Regulatory obligations

The basic principles of contract →Go uptown Formation: capacity and authority · representation · misrepresentation · offer · acceptance · consideration · intention to create legal relations · agreement to agree · privity of contract oral vs written contract · principal · agent Interpretation and change: governing law · mistake · implied term · amendment · assignment · novation Performance: force majeure · promise · waiver · warranty · covenant · sovereign immunity · illegality · severability · good faith · commercially reasonable manner · commercial imperative · indemnity · guarantee Breach: breach · repudiation · causation · remoteness of damage · direct loss · consequential loss · foreseeability · damages · contractual negligence · process agent Remedies: damages · adequacy of damages ·equitable remedies · injunction · specific performance · limited recourse · rescission · estoppel · concurrent liability Not contracts: Restitution — quasi-contract — quasi-agency Index: Click ᐅ to expand: Contract Tort Restitution 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.

Drafting Principle: Do not require compliance with existing regulatory obligations as a contractual obligation.

Financial services firms are blessed with a surfeit of detailed, arcane and constantly changing regulation. Even technical transgressions — even ones that, in practice, did not harm a soul, invite a storm of swords from conduct regulators on the ostensible grounds that, had things been only slightly different, they might have.

In 2024, JPMorgan Chase & Co was fined $348.2 million for “not properly monitoring firm and client trading activities”, a shortcoming the bank self-identified and which did not involve employee misconduct nor harm to clients or the broader market.

JC has no quarrel with the Federal Reserve other than to wryly wonder how much of this is punishment and how much a tax upon an institution well-placed to pay it. One third of a billion dollars for owning up to some systems and controls issues? Compare this with Thames Water who dumped millions of litres of raw human effluent into a river killing thousands of fish, deliberately misled the Environment Agency about it, and copped just a £3m fine.

Go figure.

In any case, if for no other reason than to discharge an inhouse legal eagle’s fear of unaddressed contingencies, it will be tempting to try to cover some of this off in the contract.

“We do not want,” she may think, “to be responsible for aiding and abetting a counterparty’s failure to comply with its regulations. Hence we will ask it to promise to us, by the terms of our contract, that it will comply with all of its regulations. Since they are obliged to do that anyway it will not mind restating that obligation for the record and my buttocractic peace of mind.”

This can play out in a number of ways:

Party A obliges Party B to comply with Party B’s regulation.
Party A obliges Party B to ensure Party A can comply with Party A’s regulation.
Party A obliges Party B to comply with Party A’s regulation.

Beyond a general statement that:

The terms of this Agreement are subject always to prevailing regulations and each party may do whatever it considers necessary to comply with them.

None of these is needed or justified.