Related Author: Niki Mehta, Trainee Solicitor, Mayer Brown
On 15 November 2021, P.R.I.M.E. Finance – the Panel of Recognised International Market Experts in Finance - launched its revised Arbitration Rules (the "2022 Rules") which came into effect on 1 January 2022 and which, like their predecessors, are designed for the arbitration of complex financial disputes. The 2022 Rules is the third iteration of P.R.I.M.E. Finance's Arbitration Rules, and are said to have undergone "the most ambitious revision of its rules since its inception", following an "extensive global public consultation". It is apparent that the changes made to the rules seek to address the feedback and reservations of financial market participants ("FMPs") regarding previous versions of these rules, and possibly arbitration as a dispute resolution forum for financial disputes more generally.
This Update takes a close look at the key features of the 2022 Rules by reference to some of the reservations that have been expressed in the past, and includes a brief comparison with other major institutional rules.
Arbitrating financial disputes
Traditionally, arbitration has not been as popular in the finance sector for the resolution of disputes as it is in other industries, such as energy, construction, or shipping. Concerns expressed regarding arbitration in general include the following perceptions:
- Lack of transparency in arbitration compared to court litigation;
- Lack of precedent and legal certainty for future cases;
- Inability to obtain interim and urgent relief;
- Inability of an arbitral tribunal to issue a summary judgment;
- Fewer mechanisms to minimise the risk of parallel related proceedings and inconsistent decisions arising from multi-party and multi-contract scenarios.
Whilst FMPs have historically turned more to the courts in key financial jurisdictions such as New York, England & Wales, and Hong Kong to resolve disputes, arbitration is not uncommon for certain types of finance transaction or involving certain kinds of counterparty, particularly in deals involving emerging markets, or those involving state-owned enterprises. In these cases, there may be reasons from the outset as to why litigating a potential dispute in national courts might not be appropriate or desirable. For example, it might be felt that not all national courts have the same level of technical expertise and working knowledge of complex financial products; nor are they all equally able to resolve disputes speedily; and in some circumstances confidentiality may be of primary concern.
There are some data available from which to observe trends. For example, the finance sector is one of the top three sectors comprising the caseload of the London Court of International Arbitration ("LCIA") in recent years. In 2019, the sector comprised 32% of the LCIA's total cases and in 2020 it comprised 20%1. Similarly, in 2019 the ICDR-AAA reported a 58% year-on-year increase in disputes in financial services, having already reported a 78% increase in 2018. Although the 2020 figures show a slight decrease, it does not belie the apparent direction of travel.
Background to P.R.I.M.E. Finance and the 2022 Rules
Against the backdrop of the global financial crisis, P.R.I.M.E. Finance was established by legal and finance practitioners and experts in 2012 as an organisation dedicated to the resolution of disputes concerning complex financial products. On its launch, P.R.I.M.E. Finance also released the first version of its Arbitration Rules, which were based on the 2010 UNCITRAL Rules. Following a revised version in 2016 (the "2016 Rules"), the 2022 Rules will apply to P.R.I.M.E. Finance arbitrations commencing on or after 1 January 2022 (unless the parties specify that an earlier version should apply).
As is evident from the statistics cited above, a considerable volume of finance-related disputes are already arbitrated under the rules of established arbitral institutions. P.R.I.M.E. Finance's offering appears to be underpinned by the following characteristics:
- Arbitration rules aimed at finance disputes – the rules are specifically designed with complex financial disputes in mind, including those concerning derivatives2, sovereign lending, investment and advisory banking, financing, private equity and asset management. P.R.I.M.E. Finance say that the 2022 Rules are also suitable for resolving disputes in emerging areas such as fintech and sustainable finance.
- A Panel of Experts (the "Panel") – the Panel comprises over 250 international specialists with technical expertise and market experience in areas such as derivatives, private equity, and asset management, thus providing the parties with a ready-made longlist of arbitrators with specialist knowledge. One change brought about by the 2022 Rules is that, whilst FMPs continue to be able to select arbitrators from the Panel, they are no longer expected to do so (as was previously the case under the 2016 Rules) as it is not a closed list.
- Support of the Permanent Court of Arbitration in The Hague (the "PCA") – all arbitrations under the 2022 Rules are administered by the PCA in The Hague, a long-standing arbitral institution.
Key features of the 2022 Rules
Like many rule revisions made by mainstream arbitral institutions, the 2022 Rules purport to reflect current best practice in arbitration – including provision for remote hearings and paperless hearings. Other key features of the 2022 Rules appear to be aimed at addressing the concerns outlined at the outset of this Update by:
- Increasing transparency and publication of awards;
- Offering emergency and interim relief as well as an early determination process;
- Multi-party/multi-contract arbitrations; and
- Efficiency and cost-effectiveness, including an expedited procedure.
Each of these features is examined below.
Increased transparency and publication of awards
- Interventions by industry bodies – given the regulated nature of this sector and technical issues pertaining to standard practices in the industry, industry bodies such as ISDA, the LMA, and the P.R.I.M.E. Finance Foundation can, by virtue of the latest amicus curiae provisions, make submissions in an arbitration as a non-party. Tribunals may give such a direction at a party's request or on their own initiative and, in each case, the parties will be consulted beforehand.
- Disclosure of third parties with a significant interest in the case – to demonstrate further the independence and impartiality of arbitrators is the requirement to disclose the identity of any third party with a "significant interest" in the outcome of the dispute (for example, third persons funding a claim or defence or other members of the same corporate group) and the nature of such interest to the other party(s), the tribunal and the PCA. It is understood that the word "significant" adds a materiality threshold meaning that large corporates with diversified shareholders will not need to disclose all of their interests.
- Publication of anonymised awards – to further legal certainty in financial markets, P.R.I.M.E. Finance aim to build a body of case law arising from arbitral decisions by publishing anonymised awards on their website, subject to any party objecting in a timely fashion. Whether this development may mitigate the effects of the lack of a formal, binding system of precedent remains to be seen, though it should be observed that the 2022 Rules are not the only arbitral rules to make such a provision: see, for example, the arbitral rules of the International Chamber of Commerce (the "ICC"), whose awards from January 2019 onwards may be published.
Interim relief, emergency arbitration and early determination
- Interim measures – provisions are included in the 2022 Rules for the tribunal, prior to the issue of the final award, to grant "any interim measures which it deems appropriate" in the form of an order or an award. The 2022 Rules also now include detailed provisions at Article 50 on the tribunal's ability to grant security for costs.
- Expanded emergency arbitration provisions – while not a new feature, the power to make provision for an arbitration on an emergency basis has now clearly been placed in the hands of the PCA, which is empowered to appoint an emergency arbitrator, usually within two days of receiving the request. The 2022 Rules provide detailed provisions about the emergency arbitration process at Article 25, which are broadly consistent with those offered by other major arbitral institutions. Further, they clarify that, notwithstanding these provisions and those on interim measures generally, the parties may still seek interim measures before a court, including measures covered by Article 25, where permitted under the applicable law.
- Early determination – parties now have the express ability to request early determination of a matter, within 30 days of the date on which the claim or defence is raised. Early determination can be requested on the ground that the claim or defence is "manifestly" (a) outside the jurisdiction of the tribunal; (b) inadmissible; or (c) without legal merit. Whilst such power was implicit prior to the 2022 Rules, tribunals may have been hesitant in exercising it to avoid the risk of allegations of procedural unfairness or irregularity.
Multi-party and multi-contract arbitrations
Given the contractual basis of arbitration, consent is required from all parties in order to join a non-party or to consolidate two cases, which is often unattainable after a dispute arises. The risks generated by parallel arbitral or court proceedings include procedural and systemic inefficiencies (workload duplication, competing tribunals, higher costs) as well as inconsistent awards, and enforcement problems. The 2022 Rules include various mechanisms which make provision for multi-party and multi-contract arbitrations.
- Joinder – the tribunal (or the PCA, if the tribunal is not yet constituted) can join a non-party to proceedings upon an application by that party or by another party where (a) all the parties agree (including the joining party) and (b) prima facie that joining party is bound by the arbitration agreement.
- Consolidation –the PCA can consolidate two or more pending arbitrations where (a) all the parties expressly agree (b) all the claims are made under the same arbitration agreement or (c) all of the claims arise under two or more "compatible" arbitration agreements and they arise out of (i) the same legal relationship; (ii) a principal contract and its ancillary contract(s); or (iii) the same transaction or series of transactions.
- Single arbitration under multiple contracts – a single arbitration may be commenced in relation to claims under multiple contracts pursuant to the conditions set out at Article 33, which essentially mirror those at (c) above in relation to consolidation. It is understood, although not express in the 2022 Rules, that this bypasses the need for a consolidation application.
- Coordination procedure – this permits the coordination of two or more pending arbitrations which have the same tribunal and share a common question of fact or law. In this procedure, each arbitration would proceed separately (hence it is often termed "concurrent arbitrations" in the arbitration context); in litigation terms, this seems akin to two or more actions being "heard together".
Efficiency and cost-effectiveness
- Expedited procedure for disputes of €4 million or less –previous versions of the rules enabled the parties to expedite proceedings by agreeing, subject to certain approvals, to shortened timelines. The 2022 Rules go further by the default application of an expedited procedure if the amount in dispute is up to €4 million (at the time of filing the Response) or if the parties so agree. Parties are able to opt out of these expedited rules, or modify them, by clear wording in their arbitration clause. Important aspects of the expedited procedure include: the default appointment of a sole arbitrator (even if the arbitration agreement provides otherwise but subject to the PCA's discretion to appoint three or more arbitrators), a case management conference ("CMC") within 15 days of the tribunal's constitution, and issuance of the final award within 180 days of the tribunal's constitution.
- Procedural timeframes for CMC and awards – the 2022 Rules provide for a CMC within 30 days of tribunal's constitution and set mandatory time limits in which arbitrators must render their award, namely 90 days for a three-member tribunal and 60 days for a sole arbitrator.
- Flexible options for Tribunal fees – under the 2022 Rules, the parties can choose between an hourly-rate system (as in LCIA arbitrations) or one based on the value of the dispute (as in ICC arbitrations), by reference to a schedule of fees in the 2022 Rules, with hourly rates as the default if the parties cannot agree. The PCA's administrative costs are fixed by reference to the amount in dispute and will be no less than €10,000 (for cases up to €1 million in value).
- Arbitrator tardiness as a ground for challenge – an arbitrator's failure to "perform his functions…within agreed time limits" now constitutes a ground for challenge; one would presume this covers time limits set out in the 2022 Rules as well as those agreed with parties but the 2022 Rules are silent in this regard. This amendment is presumably to encourage arbitrators to work efficiently, not "over-trade", and render their awards promptly.
Brief comparison with other arbitration rules
The 2022 Rules combine elements of other major arbitration rules, including the LCIA Rules 2020, the ICC Rules 2021, and the SIAC Rules 2016, all of which are likely to have influenced the 2022 Rules during the feedback and revision process.
They reflect certain aspects of ICC arbitrations, such as the default application of expedited rules for claims of a certain value, the publication of awards, party nominations in a multi-party scenario, and the requirement to disclose those with an economic interest in the outcome (albeit, under the 2022 Rules, the requirement is limited to "significant interest[s]" only).
The 2022 Rules are similar to the LCIA Rules 2020 in many regards including: the default appointment of a sole arbitrator, the institution's role in confirming appointments, the early determination procedure, and the ability to recover any substitute deposit paid. The coordination procedure also appears very similar to the ability, in LCIA arbitrations, for tribunals to conduct concurrent arbitrations in multi-party and multi-contract scenarios.
A focus of recent rule revisions has been multi-party and multi / related-contract disputes, such that there are many similar provisions in the market to those in the 2022 Rules. The joinder, consolidation and "single arbitration under multiple contracts" provisions in the 2022 Rules are closely aligned with the SIAC Rules 2016. As expected, though, all institutional rules have their nuances. One key difference between the 2022 Rules and the SIAC Rules is that there is no express provision for a tribunal to order consolidation under the 2022 Rules, as this responsibility rests with the PCA. Interestingly, if the PCA decides to consolidate, it can revoke arbitral appointments already made (and appoint or reappoint arbitrators), since all parties are deemed to have waived their right to appoint an arbitrator in this scenario.
The 2022 Rules also go further than the above-mentioned institutional rules in certain respects, including in relation to non-party intervention, security for costs, and the ability to choose between an ad-valorem and time-based system for arbitrator fees.
Even before the launch of the 2022 Rules, ISDA had been recommending P.R.I.M.E. Finance as an institution for finance-related arbitrations since P.R.I.M.E.'s Model Clauses feature in its 2018 Arbitration Guide. But beyond this, the popularity of the 2016 Rules has been hard to gauge due to a lack of published data.
With the changes aimed at increasing transparency, expressly granting tribunals and the PCA wide-ranging powers, promoting efficiency and cost-effectiveness, and facilitating effective management of multi-party and multi-contract arbitrations, the 2022 Rules look to address some important concerns raised by FMPs and aspire to provide a credible regime for the resolution of complex banking and finance disputes.
The 2022 Rules are, of course, not the only arbitration rules in the market designed for finance disputes (for example, there are the CIETAC Financial Disputes Arbitration Rules). Other institutions – like HKIAC – have also launched specific panels of arbitrators for financial services disputes. Further, the LCIA and ICDR-AAA statistics may suggest that FMPs will remain happy using these mainstream arbitration rules rather than looking for industry-specific arbitration rules.
However, as finance transactions become increasingly complex, and as relatively new product areas arising from fintech and sustainable finance continue to develop, the need for technical expertise in resolving disputes may become increasingly important to FMPs. Given the breadth of expertise offered by P.R.I.M.E.'s Panel, which arguably remains the 2022 Rules' most distinguishing feature (but no longer with an expectation to nominate arbitrators only from the Panel), there may be reason to believe that the 2022 Rules will prove to be more popular than their predecessors. Ultimately, the real uptake and impact of the 2022 Rules can only be meaningfully assessed in the years to come, to the extent that disputes arise out of transactions in which the parties elect arbitration as their dispute resolution forum and choose the 2022 Rules to govern.
1 The 2019 figure was unusually high due to a large group of 41 arbitrations which accounted for more than one third of the banking and finance cases. See pages 10-11 of LCIA's Annual Casework Report 2020: https://lcia.org/LCIA/reports.aspx
2 The ISDA Arbitration Guide, for example, includes a range of P.R.I.M.E. Finance model arbitration clauses designed to be used with the ISDA Master Agreements (1992 and 2002).