Basic Representations - ISDA Provision
2002 ISDA Master Agreement
Section 3(a) in full
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An observant negotiator (is there any other kind?) handling a 1992 ISDA might wish to add a new agency rep as Section 3(a)(vi). In 2002, ISDA’s crack drafting squadTM obviously thought this was such a good idea that they added a brand-new “no-agency” rep to the 2002 ISDA, only they can’t have felt it was basic enough to go in the Basic Representations, so they put it in a new clause all by itself at Section 3(g).
“any Credit Support Document to which it is a party”: Business at the front; party at the back.
Now given that a Credit Support Document will generally be a deed of guarantee, letter of credit or some other third party form of credit assurance from a, you know, third party to which a Party in whose favour it is provided will not be a “party” — and no, an 1995 English Law CSA is not a Credit Support Document, however much it might sound like one, one might wonder what the point would be of mentioning, in this sub-section, Credit Support Documents to which a Party is party.
Well — and this might come as a surprise if you’re an ISDA ingénue; old lags won’t bat an eyelid — there isn’t much point.
But does anyone, other than the most insufferable pedant, really care? I mean why would you write a snippy wiki article about some fluffy but fundamentally harmless language unless you were a stone-cold bore?
Hang on: Why are you looking at me like that?
For details freaks
That basic, resting-state level of confidence we all want to have that the legal entity we are hoping to trade with is not, actually a figment of our imagination, has not sneakily been dissolved or somehow transmogrified into a non-material projection on an astral plane, and is up to date with its bills, audits financial statements and annual regulatory filings.
Some of these, nowadays, ought to be moderated by the existence of universal unique legal entity identifiers — to quote pub philosopher Des Carter, I have an LEI, therefore I am — though most, you would think would be better coming from your satisfaction that the folk in onboarding have actually done their job.
However you look at it, there remains a bit of an existential question afoot here. It quickly gets rather Cartesian. For if you are not sure whether the person to whom you are speaking is really there, then how will asking that person to confirm it help?
“Could you please tell me you exist?” sounds to these old ears like a cry for the kind of help the representations and warranties section of a legal contract is not, realistically, well positioned to provide.
And if they do, but it turns out they don’t, then what?
Whether your counterparty is even constitutionally capable of entering into obligations of the type contemplated by your contract, is a question of its capacity (as to which see also ultra vires). In this day and age, capacity — once a rich source of legal paranoia — is largely a dead letter among commercial enterprises in sensible jurisdictions, but it is still a banana skin for municipal bodies and local governments. Even thirty years on, the words “Orange County” or “Hammersmith and Fulham council” will be enough to get buttocks clenching in your risk department.
Ultra vires is Latin for “beyond its powers”, a concern which crops up usually in the context of a corporation or governmental authority exceeding the powers and objects set out in its constitution or charter. It may also have some relevance to a Trust.
In that most valuable and intellectually rewarding pastime of checking a prospective
combatantcounterparty’s capacity and authority, ultra vires is your principle concern should it not, after all, have the capacity to transact in your chosen kind of derivative.
These days ultra vires is a rather old fashioned notion as far as an ordinary corporation goes — in most sensible jurisdictions, the vicissitudes of the ultra vires rule for innocent, publicly spirited bystanders (like swap dealers), whose only concern is that an undertaking is prudently managing the financial exposures inherent in its business, have been largely obliterated by legislation, but it is still liable to induce butterflies in your team of legal eagles if you are dealing with a local authority.
Section 3(a)(iii): No Violation or Conflict
No, it doesn’t make any sense to add this agreement, nor to have a separate continuing warranty that you have not breached this agreement. That is tantamount to a no event of default rep — so you should already have it — and as canvassed in that very article, that representation is, in any case, a big old waste of time. If I tell you I have not breached the agreement, but in actual fact, I have, in what way are you in a better position than if I didn’t tell you that?
There is an argument that a representation as to the outright legality of your action is useful, though implied terms should help you here. For it is surely necessary for the business efficacy of a contract that a counterparty is able, in compliance with the laws of the land, to perform those tasks it has promised to. It is an implied term, that is to say. It goes without saying. There are so many grounds for this that I really shouldn’t have to justify this, but any other outcome must be some kind of puncture of the hermeneutic beach ball in which we all play our commercial games.
The “consents” representation attests that its giver has the necessary permissions regulatory status to carry out its obligations as contemplated under the contract: for example, that a broker-dealer carrying out a regulated activity, has the necessary authorisation and permission from any regulator claiming jurisdiction over the activity. A lack of regulatory authority is not likely to lead to outright voidability of the transaction — certainly not where that would run against the person whose interests a missing regulatory authorisation is meant to protect — and this sort of thing is usually covered in pre-contractual due diligence, so this is not a representation over which one spends a great deal of time agonising.
Here especially the caveat in the Misrepresentation Event of Default as to materiality might come in to play, if one has lost some trivial regulatory status, or perhaps one that increases the compliance cost of business that does not prevent the firm carrying out their business altogether.
Having successfully made this representation, your work is not over. Proceed to Section 4(b) where you covenant to maintain them, for better for worse, and in sickness and in health, and make reasonable efforts to obtain any new consents that might be needed in the future. Why the pedantic separation, you may ask? Because representations address the now and the past, and speak to states of affairs and not actions — any necessary action, ipso facto, having been already taken; whereas promises address the future where things are unknown, frightening and inherently fascinating for it is where, as Criswell correctly observed, you and I are going to spend the rest of our lives.
Section 3(a)(v): Obligations Binding
A representation that transgresses the very first rule of representations and warranties, which is that they are meant to be about matters of private, present fact, known to the representor but not the representee, but about which the representee cares a lot, and which might colour its decision to enter the contract in the first place.
Since the representee knows these things, the representor doesn’t, and they’re just facts, it can safely make representations about them to the representee to make it feel better.
But there are no such matters of private fact involved when one represents one’s obligations under a contract are binding: a contract is either valid and binding on a party or it isn’t; this isn’t the sort of thing that one party can conceal from the other. Indeed; whether a contract is valid and binding is not a question of fact at all: it’s a question of law.
It, therefore, requires an opinion, from one qualified to give such an opinion. The person who can attest to these is a special fellow. A boy wizard. A legal eagle. If you want to know whether your agreement is binding, don’t ask the counterparty; ask legal.
The obligations binding representation offends another principle of contractual representation, too: it is a pre-contractual statement as to a legal state of affairs which, by definition, has not yet come about. The “bindingness” of the contract is not a present fact at the time this representation is made. Representations as to the expected state of the world in the future are not generally called “representations”. They are called “promises”.
And yet there is more: if it is, somehow, a post-contractual representation, albeit about a notionally current state of affairs, it presents some kind of existential paradox or state of undecidability that not even Kurt Gödel can let us out of. For if this warranty is wrong, then the contract it lives in, QED, is invalid — that is to say, for all intents and purposes, does not exist, including this warranty. So precisely when you need to rely on it, you find it has vanished like some kind of that Schrödinger’s cat.