The Introduction of the French and Irish Law ISDA
Monday 1 June 2020
Now that we have confirmation that the United Kingdom will be withdrawing from the European Union and its judicial system, investment banks and their counterparties entering into derivatives transactions may now consider looking into alternative methods which will allow their transactions to be remain governed by European Law.
It is well established that English law-governed documents have largely dominated the European swaps and derivatives markets since the landmark ISDA Master Agreement was first published in 1987. Although following Brexit, English court judgments would likely still be recognised and could well be enforced in a Member State, there is no longer a guarantee this will be automatic, leading to a potentially expensive and draining process for recognition and enforcement of judgements to be confirmed.
In response to the growing legal uncertainty surrounding Brexit and the ability to enforce English court judgments in a Member State, in July 2018 ISDA published a new ISDA Master Agreement governed by French law, and an ISDA Master Agreement governed by Irish law. The two new governing law versions represent both the common law system (Irish law) and the civil law system (French law), therefore allowing parties to choose which system of law they prefer for their ISDA Agreements. Confirming this, Katherine Tew Darras, ISDA’s General Counsel, said (in July 2018) “An English Law Master Agreement won’t become any less valid in the EU post-Brexit, irrespective of the outcome of the Brexit negotiations. There will be good reasons for EU / EEA counterparties to continue using the English Law Master Agreement, and there will be good reasons for them to start using the French and Irish law versions. This is all about providing choice to the market and allowing counterparties to choose the option that best suits their needs.”
There are clear benefits to choosing the French and Irish Law ISDAs in the wake of Brexit for entities. The main benefit could be argued to be the continued framework of established and successful regulation of counterparties through Regulations and Directives set by the European Courts. The most obvious amendment in the new agreements is to the Governing Law provisions, since these agreements will be governed French and Irish law, respectively. The agreements contain very few deviations from the English Law agreement, however, it could be argued that the Irish law version would be the more palatable choice, with the least amount of deviations or additions to the current English Law Agreement. In addition, Counterparties can continue to benefit from having cases heard in an English-speaking European court without a substantial change to their current Agreement templates.
The French Law Agreement, however, has several further amendments to the Agreement, summarised here:
Section 2(a)(iii) – Flawed Assets Arrangement
Civil law does not have an equivalent version to the ‘flawed asset arrangement’, but the new French Master Agreement does provide for the suspension of performance and a conditional element.
Section 2(c) – Payment Netting
A small amendment has been made to obviate the possibility that payment netting might qualify as a novation.
Section 3 – Sources of Law
“Equity as a source of law” has been removed, because it is not a source of law under civil law. However, “equity” has been retained as an aid to the interpretation of intent.
Section 9(f) – No Waiver of Rights
A five-year contractual limitation period has been included.
Section 13(b) – Jurisdiction
Disputes are to be submitted to the Paris Commercial Courts and the Paris Court of Appeals jurisdiction. Parties can choose whether the jurisdiction is to be exclusive or non-exclusive.
With reference to the French agreement, the Paris Commercial Courts are specifically designed and organised to hear cases relating to international trade, including, without limitation, cases relating to transactions on financial instruments and master agreements. This French Court system is made up of judges with specialised backgrounds in financial litigation, usually with either personal professional experience in the financial legal space or comprehensive training in this area. The French courts are working to encourage the French Law ISDA Agreement as an attractive option with the options of English language proceedings in the Paris Commercial Court and Court of Appeal, as well as all documentation being submitted in English without a French translation, therefore reducing costs and the need for specialised staff with linguistics skills or reliance on translations services. Furthering this encouragement, a benefit to the use of the French Agreement is that the set-up of their system of procedural rules would allow a quick settlement of the dispute based on a schedule set by the judge and agreed to by the parties.
As strong as these benefits are, as previously stated, the English Law ISDA Master Agreement has dominated the markets since its inception in 1987. Given the length of time the courts have been servicing disputes and cases under the ISDA and CSA, there is a strong possibility market participants could be reluctant to transition to the laws of these new jurisdictions which do not have the level of history and experience of the terms of the ISDA Master Agreement and to courts that lack the specialist expertise of the English courts in this field. There is also nothing at this point to confirm the English courts’ judgment will not be upheld, recognised, or enforced in an EU Member State following the UK’s exit. The process of seeking enforcement and recognition for a Member State would also reduce the risk of any repapering of Agreements, opening the door to further negotiation or amendment of current commercial terms. Given the number of UK counterparties who will be impacted by Brexit, this could become a cumbersome task requiring significant time and resources for banks.
The introduction of the French and Irish Law Agreements is a strong indicator of ISDA’s recognition that the uncertainty in the market that has been created by the UK withdrawing from the European Union. It is clear that ISDA is moving to diversify its portfolio of documentation templates in line with ever-changing political climates, which will of course directly impact the financial services industry. The choice of both a civil and common law agreement from an EU jurisdiction will empower ISDA members by selecting the Agreement that will best facilitate their business. This is coupled with the ability to use English language agreements, reducing the need for translations, as well as the creation of English-speaking court facilities. The moves to introduce new jurisdictions and their governing law to the ISDA Agreement will increase the capability of parties to continue to benefit from European regulatory protections, which may no longer apply to established jurisdictions, or they may now have the option for the governing law of their own country of incorporation. The question is then, does this empowerment and choice outweigh the benefits of continuing to use English law to service ISDA agreements? One of the most complex uncertainties with Brexit surrounds the place of English law and its enforceability in Member States. While the benefits have merit, the English Law ISDA has been the most dominant agreement since its inception. It will be very difficult to concede the experience and specialised knowledge of the English court judges, which will be incomparable to new courts, despite their efforts to staff new facilities with judges who have related professional experience. Financial Services, as an industry, does not welcome change and the introduction of jurisdictions in their infancy for ISDA and CSA related disputes, may be a very hard sell to counterparties.
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