Grace period

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The Jolly Contrarian’s Glossary

The snippy guide to financial services lingo.™

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A grace period — being the difference between an event of default and a potential event of default — is the sort of thing that is liable to give a credit officer hot flushes. Given away years before, in a weak moment during a sterile negotiation, when the sap finally rises and our credit fellow is fumbling in his trousers for his termination triggers, it will flare up and spoil the moment.

Grace periods are usually found in buried into failure to pay or bankruptcy events of default — or, stealthily, in the notices clause (see below). Your counterparty has failed to pay on a due date, or a petition has been presented, but the contract stipulates the counterparty has a period to cure its failure or discharge the petition. Until that period has elapsed you must keep your agitated credit officer under a cold shower. Until then, you have a potential event of default — a sort of murky netherworld of counterparty turpitude where oxygen is in short supply, skies darken and debtors start to go blue — and this might afford you some comfort (under representations and warranties) but it won’t yet permit your credit guy to pull his, ah, trigger.

Grace periods and “the essence

We have heard it argued that time being of the essence might override otherwise carefully negotiated grace periods. When challenged, the counsel in question was tongue-tied for a moment, before mumbling something about litigation over the Lehman administration[1] but could not, ultimately supply any grounds, let alone actual authority, for this proposition.[2] Time being of the essence means, more than anywhere, that one should assume the parties meant what precisely what they said. Here, one should pay exact attention to the time limits prescribed by a contract — including the grace periods so tediously injected into it — not ignore them.

Backdoor grace periods ... in the notices clause

Some counterparties — usually institutional asset managers drunk on their own self-importance — have been known to steal an option, quite literally, by making it so hard to serve notices that their brokers delay serving while they check the details and figure out a means of robust literal compliance, or even do not serve at all. Sound absurd? Consider how hard it is to negotiate a hard grace period directly into a failure to pay provision, and how hard it is to negotiate one’s own address in the notices section. Does any negotiator ever challenge an address?

See also

References

  1. As we all know, the Lehman administration was, in the Harry Potter universe, a Horcrux and, in our own, charted a new portion of legal space-time where normal rules of Euclidean geometry do not apply.
  2. Please write in if you can think of one.