No consequential loss - GMSLA Provision

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2010 Global Master Securities Lending Agreement
A Jolly Contrarian owner’s manual™

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Clause 10.4 in a Nutshell

Use at your own risk, campers!
10.4 Subject to the Failure to Deliver and Consequences of an Event of Default clauses, neither Party may claim consequential losses if the other Party breaches this Agreement.

Full text of Clause 10.4

10.4 Subject to paragraphs 9 and 11, neither Party may claim any sum by way of consequential loss or damage in the event of failure by the other Party to perform any of its obligations under this Agreement.

Related agreements and comparisons

Related agreements: Click here for the same clause in the 2018 Pledge GMSLA
Related agreements: Click here for the same clause in the 1995 OSLA
Comparison: Template:Gmsladiff 10.4
Comparison: Template:Osladiff 10.4

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Content and comparisons

Clause 10.4 of the 2010 GMSLA and its equivalent under the 2018 Pledge GMSLA, Clause 10.3, are identical.



Consequential loss

In general

There’s a lovely long essay about consequential loss, at the consequential loss page. Consequential losses — in a nutshell, one’s lost opportunity to profit elsewhere because one is tethered into this dud contract and is faithfully abstaining from the fleshy pleasures to be had in fruitier parts of the commercial plane — are not generally available as a measure of damages under a contract (historically they were excluded as a rule; nowadays the common law regard it as a simple question of whether the loss was properly caused and reasonably foreseeable; losses that are consequential in nature may be forseeable, but it will only be in unusual circumstances.

Specifically for stock lending

That is the general position. Under the GMSLA, consequential losses are specifically excluded because they are, by nature, speculative, indeterminate and not reasonably foreseeable in the context of a stock lending arrangement. It is commonly understood that parties to a stock loan do not have in mind the potential profits each other could make with the securities or collateral transferred under the loan:

  • No expectations: No Lender expects to underwrite the value of the Borrower’s lost opportunity to short if it fails to settle a Loan.
  • They’re callable: Each Loan is designed to be easily cancelled at will by either party.
  • Self-help remedies are available: There are specific self-help remedies for settlement failures (e.g., Buy-Ins). It is hard to see how there could be any expectation that consequential losses would be available for breach, and it helps for the agreement to make that explicit. It reflects the industry expectation, and takes away the temptation — sore one, for many an underoccupied lawyer — to argue that for some special reason that consequential loss might be appropriate in some cases — and here one should never underestimate the boundless imagination (or paranoia) of an underoccupied lawyer, particularly during the contract negotiation phase, to confabulate hypothetical special reasons.

We have seen it argued that a counterparty’s “fraud or wilful misconduct” is such a reason. But why? For what reason would why a contract is breached matter to the measure of damages for breach? And, besides, how could you be fraudulent or badly behaved in a stock-lending agreement anyway?

“Subject to Paragraphs 9 and 11

But what of the cagey caveat about Paragraph 9 (Failure to Deliver) and Paragraph 11 (Consequences of an Event of Default)? Search me. There is no obvious exception to the ban on consequential loss in paragraph 9, which talks about Buy-Ins and other self-help remedies which militate pretty hard against consequential damages. Likewise, Paragraph 11 goes to some lengths to articulate and itemise the termination amount calculations, all of which are focused on actually incurred expenses, and there is nothing in there that talks about loss of opportunities — see Paragraph 11.3 in particular. If you see anything looking like consequential loss in here (this is the JC’s nutshell summary by the way) you have better eyesight than me.

11.3 The Default Market Value of a Letter of Credit will be zero. For any Equivalent Securities or any other Equivalent Non-Cash Collateral it will be determined under paragraphs 11.4 to 11.6 below, where:

Appropriate Market is the most appropriate market for any securities determined by the Non-Defaulting Party;
Default Valuation Time means the Close of Business in the Appropriate Market on the fifth dealing day after the Event of Default (or where Automatic Early Termination applies, the day the Non Defaulting Party became aware of it);
Deliverable Securities means Equivalent Securities or Equivalent Non-Cash Collateral to be delivered by the Defaulting Party;
Net Value of any securities means the Non-Defaulting Party’s reasonable opinion of their fair Market Value less (where Lender is the Defaulting Party) or plus (where Borrower is the Defaulting Party), all reasonable costs of any transaction needed under paragraph 11.4 or 11.5 (Transaction Costs); and
Receivable Securities means Equivalent Securities or Equivalent Non-Cash Collateral to be delivered to the Defaulting Party.

See also