ISDA initiated a Consultation and has since published a Guide on new model clauses to the 1992 and 2002 ISDA Master Agreement. In this article, we consider the issues with the existing clauses, the contents of the new model clauses and briefly the benefits of using such clauses.
Background to the Guide
ISDA has produced four new model clauses which, at the option of the parties, can replace Section 13(a) and/or (b) on the governing law and jurisdiction (respectively) of the 1992 or 2002 ISDA Master Agreement. These include optional model forms of exclusive and non-exclusive jurisdiction clauses, and an alternative Section 13(a) governing law clause expressly covering the choice of law for non-contractual obligations. The key drive in the Consultation was the modernisation and simplification of the current clauses to create certainty as a result of the changes in international law which have complicated the interpretation of the existing clauses.
Issues with the current Section 13
The jurisdiction clause in section 13(b) of the 1992 ISDA Master Agreement is expressed as non-exclusive, with an exception which provides for exclusivity in certain scenarios. For example, if the elected governing law is English and the parties are “Contracting States”,the jurisdiction will be exclusive. However, the content of the definition of “Contracting States” has changed with the development of international law in this area (such as the Brussels Regulation), and it is now uncertain how the clause is to be interpreted. As a part of the Consultation, it was noted that the current clause is unnecessarily complex and requires clarity, given such legal developments.
Section 13(b) of the 2002 ISDA Master Agreement, similarly, provides for non-exclusivity, unless the Brussels Convention and the 1988 Lugano Convention apply (i.e. the proceedings involve a “Convention Court”). The effect of the Brussels Regulation has further complicated the application of exclusivity, and therefore has reasserted the need for a simplified clause. Neither the 1992 nor the 2002 jurisdiction clause are compliant with the Hague Convention, which is therefore another reason for new and optional clauses. This point was reinforced by ISDA members in the Consultation, as there was unanimous consensus for a clause which conforms to the requirements of the Hague Convention.
The 2002 ISDA jurisdiction clause has already slightly broadened the meaning of “Proceedings” (compared to the 1992 Agreement) to a “dispute arising out of or in connection with this Agreement” which expressly clarifies that the parties intend for disputes in connection to the Agreement to be governed by the clause. However, this clause is often amended and broadened even further to include disputes which do not arise directly from the Agreement.
Section 13(a) of the 1992/2002 ISDA is the governing law clause which currently does not expressly cover non-contractual obligations. Similarly to the definition of “Proceedings”, this clause is very often amended to ensure that all disputes are covered by the elected governing law. Such disputes could arise as a result of a misrepresentation or a breach of statutory duty, and may be particularly relevant in swap disputes. An explicit clause would be helpful, given the uncertainty in the absence of an express choice of law provision.
New Model Clauses
Each of the new model clauses is intended to be included in the Schedule when a new Master Agreement is drafted, and to be included on a bespoke basis depending on the parties. It is important to note that the clause must include the provision to delete the existing paragraph in the Master Agreement (which is included in the model clause), otherwise the agreement would have two differing jurisdiction or governing law clauses.
Appendix A – Model Exclusive Jurisdiction Clause
This clause is intended to be used where the parties to the agreement have selected English law to govern the ISDA. The clause gives exclusive jurisdiction to the English courts, which removes the contingency regarding the selected governing law and removes the doubt that this clause complies with the Hague Convention. The jurisdiction of the English courts or courts of the State of New York has been separated into two clauses (for New York see Appendix B) which removes the argument that the courts of more than one contracting party have been selected. The definition of “Proceedings” has also been further broadened to expressly include “non-contractual obligations”, which mitigates the risk that the courts may take a restrictive view of disputes not as a direct result of the agreement.
Appendix B – Model Exclusive Jurisdiction Clause
This clause is to be used in the Schedule when the parties have selected the laws of the State of New York as the governing law. It is similar to the model jurisdiction clause for English law (except that the courts of the State of New York are given jurisdiction) and therefore the points above also apply to this clause.
Appendix C – Model Non-Exclusive Jurisdiction Clause
This clause is for use where the parties have selected the governing law to be either English law or New York law, but they agree that they are not precluded from commencing a claim other than in the named court (depending on the governing law choice). This separation of non-exclusive jurisdiction from the exclusive jurisdiction clauses is in stark contrast to the 1992/2002 clauses which, as stated above, include complex exceptions to non-exclusivity. This severance of the clauses makes the parties’ intentions clear as to where they can bring a claim.
Appendix D – Model Governing Law Clause
This clause is intended for parties that have selected either English law or New York law and intend that their non-contractual obligations shall be governed by the same law as that governing the agreement. The inclusion of “non-contractual obligations” provides certainty to both parties and to the court if a dispute arises, which is both cost-effective and less time-consuming.
There are three benefits to the use of these model clauses: legal certainty, cost, and time. Although non-exclusive jurisdiction gives flexibility to parties, most parties have a tendency to elect exclusive jurisdiction to deal with all disputes. This is in part because of previous case law setting out what terms mean, and so the parties can predict the outcome of a dispute. Selecting exclusive jurisdiction is also both cost-effective, for example not requiring translations, and saves time disputing in other jurisdictions. There is a consensus in the market for exclusive jurisdiction to provide legal certainty, and therefore these model clauses provide clarity as to which jurisdiction has been selected and what the parties’ intentions are.
The Choice of Law and Governing Law Guide is intended to be a “living guide”, and so if and when additional clauses are necessary and therefore drafted, they will also appear in this Guide. One possibility could be to use English law as the governing law, but to dispute before Singapore courts or other commercial law courts.
It should be noted that ISDA is also in the process of reviewing and discussing a 2018 ISDA Master Agreement for French law and Irish law, in order to give market participants further choice when selecting a governing law.