Financial and non-financial businesses across the world depend on derivatives to manage risks to which they are exposed. It may not be possible to predict future market movements with certainty but derivatives provide the tool to lock in borrowing costs, exchange rates and prices thus eliminating many of the uncertainties affecting business. That’s a very valuable tool.
The International Swaps and Derivatives Association, Inc. (ISDA) has a long history of creating solutions for derivatives market participants, facilitating more efficient and safer derivatives markets. One of its original solutions, maintained to this day, is the production of industry standard documentation. The availability of such documentation, created with input from ISDA’s members across derivatives industry sectors, facilitates the prompt negotiation of derivatives on terms benefiting from strong legal and commercial certainty. That legal certainty is supported by various legal opinions obtained by ISDA for the benefit of its members. McCann FitzGerald acts as Irish counsel to ISDA, providing the various Irish legal opinions made available to its members.
Expanding ISDA’s Governing Law Options to Include Irish and French Law
To date, ISDA has offered users of its primary documentation two principal options regarding the laws that govern their contractual relationships; those of England and the State of New York. That choice, in turn, affects the courts that determine any disputes arising under that documentation. In a recent and very encouraging development for Ireland, ISDA has confirmed that it proposes to extend that offering to encompass Irish law and French law.
Drafts of Irish and French law versions of the ISDA 2002 Master Agreement (the 2002 ISDA) have been made available to members for comment and are expected to be finalised and published in coming months. Updated Irish and French netting opinions encompassing the Irish and French law versions will be issued to coincide with their publication. Whereas ISDA’s initial focus has been on the 2002 ISDA, a suite of Irish law versions of certain English law ISDA credit support documents has also been drafted and made available to members for comment. It is anticipated that they will be published in due course. It is also anticipated that the 2013 ISDA Arbitration Guide will be extended to encompass appropriate clauses for use with a 2002 ISDA governed by Irish law, where the seat (or place) of arbitration is in Ireland.
Benefits of ISDA’s Expanded Governing Law Options
This is a very welcome development for users of ISDA documentation and for Ireland. The new governing law option will facilitate users that have a preference for contracts governed by the laws of Ireland, or of an EU Member State more generally, whether that preference derives from Brexit-related or other reasons. Perceived advantages of designating the laws of an EU Member State as the governing law of a 2002 ISDA, with a related election for the courts of that Member State to have jurisdiction in related disputes, include the following.
• The availability of the EU’s highly flexible regime for the recognition and enforcement of judgments obtained in an EU Member State
It remains unclear whether judgments obtained in the UK post-Brexit will continue to benefit from automatic recognition throughout the EU as they do now. Even if, as proposed by the UK Government, the UK independently participates as a contracting state in the Convention of 30 June 2005 on Choice of Court Agreements (the Hague Convention), such participation will not resolve all concerns in this regard. Whereas EU Member States are contracting states to the Hague Convention, which requires effect to be given in contracting states both to in scope choice of court agreements designating the courts of a contracting state and to the judgments of the designated courts, the Hague Convention is subject to some important limitations. In particular, it only encompasses exclusive choice of court agreements concluded after it has entered into force in the contracting state whose courts are designated and, therefore, will have no effect in respect of an English law governed 2002 ISDA that includes a non-exclusive jurisdiction clause or an exclusive jurisdiction clause that pre-dates the UK’s independent participation as a contracting state in that Convention.
Some parties take the view that the extra steps and related expense, delay and uncertainty involved the post-Brexit EU enforcement of UK judgments that do not benefit from automatic recognition render such judgments less effective, notwithstanding that they may ultimately be recognised and enforced by the courts of relevant EU Member States.
• Addressing concerns deriving from Article 55 of the EU Bank Recovery and Resolution Directive (BRRD)
Article 55 requires EU banks and other in scope entities to include a contractual recognition of BRRD’s bail-in provisions in a very wide range of non-EU law governed contracts. This currently arises in respect of New York law governed 2002 ISDAs and in scope entities deal with it by including appropriate contractual provisions. Current EU proposals to amend BRRD have, however, focused some such entities on the vulnerability of these contractual fixes to legal change and the benefits of contracting under a 2002 ISDA governed by the laws of an EU Member State.
• Addressing concerns deriving from Article 46(6) of the EU MiFIR
Article 46(6) requires in scope non-EU entities providing investment services or performing investment activity within the EU to offer to submit any disputes relating to those services or activities to the jurisdiction of a court or an arbitral tribunal in an EU Member State. Such investment services and investment activity may encompass the transaction of derivatives under a 2002 ISDA.
No Significant Differences Between the Irish and English/New York Law Versions
The differences between the new Irish, and current English/New York, law versions of the 2002 ISDA are minimal, being limited to:
• designating Irish law as the applicable governing law and deleting from the Schedule the current English/New York law options in this regard. The governing law provision ion the Irish version reflects the terms of the new model governing law clause published by ISDA for use with the English law version of the 2002 ISDA in its 2018 ISDA Choice of Court and Governing Law Guide;
• replacing the current choice of court agreement with optional exclusive and non-exclusive submissions to the jurisdiction of the Irish courts and modifying the Schedule to facilitate designation of the preferred option (if neither option is designated, exclusive jurisdiction will apply). Again, the substance of these provisions reflects the new model exclusive, and non-exclusive, jurisdiction clauses published by ISDA for use with the English law version of the 2002 ISDA in its 2018 ISDA Choice of Court and Governing Law Guide; and
• replacing, amending or deleting certain related definitions.
Similarly, very limited differences arise between the proposed Irish, and existing English, law versions of relevant credit support documents. In all cases, the changes made preserve the substantive characteristics of the relevant English law version.
Implications for Ireland Inc
We anticipate that ISDA’s initiative will stimulate an increased acceptance by the international finance and business community of Irish law as a governing law of choice for cross-border transactions. As outlined above, ISDA’s Irish law option offers significant benefits to users of ISDA documentation and the:
• very limited differences between the English and Irish law governed versions of the 2002 Agreement (and related credit support documents);
• similarity of the contract law and legal systems of England and Ireland; and
• regard had by the Irish courts, in the absence of a binding Irish precedent, to decisions of the English courts on analogous matters,
will reassure users familiar with the English law versions that market expectations as to how the ISDA documentation works should be respected.