From The Jolly Contrarian
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The basic principles of contract

A Jolly Contrarian tiptoe through the tulips of consensus™

Formation: capacity and authority · representation · misrepresentation · offer · acceptance · consideration · intention to create legal relations · agreement to agree · privity of contract oral vs written contract · principal · agent
Interpretation and change: governing law · mistake · implied term · amendment · assignment · novation
Performance: force majeure · promise · waiver · warranty · covenant · sovereign immunity · illegality · severability · good faith · commercially reasonable manner · commercial imperative · indemnity · guarantee
Breach: breach · repudiation · causation · remoteness of damage · direct loss · consequential loss · foreseeability · damages · contractual negligence · process agent
Remedies: damages · adequacy of damages ·equitable remedies · injunction · specific performance · limited recourse · rescission · estoppel · concurrent liability
Not contracts: Restitutionquasi-contractquasi-agency

Index: Click to expand:

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A representation that misses. Being as it is an inducement to enter into a contract, and not a term of a contract in its own right, a broken representation entitles one to set aside the contract altogether as a failure of offer and acceptance, and any consideration subsequently delivered to be returned to the payer (perhaps on the basis of a restitutionary action for money had and received), to put the parties in the position they had been in before they entered into the contract.

That said, modern usage is slack; most folks, not being purists like the JC, care not a row of beans that representations and warranties are in fact profoundly different things, and treat them as synonymous. for example: almost none of the purported “representations” in the ISDA Master Agreement are representations at all. They are mostly warranties.

Representations by agents on agent’s own behalf

Where your client’s obligations under the ISDA Master Agreement are stewarded by an agent — quite common for an investment manager trading on behalf of a fund — a broker might think about having the agent represent, on its own behalf, about its role as agent. It might ask the agent to do this in the ISDA. The sound of an asset manager confirming its ongoing authority to bind its principal gladdens a broker’s heart. A full-throated assertion of its own regulatory authorisation; its continued good standing with the companies office; the continued involvement of its key persons in making investment decisions — each is sure to put a jaunt in a broker’s stride. Imaginative in-house counsel for the broker will doubtless dream up others.

But tarry a while. Firstly, your investment manager will sign as agent, for the client, not on its own behalf. For many this will be an article of profound faith: they will be at some pains, which they will willingly inflict on you, to avoid the barest hint they are speaking for themselves. “When an agent, as agent opens its mouth,” they will tell you, “it becomes its principal for all purposes that interest the law.”

And so it does. As far as the Courts of Chancery are concerned, to be an agent is to be wholly transubstantiated into the person of one’s principal. Transmogrified. It is, for all forensic intents to disappear; one’s ghostly outline may still be there, but it is a chimera: one exists only to be the earthly representation of another.

Which cast a pall over the representations you are being asked to make.

Take the one that “the principal has duly authorised the agent to act on its behalf”. For the principal to say that, through the person of the very one whose agency is in question, is some kind of Möbius loop. The very comfort you might draw from what is being said is taken away by the person who is saying it.

Even if the fact of the agency is in no doubt, the statements as to the agent’s character may be problematic. The agent is speaking for the principal, remember.

The exchange might go something like this:

Agent (as agent): Why would I be authorised by the FCA? I am not advising anyone. In fact, my investment manager is advising me. Why don’t you ask her?
Broker (rubbing its eyes and peering at the agent): But I am asking her. I mean you.
Agent (as agent): Who?
Broker: You! The investment manager for this blessed fund!
Agent (as agent): Ah, but I am not me, for now, you see. I am the earthly representative of the fund. In my own personal capacity, I don’t exist.
Broker: But you are here, aren’t you? Can’t I just quickly ask you? Can’t you just, you know, be yourself for a moment? It won’t take a mo —
Agent (as itself): What? Here? In this ISDA? You must be joking. I told you under no circumstances will I act as principal.
Broker (A light-bulb comes on): Aha! I've got it! All right then: can you make representations on behalf of your principal?
Agent (as agent) (Thinks for a moment.): Why yes! Yes, I can! That’s what I’m here, as agent, to do! What would you like me to represent?
Broker: Could you represent that your investment manager is duly authorised by the FCA?
Broker: What?
Agent (as agent): Look: why don’t you ask the agent?

But seriously

Assuming you can persuade your agent to represent, on its own behalf, about itself, as to these matters (whether in the master agreement itself or in a side letter):

  • Now if (notwithstanding breach of this rep) the broker does still have a claim against the fund, then no harm no foul: we shouldn’t need to close out vs the fund unless/until there’s an independent failure to pay, in which case rely on that. But now we have actual knowledge of the agent’s lack of authority we may find we have a second problem: that there is no no-one with ostensible authority to bind the fund, and it is drifting rudderless towards a wall. If so, see below.
  • If we don’t then our action is necessarily against the agent in its personal capacity and against its own assets, not the fund’s. It’s a claim in tort for negligent misstatement. Put yourself in the fund’s position here. Being itself a victim of the agent’s mendacity it will feel it is more sinn’d against than sinning and will not see why this should be a 3(d) representation under the ISDA Master Agreement. The fund will say “well hang on: I didn’t do anything wrong here: this asset manager is taking my name in vain without my consent – so how is it that you’re purporting to close out against me?
  • Loss of manager’s regulatory status, no manager, no good standing etc: The other typical representations goes to a duly authorised manager’s continued ability to to act on the fund’s behalf: to manage positions, monitor risk tolerances and keep the ship steady. If the agent goes AWOL a [[[broker]] has some call to reduce risk against the fund. If the fund is a sports car, the broker’s ATEs are the measures it can take to prevent the car hitting a wall. As long as here is a competent agent driving the car, the broker can have some confidence the car will avoid walls by itself. If the driver is prevented from steering, the car will, eventually, hit the wall. So it is fair enough for the broker to say “okay: you are out of control: unless you name a new driver, within a given period ~ and here you may treat yourself to a fun exchange with your counterpart about how long that period should be ~ we can call this an ATE”.

See also


  1. Yes; the whys and wherefores of ostensible authority are an endless delight; but we can at least say the risk is increased.