Look, I tried

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From our “understanding the implications of behavioural science for contract negotiation” series — it is a short series at present — comes this oft-overlooked motivation for your counterparty’s apparently absurd negotiation demands: not to be able to enforce them, per se, but to persuade its own, absurdly demanding clients, that it tried.

In our crazy, inter-connected world, much financial markets activity comprises of fattened intermediaries sitting cross-legged in a circle, passing around a parcel belonging, at some remove, to the ultimate client. As it passes by, each one takes a nibble at it.

Now each of these intermediaries need to agree the terms on which the parcel passes. Their main concern is that they get enough of a handle on the asset for long enough to have a good bite before they pass it on, but each needs also to prepare for the consequences of the parcel not, eventually coming back to them when their immediate client — in most cases the person who passed the parcel to them — decides to ask for it back.

Now the ultimate client might be a credulous old fool with a chip shop by the lighthouse in Dungeness, but the Russian doll assembly of agents through whose intestinal systems his pitiful savings have passed are not. Each has its own team of assiduous legal eagles, and each will want ever higher standards of prudence from their onward counterparties — one has to do something to earn one’s commission after all. And so commences an arms race of covenants, representations and warranties. It will get to a point where the legal eagle handling the incoming blanches — the request exceeds all policies and internal procedures. It cannot be done.

“I ... I ... we cannot agree to monitor every individual employee’s personal investments to comply with your environmental, social and corporate governance policy,” she will wail. “But it is absurd!”

“But you must,” will come the reply. “For it is in our charter. We have committed to our clients. This is a show-stopper.”

See also

• The mythical ultimate client
• Software as a service
• Disintermediation