Miscellaneous - 1992 ISDA Provision
1992 ISDA Master Agreement
Section 9 in a Nutshell™
Use at your own risk, campers!
Full text of Section 9
Related agreements and comparisons
Content and comparisons
Template:M comp disc 1992 ISDA 9
What you see is what you get, folks: if it ain’t written down in the ISDA Master Agreement, it don’t count, so no sneaky oral representations. But, anus matronae parvae malas leges faciunt, as we Latin freaks say: good luck in enforcing that if your counterparty is a little old lady.
Note also that liability for a fraudulent warranty or misrepresentation won’t be excluded. So if your oral representation or warranty is a bare-faced lie, the innocent party can maybe still rely on it in entering the agreement, even if it isn’t written down, though good luck parsing the universe of possible scenarios to figure out when that qualification might bite.
Smart-arse point: A warranty is a contractual assurance, made as part of a concluded contract, and cannot, logically, be relied on by the other party when entering into the contract. An assurance on which one relies when deciding to enter into a contract is a representation.
The entire agreement clause is legal boilerplate to nix any unwanted application of the parol evidence rule. Which might be a problem because the time-honoured understanding between all right-thinking derivatives trading folk is that the oral agreement, between the traders is the binding legal agreement, and not the subsequent confirmation, hammered out between middle office and operations folk after the trade is done. Hasten to Section 9(e)(ii) — the Confirmation is only evidence of the binding agreement. Could that be it?
Entire agreement bunk
Section 9(a) isn’t quite as ludicrous as the Entire Agreement clause in the 2010 GMSLA, in that ISDA’s crack drafting squad™ craftily included all Confirmations in the definition of “Agreement” in Section 1(c), but it is still mostly bunk, seeing as (as per the above) the Confirmation isn’t the canonical binding Transaction anyway, and besides an “Entire Agreement” that you freely concede the parties could be orally augmenting or Confirming several times a day for the hereafter really isn’t a fabulously stout hook to hang your hat on should you wish to make a point out of it in forthcoming litigation. Actually, what would be the point you would wish to make about an entire agreement in litigation? Answers on a postcard please.
ISDA’s crack drafting squad™ takes a clause which didn’t really need to be said, and converts it into a monster. If we convert this to symbolic logic it must mean this:
Effective amendment or waiver =In writing AND [EITHER executed by each party OR confirmed by exchange of [EITHER Telex OR electronic message]]
“In writing” means recorded for posterity, in words ingestable by means of the eyes, as opposed to the ears. This is not the OED definition, I grant you — I made it up just now — but it zeroes in on the immutable fact that, whether it is on parchment, paper, cathode ray tube, LED screen or electronic reader, you take in writing by looking at it. Not orally — from the mouth — or for that matter, aurally — to the ears nor, in the JC’s favourite example, via semaphore, by a chap waving flags from a distant hill, but in visible sentences, made up of visual words.
Could “writing” include GIFs? Emojis? We suppose so — but do you “write” them, as such? — but to the wider question “can emojis be contractually significant?” the answer is undoubtedly yes.
Acceptance, to be legally binding, need not be “in writing”. Nor “orally”. Acceptance just needs to be clear. Whether one has accepted is a matter for the laws of evidence. There is little doubt that one who has signed, sealed and delivered a parchment deed by quill in counterpart has accepted its contents — it is about as good evidence as you could ask for, short of the fellow admitting it in cross-examination — but a merchant need not, and often does not, reach this gold standard when concluding commercial arrangements about town.
Who has not stumbled morosely into the newsagent of a Sunday morning, wordlessly pushed a copper across the counter and left with a copy of The Racing Post, not having exchanged as much as a glance with the proprietor? Do we doubt for an instant that a binding contract was formed during that terse interaction?
There is, in theory, a whole ecosystem of non-verbal communications — winks, nods, wags, shaken heads, facial tics and cocked eyebrows — and nor should we forget, those who stand on distant hills and communicate by smoke signal, Greek heroes who mis-communicate their safe return by sail colour or modern admirals who transmit instructions to the fleet by means of flag sequence.
Any of these can, in theory, convey offer, acceptance and consideration as well can a written or oral communication.
In which ISDA’s crack drafting squad™ grapple with the existential question: if I close out all my Transactions because the other guy fundamentally breached the contract, can I still rely on the good bits of the contract to manage my risk position and enforce my bargain?
We are deep into ontological territory here, fellows.
The subtle difference between an event of default and a fundamental breach of contract
A fundamental breach of contract is a failure to perform its terms in such a way that deprives the other party of the basic benefit of the contract. This could be anything — like a duck, you know it when you see it — but beyond being an outright failure to perform one’s material obligations it need not, and logically cannot, be comprehensively articulated in the contract.
An event of default, on the other hand, is articulated, usually at painful length, in the contract, which then contains detailed provisions setting out what should happen, to whom, by when, if an event of default befalls either party.
Now while the same set of circumstances might be an event of default and a fundamental breach of contract — almost certainly will be, in fact — treating a case as an event of default is to see it as “infra-contractual action”, contemplated by and provided for within the four corners of the contract; while treating it as a fundamental breach is thereby to cast the whole contract into the fire. For what good are the promises in it, after all, if the other fellow won’t keep them?
Thus, alleging fundamental breach is to terminate the contract with prejudice to your remaining rights under it, and to prostrate yourself at the feet of the Queen’s Bench Division for redress by way of damages, being the liquidated net present value of those remaining rights, determined by reference to the golden streams of common law precedent, whose terms might not be quite as advantageous to you as those you might have asked for were you able to agree them in advance. These common law principles are about the contract, they are not rules of the contract. The contract itself it a smoldering husk.
Thus, an event of default leaves the contract on foot, while you exercise your options to extract the value of your party’s commitments under it, without resorting to the courts. A fundamental breach requires the intervention of our learned friends
Now in most scenarios, which route you take might not make a whole heap of difference: In a contract between a supplier and consumer, or lender and borrower, there is a fundamental asymmetry you can’t cure with fancy words: if the guy owes you stuff, or money, that he hasn’t ponied up, you will need the court’s help to get it out of him. But master trading contracts are normally more bilateral than that: you have exposure, I have collateral. Maybe, the next day, I have exposure and you have collateral. Close-out is a self-help option, and it is quicker and cleaner than praying for relief from the QBD. But exercising it requires the contract to still be there.
Netting and close-out
Why should this matter here? Well, because netting, in a word. Here the fabulous nuances of the ISDA Master Agreement come into play. Close-out netting — as we all know, a clever if somewhat artificial and, in practical application, quite tedious concept — is not something that just happens by operation of the common law. Set-off, which does, is a narrower and flakier thing requiring all kinds of mutuality that might not apply to your ISDA Master Agreement.
The contractual device of close-out netting, by contrast, relies on the patient midwifery of ISDA’s crack drafting squad™ and the sophisticated contrivances they popped into the ISDA Master Agreement: especially the parts that say all Transactions form a Single Agreement, and those long and dusty passages in Section 6 which painfully recount how one terminates those Transactions and nets down all the resulting exposures should things go tits up.
Now, it really wouldn’t do if one were found to have thrown those clever legal artifacts on the fire before seeking the common law’s help to manage your way out of a portfolio with a busted counterparty would it. Section 9(c) is there to avoid the doubt that you might have done so: Just because you’ve declared an Early Termination Date, that doesn’t mean all bets are off. Just the live Transactions.
As far as the JC can see, through his fogged-up, purblind spectacles, this doubt, like most, didn’t need avoiding and shouldn’t have been present in the mind of a legal eagle of stout mental fortitude: it is clear on its face that terminating a transaction under pre-specified mechanism in the contract is not to cancel the contract and sue for damages, but to exercise an option arising under it, and all your mechanical firepower remains in place.
Indeed, there is no mechanism for terminating an ISDA Master Agreement itself, at all. Even in peace-time. This has led at least one commentator to hypothesise that this proves that derivatives trading is all some kind of Illuminati conspiracy.
Is this intended to allow concurrent liability between contract and tort? Or is it just harmlessly stating the obvious?
Template:M summ 1992 ISDA 9(e)
Waiver: a place where the laws of the New World and the Old diverge. Does one really need a contractual provision dealing with the consequences of a fellow’s good-natured indulgence when carrying on commerce under an ISDA Master Agreement? Those with an English qualification will snort, barking reference to Hughes v Metropolitan Railway and say this Section 9(f) is inconsequential fluff that goes without saying; those acquainted with the Uniform Commercial Code and the monstrous slabs of Manhattan will tread more carefully, lest they create a “course of dealing”.
Since the ISDA Master Agreement was designed with either legal system in mind, ISDA’s crack drafting squad™ came up with something that would work in either. To be sure, it is calculated to offend literary stylists and those wholse attention span favours minimalism amongst those who ply their trade in the old country, but it does no harm.
Different approaches to evidence of the contract in the UK and US
England and the US have taken different paths when it comes to respecting the sanctity of that four-cornered document representing the contract. Whereas the parol evidence rule gives the written form a kind of “epistemic priority” over any other articulation of the abstract deal in the common law, in the new world greater regard will be had of how the parties behave when performing their contract, and less significance on what at the outset they wrote down.
So whereas in England action to not insist upon strict contractual rights will have scarce effect on those rights (at best a waiver by estoppel might arise, at least until it is withdrawn), in the United States Uniform Commercial Code a “course of dealing” between the parties at variance with the written terms of their bargain will tend to override those written terms. Thus, by not insisting on the strict terms of her deal, an American risks losing that deal, and will be taken by the course of dealing to have agreed something else; whereas an Englishman, by granting such an indulgence, at worst suspends his strict contractual rights but does not lose them.
In this way the parol evidence rule is less persuasive in American jurisprudence than in British.
So suddenly, in Section 9(g) of all places, the members of ISDA’s crack drafting squad™ wake up out of their collective fever dream, and this is what they say: It’s like, “okay, so we wrote them; we did put them here — hands up, we admit it — but we don’t mean anything by them”. And what is a fellow to make of the headings before Section 9 that, short days ago, being a logical fellow, I read, enjoyed and imbued with symbolic meaning? Am I supposed to just throw that crystalline construct away now? It just seems such a waste.
Don’t you just love lawyers?
- ↑ Students of the absurd may enjoy our essay on that topic, here.
- ↑ Sail configuration can be tricky especially if you are absent-minded, however, as Theseus’ father-in-law might have told you, had he been around to do so.
- ↑ I just made that expression up, by the way
- ↑ Hughes v Metropolitan Railway
- ↑ § 1-303. Course of Performance, Course of Dealing, and Usage of Trade.