ARBITRATING DISPUTES BETWEEN CLIENTS AND FUND MANAGERS: KEY CONSIDERATIONS FOR IN-HOUSE COUNSEL
Investment management agreements sometimes refer client-manager disputes to international arbitration. In-house counsel should be aware of the unique procedural features of international arbitration that can materially impact the outcome of a dispute.
This awareness is not only necessary when an arbitration is commenced, it is also highly relevant during settlement negotiations, so in-house counsel can appropriately gauge their client’s chances of a successful outcome during settlement negotiations.
As an initial matter, the choice of international arbitration can have subtle impacts on the approach taken by the decision maker to the law applicable to the dispute itself.
Theoretically, of course, the fact that an asset management dispute is referred to international arbitration does not and should not change the substantive law that will govern the contract or its performance. Usually, this is English law (or sister laws like Jersey or Cayman law) or US law (specifically, Delaware or New York law).
Broadly considered, all of these jurisdictions permit a client to raise a claim against an asset manager for self-dealing without consent, acting outside of the investment mandate or failing to exercise due diligence. At the same time, these jurisdictions also provide that an asset manager is not liable simply for underperforming the market, even if the underperformance is severe and even if, with hindsight, the underperformance could have been avoided. Losses alone are not by themselves actionable. Instead, a client needs to show an actual breach of an applicable statutory, tortious or contractual standard to obtain relief.
That said, international arbitration is often conducted in front of arbitrators who either are not qualified in the law governing the contract or have spent their careers handling international transactions and disputes more than domestic ones occurring solely within one country’s territory.
Apr-Jun 2025 issue
Volterra Fietta