Misrepresentation - ISDA Provision

2002 ISDA Master Agreement A Jolly Contrarian owner’s manual™ Resources and navigation [[{{{1}}} - 1992 ISDA Provision|This provision in the 1992]] Resources Wikitext | Nutshell wikitext | 1992 ISDA wikitext | 2002 vs 1992 Showdown | 2006 ISDA Definitions | 2008 ISDA | JC’s ISDA code project Navigation Preamble | 1 • (a) (b) (c) | 2 • (a) (b) (c) (d) | 3 • (a) (b) (c) (d) (e) (f) (g) | 4 • (a) (b) (c) (d) (e) | 5 • 5(a) Events of Default: 5(a)(i) Failure to Pay or Deliver 5(a)(ii) Breach of Agreement 5(a)(iii) Credit Support Default 5(a)(iv) Misrepresentation 5(a)(v) Default Under Specified Transaction 5(a)(vi) Cross Default 5(a)(vii) Bankruptcy 5(a)(viii) Merger Without Assumption 5(b) Termination Events: 5(b)(i) Illegality 5(b)(ii) Force Majeure Event 5(b)(iii) Tax Event 5(b)(iv) Tax Event Upon Merger 5(b)(v) Credit Event Upon Merger 5(b)(vi) Additional Termination Event (c) (d) (e) | 6 • (a) (b) (c) (d) (e) (f) | 7 | 8 • (a) (b) (c) (d) | 9 • (a) (b) (c) (d) (e) (f) (g) (h) | 10 | 11 | 12 • (a) (b) | 13 • (a) (b) (c) (d) | 14 | Index: Click ᐅ to expand: 2002 ISDA 1992 ISDA Section 5(a)(iv) in a Nutshell™ Use at your own risk, campers! 5(a)(iv) Misrepresentation. A representation (other than a Payee or Payer Tax Representation) made under this Agreement or a Credit Support Document was materially incorrect or misleading when it was made; view template Full text of Section 5(a)(iv) 5(a)(iv) Misrepresentation. A representation (other than a representation under Section 3(e) or 3(f)) made or repeated or deemed to have been made or repeated by the party or any Credit Support Provider of such party in this Agreement or any Credit Support Document proves to have been incorrect or misleading in any material respect when made or repeated or deemed to have been made or repeated; view template Related agreements and comparisons Click here for the text of Section 5(a)(iv) in the 1992 ISDA Click to compare this section in the 1992 ISDA and 2002 ISDA. Tell me more Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. Ask about it here.

Content and comparisons

No change between 1992 ISDA and 2002 ISDA.

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Summary

A seldom-invoked grounds for terminating an ISDA Master Agreement but note a couple of things:

Firstly, unlike Breach of Agreement, there is no grace period allowing for rectification or correction of a misrepresentation. If you make a material false statement, you are thereafter immediately, and irrevocably, at your counterparty’s mercy.

Owning up to it, and trying to make things right, does not get you out of the schtuck. Nor is there any ticking clock by reference to which your Counterparty must use or lose its close-out right (though Americans may wonder about the “course of dealing”). This is, in equal parts, a boon and bane: it does not oblige a Non-Defaulting Party to take precipitate action, so it need not act rashly; on the other hand, it gives the Non-Defaulting Party a free option and the licence to pull something out of the bag long after the misrepresentation has ceased to have any practical effect. Would anyone actually behave like such a cad? You’d like to think no, but have you met any hedge fund managers?

In any case, there is a predictable cottage industry of credit officers tasking unwilling negotiations with the thankless task of sending out notices waiving misrepresentations about facts that the credit officer should not have asked for representations about in the first place.

Secondly, a misrepresentation is faster than a Breach of Agreement. The moment a misrepresentation is made, you can get out. No waiting for 30 days to see if anything comes right.

Given this, it is curious that Misrepresentation is not more frequently cited than it is — that may be to do with the liminal vagueness of the “materiality” requirement.

Misrepresentation? Or breach of warranty?

The purist’s objection is that, since a representation is a pre-contractual statement which induced the wronged party to enter the contract and (ergo) was not, and could not be, itself, a contractual term at all — its bolt was shot, so to speak, before “minds met” — and, as such, one’s remedy for misrepresentation ought to be to set aside the contract altogether (ab initio, as Latin lovers — well, my one, at any rate — would say) voiding it on grounds of no consensus, and not suing for damages for breach of something which, by your own argument, never made it into the cold hard light of legal reality. The JC is nothing if not a purist. We feel that, as written, this provision is a bit misconceived.

Giving our friends at ISDA the benefit of the doubt we think ISDA’s crack drafting squad™ means “breach of warranty”, and were really just being loose with terminology. There again, unlike other, more fundamental obligations, misrepresentation as an Event of Default has neither a materiality threshold nor the accommodation to the wrongdoer of a grace period or even a warning notice, so perhaps not. Anyway.

This is where that mystifying Section 3(d) representation comes in.

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General discussion

Representations by agents on agent’s own behalf

Where your client’s obligations under the ISDA Master Agreement are stewarded by an agent — quite common for an investment manager trading on behalf of a fund — a broker might think about having the agent represent, on its own behalf, about its role as agent. It might ask the agent to do this in the ISDA. The sound of an asset manager confirming its ongoing authority to bind its principal gladdens a broker’s heart. A full-throated assertion of its own regulatory authorisation; its continued good standing with the companies office; the continued involvement of its key persons in making investment decisions — each is sure to put a jaunt in a broker’s stride. Imaginative in-house counsel for the broker will doubtless dream up others.

But tarry a while. Firstly, your investment manager will sign as agent, for the client, not on its own behalf. For many this will be an article of profound faith: they will be at some pains, which they will willingly inflict on you, to avoid the barest hint they are speaking for themselves. “When an agent, as agent opens its mouth,” they will tell you, “it becomes its principal for all purposes that interest the law.”

And so it does. As far as the Courts of Chancery are concerned, to be an agent is to be wholly transubstantiated into the person of one’s principal. Transmogrified. It is, for all forensic intents to disappear; one’s ghostly outline may still be there, but it is a chimera: one exists only to be the earthly representation of another.

Which cast a pall over the representations you are being asked to make.

Take the one that “the principal has duly authorised the agent to act on its behalf”. For the principal to say that, through the person of the very one whose agency is in question, is some kind of Möbius loop. The very comfort you might draw from what is being said is taken away by the person who is saying it.

Even if the fact of the agency is in no doubt, the statements as to the agent’s character may be problematic. The agent is speaking for the principal, remember.

The exchange might go something like this:

Agent (as agent): Why would I be authorised by the FCA? I am not advising anyone. In fact, my investment manager is advising me. Why don’t you ask her?

Broker (rubbing its eyes and peering at the agent): But I am asking her. I mean you.

Agent (as agent): Who?

Broker: You! The investment manager for this blessed fund!

Agent (as agent): Ah, but I am not me, for now, you see. I am the earthly representative of the fund. In my own personal capacity, I don’t exist.

Broker: But you are here, aren’t you? Can’t I just quickly ask you? Can’t you just, you know, be yourself for a moment? It won’t take a mo —

Agent (as itself): What? Here? In this ISDA? You must be joking. I told you under no circumstances will I act as principal.

Broker (A light-bulb comes on): Aha! I've got it! All right then: can you make representations on behalf of your principal?

Agent (as agent) (Thinks for a moment.): Why yes! Yes, I can! That’s what I’m here, as agent, to do! What would you like me to represent?

Broker: Could you represent that your investment manager is duly authorised by the FCA?

Agent (as agent): WELL HOW THE HELL AM I SUPPOSED TO KNOW THAT??

Broker: What?

Agent (as agent): Look: why don’t you ask the agent?

But seriously

Assuming you can persuade your agent to represent, on its own behalf, about itself, as to these matters (whether in the master agreement itself or in a side letter):

• Due appointment, authority etc: This goes to the agent’s ostensible authority to bind its principal. If an investment manager breaches this kind or representation, then worst case the broker risks having no claim at all against the fund – if it can’t make out that there was ostensible authority.

• Now if (notwithstanding breach of this rep) the broker does still have a claim against the fund, then no harm no foul: we shouldn’t need to close out vs the fund unless/until there’s an independent failure to pay, in which case rely on that. But now we have actual knowledge of the agent’s lack of authority we may find we have a second problem: that there is no no-one with ostensible authority to bind the fund, and it is drifting rudderless towards a wall. If so, see below.
• If we don’t then our action is necessarily against the agent in its personal capacity and against its own assets, not the fund’s. It’s a claim in tort for negligent misstatement. Put yourself in the fund’s position here. Being itself a victim of the agent’s mendacity it will feel it is more sinn’d against than sinning and will not see why this should be a 3(d) representation under the ISDA Master Agreement. The fund will say “well hang on: I didn’t do anything wrong here: this asset manager is taking my name in vain without my consent – so how is it that you’re purporting to close out against me?

• Loss of manager’s regulatory status, no manager, no good standing etc: The other typical representations goes to a duly authorised manager’s continued ability to to act on the fund’s behalf: to manage positions, monitor risk tolerances and keep the ship steady. If the agent goes AWOL a [[[broker]] has some call to reduce risk against the fund. If the fund is a sports car, the broker’s ATEs are the measures it can take to prevent the car hitting a wall. As long as here is a competent agent driving the car, the broker can have some confidence the car will avoid walls by itself. If the driver is prevented from steering, the car will, eventually, hit the wall. So it is fair enough for the broker to say “okay: you are out of control: unless you name a new driver, within a given period ~ and here you may treat yourself to a fun exchange with your counterpart about how long that period should be ~ we can call this an ATE”.

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See also

• Representations and warranties
• Misrepresentation generally
• Consents

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