Financial contract

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Finance contract /faɪˈnæns/ /ˈkɒntrækt/ (n.)

Any contract the gist of which is for its parties to exchange large amounts of money, or money-like things, having readily realisable value, and the performance of which therefore generates significant credit risk, should one of the parties blow up before it has a chance to pay everything it owes under the contract.

The paradigm example of a finance contract is a loan. Other good examples are swaps, futures, securities, securities financing arrangements, options, trade financing arrangements, securitisations and commodity supply contracts.

Finance contracts create special, large, financial risks, and therefore have lots and lots of boilerplate aimed to keep those who are owed money, or money-like things, safe.

Finance boilerplate is thus an unfortunate and miserable fact of life for banking legal eagles, but we contrarians address our labours with fortitude, good humour, and do our level best to see the funny side of it. Not easy, but possible.

But other legal eagles should not have to toil so. You would think they would rejoice in this comparative freedom from the outright tedium of financial wordwrightery. “Look at us,” you might expect they would say, taunting the poor, Promethean banking legal eagle, chained to a rock and pecking away at his own liver, “with our our neat, elegant and stylish prose contracts. How ghastly it must be to be a banking legal eagle.”

But, friends, they do not say that, Rather they have a kind of banking envy. It seems they want their contracts to be long and impentrable and tiresome too. And to do that they have just culturally appropriated banking boilerplate.

And so we find non financing contracts — things like service agreements, employment contracts, licensing arrangements — which should be a model of Ellroyesque brevity, are shot through with this ghastly banking dreck.

Finance specific boilerplate

Here are some common standard clauses which, it is submitted, do not belong outside a finance contract. This is an organic list that will grow as I get round to expressing my angst and frustration at crappy legal eagles who keep insisting on this sort of thing:

Why you don’t need finance contract boilerplate in other types of contract

Clause	What is does	Why you don’t need it
Events of Default	A laundry list of events of default, mostly concerned with the solvency and ability to pay sums of money, entitling the “non-Defaulting party” to take extreme, and pre-identified measures, including terminating the agreement	This is the daddy. The thing is, the ordinary rules relating to recovery of damages upon fundamental breach of contract are, for the most part, fine if you are just performing a service contract. They are in fact rather good: they have been honed and smoothed over the centuries by the fast-flowing babble of common law precedent. Financing contracts, in this river, are queer fish: one must navigate tendentious insolvency rules — especially if you are trading across border — to give effect to vitally important set-off and netting rights which are engineered to deliver a specific financial outcome, and might not work as well, or as quickly, when a counterparty is insolvent. Especially where the sums at stake are colossal, you don’t want to be applying to the local courts to recover a debt claim: you don’t want to be in hock to a bankrupt company at all. It is is providing consulting services you can cut your losses by ditching it and finding another consultant. If it owes you three hundred million dollars, it is not so easy being sanguine. Plus, events of default are designed as “self-help” remedies to allow an innocent party to quickly and unfussily exercise its rights and put itself in the best possible position with the least possible resort to the courts and the legal process.
No set-off or counterclaim	A provision stating that “all sums shall be paid in full, free of any restriction, condition, set-off or counter-claim, and without deduction or withholding for or on account of tax except where required by law”	Because in the ordinary world or service contract this goes without saying, and the hassle is manageable even where it doesn’t: this is relevant when you are paying cashflows, manufacturing dividends and so on across borders, or where a certain sum arriving at a certain time in a certain place without counterparty nibblement is important. If your client deducts tax from your consulting fees, or has set them off against something you owe it, that’s a bummer for sure, but you’ll survive: it won’t set an ending chain of operational payments into a vortex of destruction. As our friends in the stupid banker cases show us, you don’t have to get things that badly wrong for things to go really, apocalyptically badly wrong.
No waiver	Tedious verbiage to the effect that “No failure or delay in exercising, any remedy under this Agreement will operate as a waiver, nor will any single or partial exercise of any right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy.”	Again, this is all about does this dude owe me the ten million dollars or not rather than “will I get paid my $25,000 consulting fee”. If, out of the goodness of your heart and a realistic view of your long term revenue prospects, you let a distressed creditor off strict enforcement during a tough patch, to help it through a difficult cashflow situation, you don’t want to find you have waved away your rights to get that money later, or not grant that indulgence should it find itself “inexplicably” in the same situation again next time a margin payment is due.
No Assignment	Words to the effect that one party can’t assign or transfer its rights without the other’s consent.	The old chestnut from laws 201, is that you cannot unilaterally transfer obligations under a contract in any case; only rights. Transferring rights and obligations is a novation. Everyone has to agree to that. Transfer of rights only — “assignment” — is mostly harmless in any contract, even a finance contract, though that doesn’t stop banking legal eagles getting agitated about it — possibly out of a misfounded suspicion it might upset close-out netting arrangements. (In our rambunctious opinion, it does not and cannot: nemo dat quod non habet.) In any case, nervousness about precisely whom you can invite to enjoy the benefits or suffer the burdens of your contract on your behalf is a quite a bit more of a “thing” in a lending situation, where the action itself — paying or receiving money — isn’t one that requires any skill, competence or personality in itself. (Sorry, banker friends, but it is true). Now, quite unlike the performance of personal services, simply discharging a payment obligation is, of itself, a non-personal thing: I don’t care who pays the million quid you owe me as long as someone does. But if I have invited Pink Floyd to play at my son’s Barmitzvah I will care, a lot, if they send some other jokers along instead. The thing about money payments isn’t who pays the money, but whether they pay it. But who actually pays the money — as often as not it will be a direct wire from your bank on your behalf, after all — is a very different thing from who is obliged to pay it, and, especially six months out from a coupon payment in a choppy credit environment, this is a personal thing, so boilerplatey legal eagles like to make that clear. With personal services it goes without saying. It is not possible for someone who is not Pink Floyd to perform the obligation of being Pink Floyd.
Severability	Claiming the illegality, invalidity or unenforceability of any provision of this Agreement does not affect the rest of its enforceability.	Another one we at the JC have a hard time understanding the logic of in any weather, but you can see that if I agree to lend you six squillion smackeroonies and you agree to repay in one year with interest and provide me one bowl of M&Ms per week with the brown ones removed for the term, then if it becomes illegal supply M&Ms (look, let’s just say OK?), that doesn’t let you off your loan repayment or interest obligations. Again, this seems less of a monstrously critical risk for me if I am not ledning yuou six squillion smackeroonies.

See also

• Loans, securities, swaps and securities financing transactions