Additional Representation - ISDA Provision
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2002 ISDA Master Agreement
Section 3 in a Nutshell™ Use at your own risk, campers!
Full text of Section 3
Related agreements and comparisons
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Content and comparisons
Redlines
- 1987 ⇒ 1992: Redline of the ’92 vs. the ’87: comparison (and in reverse)
- 1992 ⇒ 2002: Redline of the ’02 vs. the ’92: comparison (and in reverse)
- 1987 ⇒ 2002: Redline of the ’92 vs. the ’87: comparison (and in reverse)
Discussion
As the comparisons above illustrate the Representations have remained largely intact since the 1987 ISDA.
There is no “No Agency” representation in the 1992 ISDA or the 1987 ISDA. A fun part of the ritual of negotiating a 1992 ISDA always was — in America, we imagine, still is — to put one in, so when those kill-joys on ISDA’s crack drafting squad™ shunted one into the 2002 ISDA it will have ruined a few people’s days — so much so that, in some quarters, they still use the 1992 ISDA as a standard. Americans, for example.
A JC digression, if I may. The 2002 ISDA was published now over two decades ago. Since 1992, a great deal has happened which the derivatives industry has learned from: the Internet; email; Enron, LTCM, the Russian Crisis, the GFC, the LIBOR scandal, COVID, the rise and fall of asset classes, cryptocurrencies and artificial intelligence (... yes and they are sure to rise again, and crush us all. Keep holding your breath). Nevertheless, we are stuck in our ways. Not only has the 2002 ISDA not been updated, or even had an update proposed, large parts of the derivatives market — and the most sophisticated, heavy-hitting parts of that market, what is more: the American parts — still trade on the 1992 Master Agreement.
We mention this not to make fun of Americans, or the derivatives industry more generally, however they richly deserve it — we do plenty enough of that in these pages as it is — but to temper the expectations of those who think anything is going to change any time soon. There are far too many vested, rent-seeking interests in things chuntering along just how they are for anyone to be seriously confronted with the idea of having to adopt anything new. Allen Farrington might claim that Bitcoin fixes a lot of things: it does not fix this.
Summary
If you want any special extra Representations over and above the boring ones in Section 3, stick them in Part 5 of the Schedule, or maybe a master confirmation, be sure to label them “Additional Representations” and, if the fancy catches you, have the representor deem them repeated on the commencement of any new Transaction, the anniversary of the ISDA Master Agreement or whenever, in a moment of weakness, insecurity or indolence, your operations team feels like reaching out to the counterparty and asking it to say them again. They’ll love you for it.
Yes, Misrepresentation is an Event of Default
A breach of any of these Representations when made (or deemed repeated) (except a Payer or Payee Tax Representation, but including any Additional Representation is an Event of Default. Eventually.
Additional Representations as Additional Termination Events
In the case of Additional Representations this can be somewhat drastic, especially if your Additional Representation is Transaction-specific (for example India, China and Taiwan investor status reps for equity derivatives), and it would seem churlish to close out a whole ISDA Master Agreement on their account.
Then again, show me a swap dealer who would detonate an entire swap trading relationship with a solvent counterparty and I’ll show you a moron — but, as we know, opposing legal eagles operate on the presumption that everyone else is a moron and thus tend to be immune to such grand rhetorical flourishes, and regard such appeals to basic common sense as precisely such flourishes, so don’t expect that argument to carry the day, however practically true it may be.
Instead, expect to encounter leagues of agonising drafting, but there are easier roads to travel. Try:
These representations will be Additional Representations, except that where they prove to be materially incorrect or misleading when made or repeated it will not be an Event of Default but an Additional Termination Event, where the Transactions in question are the Affected Transactions and the misrepresenting party is the sole Affected Party.
General discussion
See also
References
If you want any special extra Representations over and above the boring ones in Section 3, stick them in Part 5 of the Schedule, or maybe a master confirmation, be sure to label them “Additional Representations” and, if the fancy catches you, have the representor deem them repeated on the commencement of any new Transaction, the anniversary of the ISDA Master Agreement or whenever, in a moment of weakness, insecurity or indolence, your operations team feels like reaching out to the counterparty and asking it to say them again. They’ll love you for it.
On representations and warranties generally
Representations
A representation is a statement of present or historical fact made by one person to another outside the bounds of a contract that induces that other person to enter a contract. By its nature, a representation is therefore not a term of the contract itself — it cannot be; it was made before the contract came about; it is an egg to the contract’s chicken — although that won’t stop Legal riddling your contract with representations and, usually, co-branding them as warranties for good measure. A false representation may entitle an innocent to claim under the Misrepresentation Act 1967 and rescind its contract, or claim damages for negligent misstatement in tort.
Being founded on the tortious action on negligent misstatement, one of the ingredients of an actionable misrepresentation is that the representer somehow fell short of her duty of care: the simple fact that the representation was false might not be not enough if she can’t cannot reasonably have known it was false. This feels a more significant distinction than it is: tort governs situations where the parties, being randoms, have not had the opportunity to document their duties to one another, so the law steps in to help. Where they have, through the medium of contract, the law says, “you don’t need my clever appeals to the judgment of prudent people on public transport in south London to work out how you must treat each other, because you have worked it out for yourselves.”
Where the parties have written down their respective duties, but they still appeal to a tortious standard — which is what they are doing by writing “representations” into a contract — they are admitting to confusion between the laws of tort and contract. Here the fellow on the Clapham omnibus would surely say that the abstract duty of care maps exactly on to what the parties have voluntarily agreed. Why would it be any different? To be “negligent” under a contract is surely to breach it; no more and no less.[1]
Warranties
A warranty is a statement of a present or historical fact made as a term of a contract. If a warrantor breaches its warranty the injured party might claim damages for the breach of contract and sue for damages, but cannot rescind it altogether. To set aside the contract as if it never happened — to void it, ab initio — you would need to prove a misrepresentation from someone before the contract, that induced you to enter it.
Since a warranty is creature of contract, one’s liability for its failure is absolute: if a warranty fails, you’re in the schtook: it is no defence that you could not reasonably have known that the matters warranted were not true, or that some mendacious interloper (other than the other party to the contract) has intervened to defeat your best intentions unless that kind of conditionality is written into the contract. This is the appeal of a written contract: the parties can write down with infinite, tedious precision, what they mean to say, and what they say they mean, one-hundred per cent.
It also points up the logical befuddlement behind the idea of writing representations into a contract.
See also
3 Representations
3(a) Basic Representations
3(b) Absence of certain events
3(c) Absence of litigation
3(d) Accuracy of Specified Information
3(e) Payer Tax Representations
3(f) Payee Tax Representations
3(g) No Agency (2002 ISDA only)
- ↑ This is why the idea of “gross negligence” is all the more abstruse.