Misrepresentation - ISDA Provision
Overview
No change between 1992 ISDA and 2002 ISDA. Nothing to see here, folks. Move along please.
Summary
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 before minds met, so to speak — and as such, one’s remedy for misrepresentation ought to be to set aside the contract altogether — ab initio, as Latin lovers would say — voiding it on grounds of lack of 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 mite 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 or the accomodation to the wrongdoer in the form of a grace period or even a warning notice, so perhaps not. Anyway.
This is where that mystifying Section 3(d) representation comes in.
The fabulous Section 3(d) representation, giving one’s counterparty the right to close out should any so-designated representations turn out not to be true. This is sure to occupy an inordinate amount of your negotiation time — in that it occupies any time at all — because you are as likely to be hit in the face by a live starfish in the Gobi Desert as you are to close out an ISDA Master Agreement because your counterparty is late in preparing its annual accounts. But that’s a personal view and you may not rely on it.
The 3(d) representation, in the documents for delivery table in the Schedule, therefore covers only the accuracy and completeness of Specified Information and not (for example) whether Specified Information is delivered at all. For that, see Section 4(a) - Furnish Specified Information.
“Covered by the Section 3(d) Representation”
If one is required to “furnish” Specified Information under Section 4, two things can go wrong:
No show
One can fail to provide it, at all, in which case there is a Breach of Agreement, but be warned: the period before one can enforce such a failure, judged by the yardstick of modern financial contracts, is long enough for a whole kingdom of dinosaurs to evolve and be wiped out; or
It’s cobblers
One can provide the Specified Information, on time, but it can be a total pile of horse ordure. Now, here is a trick for young players: if your Specified Information is, or turns out to be, false, you have no remedy unless you have designated that it is “subject to the Section 3(d) representation”. That is the one that promises it is accurate and not misleading.
Might Section 3(d) not cover a representation?
Now you might ask what good an item of Specified Information can possibly be, if Section 3(d) didn’t apply and it could be just made up on the spot without fear of retribution — as a youngster, the JC certainly asked that question, and has repeated it over many years, and is yet to hear a good answer — but all we can presume is that in its tireless quest to cater for the unguessable predilections of the negotiating community, ISDA’s crack drafting squad™ left this preposterous option open just in case. It wouldn’t be the first time.
Legal opinions, and Credit Support Documents
A trawl through the SEC’s “Edgar” archive[1] reveals that the sorts of things to which “Covered by Section 3(d) Representation” results in a “No” outcome are rare — but not non-existent. It is things like “Legal opinion from counsel concerning due authorization, enforceability and related matters, addressed to the other party and reasonably acceptable to such other party”, or “Credit Support Documents”.
See further discussion in the sections below.
Annual reports
The other little fiddle — and it is a little fidgety fiddle — is to remark of annual reports that, yes, they are covered by that Section 3(d) representation, but with a proviso:
“Yes; provided that the phrase “is, as of the date of the information, true, accurate and complete in every material respect” in Section 3(d) shall be deleted and the phrase “fairly presents, in all material respects, the financial condition and results of operations as of their respective dates and for the respective periods covered thereby” shall be inserted in lieu thereof.”
As to these all, we go into further detail in the section below.
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- The JC’s famous Nutshell™ summary of this clause
- How material is “material”?
- The curious Mœbius loop of agency representing, on behalf of its principal, that it is not acting as agent.
- Things, joking aside, you should expect a manager to represent to about itself.