Template:M summ 2002 ISDA 5(a)(iv)

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.