Absence of Litigation - ISDA Provision
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2002 ISDA Master Agreement
Section 3(c) in a Nutshell™ Use at your own risk, campers!
Full text of Section 3(c)
Related agreements and comparisons
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Content and comparisons
Section 3(c) was one of the bits of the 1992 ISDA that ISDA’s crack drafting squad™ “got mostly right” at the first time of asking. But still, some bright sparks on the ’Squad took it upon themselves, in the 2002 ISDA, to switch out reference to “Affiliates” which — I don’t know, might take in some distant half-bred cousin you don’t enormously care about and who doesn’t cast any real shadow on your creditworthiness — with “Credit Support Providers” and “Specified Entities” who no doubt more keenly do, but this leads to just more fiddliness in the Schedule over-stuffed with fiddliness, since one must then go to the trouble of specifying, and then arguing with your counterparties about, who should count as a Specified Entity for this remote and rather vacuous purpose.
Keeps the home fires burning in the hobbity shires where ISDA negotiators make their homes, we suppose.
Summary
Reference to Affiliates can be controversial, particularly for hedge fund managers.
More generally, absence of litigation is a roundly pointless representation, but seeing as (other than unaffiliated hedge fund managers) no-one complains about it, it is best to just leave well alone.
General discussion
Absence of litigation generally
An absence of litigation representation seeks to address litigation carrying two particular risks:
- Enforceability: Litigation that could somehow undermine or prejudice the very enforceability of life was we know it (a.k.a the agreement you are presently negotiating);
- Credit deterioration: Litigation that is so monstrous in scope that it threatens to wipe your counterparty from the face of the earth altogether, while it still owes you under the agreement you’re negotiating.
Enforceability-threatening litigation
Firstly, Earth to Planet ISDA: what kind of litigation or regulatory action — we presume about something unrelated to this agreement since, by your theory, it doesn’t damn well exist yet — could adversely impact in the enforceability of this future private legal contract between one of the litigants and an unrelated, and ignorant, third party?
Search me. But still, I rest assured there will an ISDA boxwallah out there somewhere who could think of something.
Existentially apocalyptic litigation
Look, if your counterparty is banged up in court proceedings so awful to behold that an adverse finding might bankrupt it altogether, and your credit sanctioning team hasn’t got wind of it independently then, friend, you have way, way bigger problems than whether you have this feeble covenant in your docs. And, if you are only catching it at all thanks to a carelessly given absence of litigation rep, by the time said litigation makes itself known to you.[1] won’t it be a bit late?
Deemed repetition
Ah, you might say, but what about the deemed repetition of this representation? Doesn’t that change everything?
Deemed repetition
What of this idea that one not only represents and warrants as of the moment one inks the paper, but also is deemed to repeat itself an the execution of each trade, on any day, or whenever a butterfly flaps its wings on Fitzcarraldo’s steamer? Do we think it works? Do we? Given how practically useless even explicit representations are, does it really matter?
And, having given it, how are you supposed to stop a continuing representation once it has marched off into the unknowable future, like one of those conjured brooms from the Sorcerer’s Apprentice? If you don’t stop it, what then? This may seem fanciful to you, but what are buyside lawyers if not creatures of unlimited, gruesome imagination? Are their dreams not full with flights of just this sort of fancy? Rest assured that, as you do, they will be chewing their nails to the quick in insomniac fever about this precise contingency.
For which reason — it being a faintly pointless representation in the first place and everything — it might be best just to concede this point when it arises, as inevitably it will.
Pick your battles
All that said, and probably for all of the above reasons, parties tend not to care less about this representation, so your practical course is most likely to leave it where you find it.
See also
References
- ↑ Judgment day, in other words.