|Philip Reeser Cuperus|
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
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