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Finance contract: Difference between revisions
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{{ | {{A|negotiation|{{financecontractenvy}} | ||
{{image|Bank contract envy|png|Some finance contract envy, yesterday.}} | |||
}}{{d|Finance contract|/faɪˈnæns ˈkɒntrækt/|n|}} | |||
Any [[contract]] the gist of which is for its parties to exchange ''large'' — like, ''really'' large — amounts of [[money]], or [[Securities|money-like things]], having readily realisable value, and the performance of which therefore generates significant [[credit risk]], should one of the parties [[Insolvency|blow up]] before it can pay everything it owes under the contract. | Any [[contract]] the gist of which is for its parties to exchange ''large'' — like, ''really'' large — amounts of [[money]], or [[Securities|money-like things]], having readily realisable value, and the performance of which therefore generates significant [[credit risk]], should one of the parties [[Insolvency|blow up]] before it can pay everything it owes under the contract. | ||
===Loans=== | |||
The classic finance contract is a [[loan]]. I lend you a large sum of money; you pay me interest, and eventually pay it back. In the mean time I am constantly beset by daemons, plagues, dread terrors and so on, fantastical threnodies all on the single worry that ''you never pay me back''. | |||
The | The loan has one unique feature that makes it even more fraught than the other trading contracts. It involves a big guy giving a little guy a lot of money, and hoping upon hope, for the term of the loan, that the little guy manages to stick around and pay it back. | ||
===Types of loan=== | |||
'''Conventional loans''': “Ordinary” loans can be [[term loan]]s, at-call loans (often called [[deposit]]s — for these, you must be licenced to accept deposits), revolving credit facilities, and big ones can be syndicated amongst a bunch of borrowers. There are also traded interests in [[loan]]s called [[participation]]s. These may also be secured or unsecured. | |||
'''Debt securities''': These are loans in the form of tradable securities: [[Debt security|Bond]]s, notes, or [[Certificate of deposit|certificates of deposit]]. That kind of thing. | |||
But | '''[[Margin loans]]''': Margin loans are a separate type of secured loan, where the amount loaned depends on the value of an asset you must buy with the loan and give to the lender as collateral for safekeeping. Prime brokerage is a kind of margin loan, as is stock loan. These resemble traded contracts, and sometimes people forget they are loans, but they are. | ||
===Trading contracts=== | |||
Trading contracts do not, ostensibly, involve one person forking out a whole lot of cash and giving it away and hoping for the best, but often this is their economic effect. Other good examples are [[swap]]s, futures, [[securities]], [[Securities financing transaction|securities financing arrangements]], [[option]]s, trade financing arrangements, securitisations and commodity supply contracts, and assurances offered to support others’ obligations under loans, like [[guarantee]]s. Extra points for excitement if they [[cross-border|cross borders]] or constitute, as they often will, regulated activity of some kind. | |||
Finance contracts create special, ''large'', monetary risks. These are different in quality and nature than risks presented by other contracts. You may — in fact, almost certainly will — feel a deep resentment and disappointment at those you engage to carry out your loft extension, as the fourteenth month passes of a project you were assured would take six weeks, but the answer is just to not pay for things they haven’t done, or have done half-heartedly, or have bished up. These things may well exasperate you, mightily, but they aren’t ''that'' likely to send you to the brink of ruin, and — trust me — ''however'' dismal your contractors may be, suing them will be worse, and “self-help” isn’t really an option. If it was, no-one would hire builders in the first place. Wouldn’t that be a beautiful world. | |||
But enough about the JC’s forlorn endeavours with home improvement. When your business is handing over large quantities of liquid assets to people you don’t know well, in the expectation of they will return them later, things can quickly, and effortlessly, ''badly'' go wrong. Therefore, finance contracts have lots and lots of [[boilerplate]] aimed to keep those who are owed money-like things safe. | |||
[[Finance boilerplate]] is thus an unfortunate, miserable fact of life for [[banking legal eagle|banking legal eagles]], but we address our labours with fortitude, good humour, and do our level best to see the funny side of it, seeing as we have no choice. Levity is not easy, but possible — it propels this wiki, after all. | [[Finance boilerplate]] is thus an unfortunate, miserable fact of life for [[banking legal eagle|banking legal eagles]], but we address our labours with fortitude, good humour, and do our level best to see the funny side of it, seeing as we have no choice. Levity is not easy, but possible — it propels this wiki, after all. | ||
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And so we find ''non'' financing contracts — things like service agreements, employment contracts, licensing arrangements — which should be a model of [[James Ellroy|Ellroy]]esque brevity, are shot through with this ghastly banking dreck. | And so we find ''non'' financing contracts — things like service agreements, employment contracts, licensing arrangements — which should be a model of [[James Ellroy|Ellroy]]esque brevity, are shot through with this ghastly banking dreck. | ||
===Finance specific boilerplate=== | ===Finance-specific boilerplate=== | ||
Here are some common standard clauses which, it is submitted, do not belong outside a finance contract. This is an | Here are some common standard clauses which, it is submitted, do not belong outside a finance contract. This is an | ||
organic list that will grow as I get round to expressing my angst and frustration at crappy legal eagles who keep insisting on this sort of thing: | organic list that will grow as I get round to expressing my angst and frustration at crappy legal eagles who keep insisting on this sort of thing: | ||
{| class="wikitable sortable" | {| class="wikitable sortable" | ||
|+ Why you don’t need finance | |+ Why you don’t need finance boilerplate in other contracts | ||
{{aligntop}} | {{aligntop}} | ||
! Clause !! What is does !! Why you don’t need it | ! Clause !! What is does !! Why you don’t need it | ||
| Line 34: | Line 46: | ||
| No set-off or counterclaim || A provision stating that “all sums shall be paid in full, free of any restriction, condition, set-off or counter-claim, and without deduction or withholding for or on account of tax except where required by law”|| Because in the ordinary world or service contract this goes without saying, and the hassle is manageable even where it doesn’t: this is relevant when you are paying [[cashflows]], [[Manufactured dividend|manufacturing dividends]] and so on across borders, or where a certain sum arriving at a certain time in a certain place without counterparty nibblement is important. If your client deducts tax from your consulting fees, or has set them off against something you owe it, that’s a bummer for sure, but you’ll ''survive'': it won’t set an ending chain of operational payments into a vortex of destruction. As our friends in the [[stupid banker]] cases show us, you don’t have to get things that badly wrong for things to go really, apocalyptically ''badly'' wrong. | | No set-off or counterclaim || A provision stating that “all sums shall be paid in full, free of any restriction, condition, set-off or counter-claim, and without deduction or withholding for or on account of tax except where required by law”|| Because in the ordinary world or service contract this goes without saying, and the hassle is manageable even where it doesn’t: this is relevant when you are paying [[cashflows]], [[Manufactured dividend|manufacturing dividends]] and so on across borders, or where a certain sum arriving at a certain time in a certain place without counterparty nibblement is important. If your client deducts tax from your consulting fees, or has set them off against something you owe it, that’s a bummer for sure, but you’ll ''survive'': it won’t set an ending chain of operational payments into a vortex of destruction. As our friends in the [[stupid banker]] cases show us, you don’t have to get things that badly wrong for things to go really, apocalyptically ''badly'' wrong. | ||
{{aligntop}} | {{aligntop}} | ||
| [[No waiver]] || Tedious verbiage to the effect that “No failure or delay in exercising, any remedy under this Agreement will operate as a waiver, nor will any single or partial exercise of any right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy.”|| Again, this is all about ''does this dude owe me the ten million dollars or not'' rather than “will I get paid my $ | | [[No waiver]] || Tedious verbiage to the effect that “No failure or delay in exercising, any remedy under this Agreement will operate as a waiver, nor will any single or partial exercise of any right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy.”|| Again, this is all about ''does this dude owe me the ten million dollars or not'' rather than “will I get paid my $2,000 consulting fee”. If, [[Commercial imperative|out of the goodness of your heart]] and a realistic view of your long term revenue prospects, you let a distressed creditor off strict enforcement during a tough patch, to help it through a difficult cashflow situation, you don’t want to find you have waved away your rights to get that money later, or ''not'' grant that indulgence should it find itself “inexplicably” in the same situation again next time a margin payment is due. | ||
{{aligntop}} | {{aligntop}} | ||
| [[Assignment|No Assignment]] || Words to the effect that one party can’t assign or transfer its rights without the other’s consent. || {{no assignment capsule}} | | [[Assignment|No Assignment]] || Words to the effect that one party can’t assign or transfer its rights without the other’s consent. || {{no assignment capsule}} | ||
| Line 40: | Line 52: | ||
| [[Severability]] || Claiming the illegality, invalidity or unenforceability of any provision of this Agreement does not affect the rest of its enforceability. | | [[Severability]] || Claiming the illegality, invalidity or unenforceability of any provision of this Agreement does not affect the rest of its enforceability. | ||
|| {{Severability boilerplate capsule}} | || {{Severability boilerplate capsule}} | ||
{{aligntop}} | |||
| [[Counterparts]] || Allows the contract to be signed on different bits of paper || ''No'' contract needs a counterparts clause. Not even a [[finance contract]]. | |||
Sometimes it is important that more than one copy of a document is recognised as an “original” — for [[tax]] purposes, for example, or where “the agreement” must be formally lodged with a land registry. But these cases, involving the conveyance of real estate, are rare — non-existent, indeed, when the field you are ploughing overflows with flowering {{isdama}}s, [[confidentiality agreement]]s and so on. If yours does — and if you are still reading, I can only assume it does, or you are otherwise at some kind of low psychological ebb — a “[[counterparts]]” clause is as useful to you as ''a chocolate tea-pot''. | |||
ANYWAY — if your area of legal speciality ''doesn’t'' care which of your contracts is the “original” — and seeing as, [[Q.E.D.]], they’re identical, why should it? — a counterparts clause is ''a waste of trees''. If the law decrees everyone has to sign the same physical bit of paper (and no legal proposition to our knowledge ''does'', but let’s just say), a clause ''on'' that bit of paper saying that they ''don’t'' have to, is hardly going to help. | |||
{{aligntop}} | |||
| [[No oral modification]] || Prevents one of your salesguys from modifying the agreement by casual, drunken conversation in a bar ||A self-contradictory stricture on an [[amendment agreement]], until 2018 understood to be fluff put in a contract to appease the lawyers and guarantee them a tedious annuity. But as of 2018, thanks to {{Casenote|Rock Advertising Limited|MWB Business Exchange Centres Limited}} if one ''says'' one cannot amend a contract except in writing then one will be held to that — even if on the clear evidence the parties to the contract later agreed otherwise. | |||
This is rather like sober me being obliged to act on promises that drunk me made to a handsome ''[[rechtsanwältin]]'' during a argument about [[Schwarzschild radius of alcohol consumption|theoretical physics]] in a nasty bar in Hammersmith after the end-of-year do, which that elegant German attorney can not even remember me making, let alone wishing to see performed.<ref>I know this sounds oddly, ''verisimilitudinally'' specific, but it actually isn’t. I really did just make it up.</ref> Hold my beer. Again, if your contract, and your [[regulatory capital]] treatment, involves the payment of tens of millions of dollars on specific days, by reference to oblique and tendentious reference events over which your [[legal eagle]]s have slaved for months, you don’t want a cretinous [[salesperson]] accidentally detonating your [[leverage ratio]] by having agreed to change them — or even been alleged to have done so — during a well-lubricated trip to the greyhounds at Walthamstow. | |||
Not such a big concern, we submit, if you’re delivering double glazing, or licensing software, where the ability to agree changes on the fly without having to oblige the tedious wordwrights of the supreme court is surely a good thing. | |||
|} | |} | ||
{{sa}} | {{sa}} | ||
*[[Loan]]s, [[securities]], [[swap]]s and [[securities financing transaction]]s | *[[Loan]]s, [[securities]], [[swap]]s and [[securities financing transaction]]s | ||
{{ref}} | |||