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:
| 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 parties can’t assign or transfer their rights. | Assignment only (rights and not obligations) is reasonably innocuous in any contract, and generally transfer of obligations requires consent anyway — that’s a novation — but again, this is a lot more of a “thing” in a lending situation. Unlike a contract for the performance of services, the discharge of a money payment obligation is, of itself, a non-personal thing: I don’t care who pays my million buckaroonies, on your behalf, as long as someone does; if I have invited Pink Floyd to pay at my Barmitzvah it won’t do if they send some other jokers along instead. But the thing about money payments isn’t who pays the money, but whether they pay the money, and this is a personal thing, so boilerplatey legal eagles like to make that clear. End of the day, if you do arrange your buddy up the road to wire the cash to me, and he does, I will be good with it, but I don’t want to let you do that willy-nilly. |
| Partial invalidity | 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. |