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{{a|negotiation|}}It is tempting to view | {{a|negotiation|}}It is tempting to view “contract risk” as a single, integrated, unitary thing that manifests evenly as a function of the ''value'' at stake, and about which the complication and volume of surrounding legal endeavours — “[[verbiage]]”, to our friends in [[sales]] — are but a second-order derivative. The more value-at-risk, the more complicated are the docs. | ||
This is true in practice, but not in theory. It is true in practice because of the operation of the [[Special theory of Parkinson’s Law|special theory of Parkinson’s law]], which confers upon our learned friends a “best-of” option. The more the value at risk, the more scope for ''[[eaglery]]''.<ref>This is, of course, another way of articulating {{buchstein}}’s [[Special theory of Parkinson’s Law|special theory of Parkinson’s Law]].</ref> There is money at stake, and so scope to work your magic, and if you do your baffling best, you can leave an suite of documents behind you that are so confusing — so intimidating — that no-one will dare touch them without a trained professional — i.e., you — on hand to vouchsafe its safe passage. This is the basic premise of securities documentation. | |||
But | But careful theoreticians ought to be able to steer around this [[I’m not going to die in a ditch about it|ditch]]. (The “steering” metaphor is deliberate). For different contracts ask us to take different ''kinds'' of risk, and these position us at different points along the [[airbag - steering-wheel continuum]]. | ||
Only ''some'' of those risks demand greater acumen from our legal friends. | |||
==== | ==== Risks lawyers can’t really solve — airbags and life-rafts ==== | ||
The ''economic'' risk that you lose money on the deal because things didn’t work out as everyone hoped — there was no market for the product after all, all the investments went south, the flagship product got sideswiped by an innovation no-one saw coming — these are intractable risks of the world of business. They are a fact of life: there is not much lawyers can do about them, beyond supplying “functional airbags and life-rafts” that inflate when you need them. Lawyers have a fulsome menu of trapdoors, ripcords, alarms, panic rooms, and crashmats to help you bail out should the economic risk come about. But a crash mat is only so much use if you’re traveling at 600mph at the point of impact. | |||
==== | ==== Risks lawyers ''can'' solve — steering, acceleration, brakes ==== | ||
Then there are intrinsically ''legal'' risks where getting the legal docs right ''will'' make all the difference. These arise if, due to formal deficiencies in your legal arrangements, you don’t get the value you bargained for. For example, if someone forgets to file a [[Slavenburg]] or the security package was not perfected; if you were short a buried [[cheapest-to-deliver]] option meaning your counterpart provided something less valuable than you wanted. This is the basic engineering of safe transport. | |||
Also, deals involving [[security]], third-party credit support, or formal [[Magic words|magic incantations]] (letters of credit, trusts, securities) or punitive regulations (e.g., [[Employee Retirement Income Security Act of 1974|ERISA]], securities regulation) can go wrong purely because of formal deficiencies or because someone misdescribed the risks or | ==== Different contracts have different risk profiles ==== | ||
Sometimes, the engine is the trick. Having a vehicle that is responsive, hugs the road, accelerates our of corners, brakes quickly before hairpins makes all the difference. If you want to drive at the grand prix you need a dream machine: this your lawyer can help with. So: structured products with complex derivative payoffs embedded in them — credit-linked notes, [[CDO squared|CDO²]] and that kind of thing — are inherently complicated, fine pieces of engineering, and it is really easy to screw up the legals if you don’t get it just right. Also, deals involving [[security]], third-party credit support, or formal [[Magic words|magic incantations]] (letters of credit, trusts, securities) or punitive regulations (e.g., [[Employee Retirement Income Security Act of 1974|ERISA]], securities regulation) can go wrong purely because of formal deficiencies or because someone misdescribed the risks or a complex outcome. Here you need a proper engineer. An outsourced call centre in Bratislava won’t do. | |||
But sometimes the terrain is the problem. What you need is a Hilux. No fancy electronics, no heated seats, just a decent diesel and Toyota engineering that won’t break down. A commercial loan has a lot of economic risk but the inherent legal risk is actually pretty low: just make sure you have sensible and sensitive default triggers: failure to pay, insolvency, downgrades, cross default and so on. Once the borrower has gone bust there is nothing the legal docs can do to help you. | |||
A loan has a lot of economic risk but the inherent legal risk is actually pretty low: just make sure you have sensible and sensitive default triggers: failure to pay, insolvency, downgrades, cross default and so on. Once the borrower has gone bust there is nothing the legal docs can do to help you. | |||
But lawyers tend to conflate the two — it is in their interests to; see the [[special theory of Parkinson’s Law]] — to regard a loan for say £100,000,000 as an innately risky, legally risky thing. Send for the [[Legal eagle|legal eagles]]! What will our learned friends do: they will ''validate'' your suspicion that lending £100m is categorically different from lending £100, by serving up loan facility documentation running to hundreds of pages, formally complicating what is basically a straightforward arrangement, and thereby ''introducing a new lawyer of legal risk on top of the already monstrous economic risk''. | |||
This is not innate legal risk and it is only a derivative of the economic risk: we call it pure complication risk, and it is, in theory (even if not in practice) entirely eradicable, by disciplined brevity and committed clarity in legal documents. | This is not innate legal risk and it is only a derivative of the economic risk: we call it pure complication risk, and it is, in theory (even if not in practice) entirely eradicable, by disciplined brevity and committed clarity in legal documents. |