internationally standardised documentation.
Submitting disputes arising from standardised documentation
to the new tribunal could steer parties away from local courts
lacking the necessary expertise. However, when drafting a new
addition to the boiler plate, market participants should take
into account the possibilities of (non) recognition of a
submission to arbitrage in the relevant jurisdictions. The New
York Convention of 1958 will, for most jurisdictions, including
the Netherlands, be the starting point of such analysis.
Firstly, however, the tribunal will have to prove that it is
up to the task. The new tribunal would need to attract
arbitrators with the relevant expertise and authority to be
able to interpret standardised clauses correctly, and to incite
acceptance of its rulings amongst market participants.
In the interest of all parties involved, the further
development of the tribunal should therefore be closely
monitored. In any case, the Peace Palace, home to the Permanent
Court of Arbitration since 1899, seems the ideal venue for this
promising new initiative.
Philip Reeser Cuperus