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In which JC ventures forth, unbidden, onto the topic of ''what makes a good ISDA''. Mainly the same things that make any good commercial contract, but ISDA is what we know so we will go with it.
So, what makes for a good ISDA? What makes ''any'' commercial contract good?


The pre-printed Master Agreement being what it is — a stone tablet hewn, so conventional wisdom has it, from holy granite so as to ''avoid'' controversy — when we talk about the “qualities of a good ISDA” it goes without saying “the sacred fourteen” are already immaculate: we mean of course a good ISDA ''{{isdaprov|Schedule}}''. It is toiling over that, grubby mortal appendix — a crazed shadow thrown by guttering light across the far wall of Plato's cave —that you will live out your days.<Ref>What is the difference between a schedule, an appendix and an annex?</ref>
Bear in mind that a contract fulfils different purposes for different constituents during its life. For [[Sales]], it is a tool of [[persuasion]]. For [[Credit]], a long-range defensive strategy. For [[Operations]], a manual. For the [[Legal Eagles]], a ''crust''.<ref>There is an expanded riff on this for, premium subscribers, [https://jollycontrarian.com/secure/index.php?title=Purpose '''here'''].</ref>


A scan of the sub-headings below will betray JCs view of it: an ISDA should have five basic qualities:  ''fairness'', ''clarity'', ''consistency'', ''simplicity'' and aptness to instil ''confidence''.
Crystalline legal exactitude is but one quality and, in most cases an oddly insignificant one in that, once a contract is signed, the overwhelming likelihood is that ''no-one will ever look at it again''. Not even Ops, once they have punched the collateral eligibility criteria into their systems.


These qualities interact with and, in large part, depend on each other. They are in symbiosis.  
The ISDA Master Agreement being what it is — a stone tablet hewn, by conventional wisdom, from holy granite so as to ''avoid'' controversy — it goes without saying “[[the sacred fourteen]]” are already immaculate: we mean, of course, “what makes a good ISDA ''{{isdaprov|Schedule}}''”. For it will be toiling over that grubby mortal [[appendix]] — a crazed shadow thrown by guttering light across Plato’s craggy cave —that a [[negotiator]] will live out her days.<Ref>What is the difference between [[appendix|a schedule, an appendix and an annex]]?</ref>


''Fair'' agreements must be ''clear'' for customers to realise they are fair. ''Clear'' agreements will inspire ''confidence'', in your own staff, thus distracting them from the temptations of [[Casanova principle|Casanova’a principle]] and toward ''fairness''. ''Clarity'' and ''fairness'' lend themselves also to ''consistency'', since you will treat your customers the same way — with equanimity — and as such they will find less cause to negotiate. ''Clarity'', ''fairness'', ''confidence'' and ''consistency'' make for ''simplicity'': a simple record that is easy to  create, maintain, roll out and, heaven forfend, enforce.
It should have five basic qualities:  ''fairness'', ''confidence'', ''clarity'', ''consistency'' and ''simplicity''. These qualities interact with and, in large part, depend on each other.


===Fairness===
''Fair'' agreements must be ''clear'' for customers to realise they are fair.  
{{Quote|“There could be no negotiating with terrorists.”
:—Attributed to Richard Nixon}}
{{Drop|[[Qualities of a good ISDA|F]]|airness as an}} abstract quality seems like one of those lip-servicey, all-very-well-in-theory ideas that got you good grades in that [[alternative dispute resolution]] module but is sure to ship a haymaker to the jaw on first contact with commercial reality. We treat a negotiation as some kind of trench warfare: as if we face a mortal enemy and not a customer. It is true that our customers tend to be similarly disposed — ''fairness'' never gets a chance to break out.


But this is no [[single round prisoner’s dilemma]]. To show fairness is not to show weakness, but ''strength''.
''Clear'' agreements will inspire ''confidence'', in your own staff, thus distracting them from the temptations of [[Casanova principle|Casanova’s principle]] and toward ''fairness''.  


JC is, by lifelong experience, a [[sell-side]] guy: he comes at this from the perspective of a merchant contracting with its customers. Hip types call these “B2C” deals, but the JC is not a one of those. Merchant and customer are, generally, on the same side: their interests conflict, but gently: the merchant wants a [[commission]] or a mark-up, the customer wants a good price, but beyond that each wishes earnestly for the other’s continued prosperity.  
''Clarity'' and ''fairness'' lend themselves also to ''consistency'' since, armed with it, you will be able to treat your customers the same way — with equanimity — and they will find less cause to object.  


Things can get chewy at the extremes — but most customers never get near a [[tail event|chewy extreme]].
''Clarity'', ''fairness'', ''confidence'' and ''consistency'' make for ''simplicity'': a simple record that is easy to create, maintain, roll out and, heaven forfend, enforce.


Now, we sell-siders may occasionally engage with ostensible ''hostiles'' — competitors, for example — but when we do, we abide by an unspoken pact of [[good faith]] for the limited ends which have brought our warring sides together. We must, at some level, trust one other, or have a common interest, or we would not contract at all.<ref>[[David Graeber]] makes a fascinating point when discussing the ''non''-origin of currency out from [[barter]]: [[barter]] is an arm’s length trade of equivalent goods conducted between parties who are dispositionally ''rivals'' and not partners. Once the exchange happens, nothing is left on the table; there is no presumption of enduring goodwill, no expectation of further business, or any kind of obligation undischarged. A barter is an exchange conducted with untrusted aliens. Inside your community, where there is trust, we are less compelled to extract our precise pound of flesh: there is a give and take; we let obligations lie undischarged and they acquire a moral quality. These are the ties that bind — the imperative becomes to ''avoid'' fully discharging our dues to each other. This is the relationship we should aspire to with our customers. We trust them to pay later — we extend ''credit''. (Hence money emerged not from fair value barter with strangers but as a way of evidencing indebtedness amongst those who knew each other. You don't extend credit to aliens.</ref>
===Fairness===
 
{{Quote|“There could be no negotiating with terrorists.”
So a presumption of any negotiation is [[good faith]]. ''Some'' level of trust. We don’t negotiate with terrorists. If you can’t trust your counterparts, {{plainlink|https://www.bbc.co.uk/iplayer/episode/m001w2dd/the-traitors-australia-series-2-episode-9|''this''}} happens: {{plainlink|https://www.bbc.co.uk/iplayer/episode/m001w2dd/the-traitors-australia-series-2-episode-9|the traitor’s dilemma}}.
:—Attributed to Richard Nixon}}
 
{{Drop|[[Qualities of a good ISDA|F]]|airness as an}} abstract quality seems like one of those lip-servicey, all-very-well-in-theory ideas that got you good grades in [[alternative dispute resolution]] class but will ship a haymaker to the jaw on first contact with reality. We are taught to treat legal [[negotiation]] as a kind of trench warfare: as if we are facing a mortal foe and not a valued customer. It is true that customers tend to be similarly disposed, so ''fairness'' never gets a chance to break out.
In any case, the “merchant-to-customer” contract is, by a landslide, the most common kind. Those with any [[in-house counsel]] experience of bona fide, non-existential, customer disputes know one thing: if there is any doubt — and frequently, when there isn’t — ''the business will roll over''. No-one takes a point with a solvent client.
 
This is nothing more than common sense: you stand far more to gain in future revenue by preserving your relationship at the small cost of excusing a customer the occasional gaffe than taking a literal stance on technical errors.
 
The instinct to “let it go” is so pronounced that compliance teams have contrived means to prevent the business granting these concessions for fear they are seen as impermissible “inducements”.<ref>Were it not for the deeply embedded [[agency problem]] inside most organisations, by dint of which these  arrangements could well be, this would be a bit silly. As It is, it probably isn’t.</ref>
 
In any case, the [[commercial imperative]] is so overwhelming a factor in ongoing business relationship that there is little point in asking for, let alone achieving, terms that go beyond “fair”. ''No-one will ever use them''. Seeing as, all other things being equal, you will conclude a fair contract faster than an unfair one — [[the ideal negotiation is no negotiation|the ideal negotiation is ''no'' negotiation]] — you should start with a fair template.
 
===Confidence===
{{Drop|Y|our form should}} also inspire confidence, and not fear, in your own negotiating team. It is a fact of life that negotiators these days have less combat experience and expertise than they once had. To do a good job they must be comfortable with their tools. They should ''understand'' the templates and the products they govern. They should go beyond the contract’s formal articulation to grasp the underlying commercial drivers of the relationship. <ref>JC is well aware that, among [[management consultant]]s, this view borders on the heretical.</ref> If they do, they can help you identify the parts of the contract that aren’t achieving what they seem to be.
 
By contrast, a negotiator who [[fear]]<nowiki/>s her material will hide behind the formal rules you give her to manage it. She won’t be drawn to discuss anything live — if she doesn’t understand the form and what it is trying to achieve, why would she put that vulnerability on show? — so will hide behind her keyboard, thereby contributing to the familiar experience of electronic trench warfare: she will lob long, bulleted issues lists over no-man’s-land and into the enemy’s advanced positions, or escalate that way internally to risk departments, where the missives will hiss and sputter, being passed about for days, before eventually being lobbed back, annotated in [[BLOCK CAPITALS]], appended with yet more more bullets points. This impasse can go last, as it did in Ypres, for years. You could write [[strange negotiation|war poetry]] about it.
 
Reverence to and intimidation by your own contractual form is madness, of course. While we should not be surprised, in our [[High modernism|high modernist]] times, that we fetishise the [[Substance and form|form over the substance]], ''deference'' to a contractual form that is plainly suboptimal is no cause for celebration. A confident negotiating team ''engages'' with the form rather than deferring to it. This is the negotiator’s version of “[[jidoka]]”: the human touch that makes the machine sing.
 
=== Clarity ===
 
{{Drop|[[Qualities of a good ISDA|O]]|f the many}} [[The purpose of an ISDA|purposes of the ISDA]], most deal with the ''present'' — desired capital treatment; the availability of close-out [[Close-out netting|netting]], margin  obligations — and the ''past''  —representations and warranties, and [[Section 2(a)(iii) - ISDA Provision|conditions precedent to transacting and continuing to perform]] — but only one deals with the ''future''. The close-out terms: the circumstance in which one can break the glass, sound the alarm and head for the lifeboats.
 
Closeout terms will only come into serious contemplation at times of extreme stress: the market’s, your management’s and, therefore, ''yours''. The more the firm stands to lose, the more extreme those stressy circumstances are likely to be. Your management will be going mad — make no bones about that — but so will the market and, quite possibly, the geopolitical situation too. All kinds of people will be doing inexplicable things.
 
Your customers will be AWOL: the defaulting client certainly will. Bank chief executives won’t take each other’s calls. Prime Ministers will be ordering overseas embassies to max out their credit cards just to have cash on hand to meet the government’s obligations.<ref>This happened in New Zealand in 1981. [[Wage and price freeze|True story]]. </ref> Central bankers will be ordering the banks they regulate to lowball [[London Inter Bank Offered Rate|LIBOR]].<ref>Controversial, I know, but this seems increasingly likely to have been the case.</ref>
 
We do not imagine that, when they crafted its close-out mechanics, the ’squad had the wider general ''ambiance'' in which the ISDA’s s last-resort rights would be exercised. They ''can’t'' have. We imagine they pictured the close-out urge coming upon the responsible credit officer, in isolation, at a time of beatific placidity: that there would be time and space to consider and quietly contemplate what must be done, perhaps with a frisson of regret for the poor customer whom one is letting down.
 
''It will not be like that.''
 
There will be multiple counterparty failures at once. All kinds of things will be stretching your attention, and your management’s. There will be allegations — unproven, unverifiable, and likely false ''but at the time you won’t know it'' — of fraud, of dastardly dealing, of internecine conflicts within the client, of side-conversations with your CEO who is allegedly related to the chief investment officer by marriage, of predatory competitors beating you to the close-out punch and eating your lunch. All of this is the fog of war.
 
Even among those who had them in the first place, patience and a sense of humour will be in short supply. People — many, ''many'' people — will want short, clipped answers to different questions they are all shouting at you at once — ''to which there are no short, clipped answers''. If you even understand the question, the last thing anyone wants to hear by way of answer is, “ahhh, it’s ''complicated''” or, God forbid, “the contract is not clear.”
 
And bet your bottom dollar, it will ''not'' be clear.
 
This, counsels, we think — and we are obliged to say the JC seems to be on his own about this one — short, clear, plain, ''blunt'' termination language, with simple-to-follow events addressing only generally catastrophic circumstances. The day is going to be an omnishambles, so make your job on that day as easy as it can possibly be.
 
The reality is that most of the weapons you need are embedded in the pre-printed form of the ISDA master agreement itself. Do not mess around with these, try to resist the temptation to unnecessarily augment them, and have ready-at-hand a simple step-by-step guide to how to get through them without screwing anything up. Like [[Closing out an ISDA|this one]].
 
=== Consistency ===
{{Drop|I|t helps with}} clarity if you have confidence, in a scrape, that you know what your ISDA is going to say where it matters. You can be sure of this if you are control quality where it matters. (Where it doesn’t — where the request is to acquiesce to a counterparty’s modern slavery policy — which it win’t disclose to you — or agreeing to the ethical treatment of the polar  bears etc, you can afford to take a view.)
 
“This is all very well but how, JC, are we supposed to force a counterparty to take our credit terms? It is a competitive market! No-one in their right mind would do that! We must negotiate every time! And plus, we can’t stop our counterparties insisting on bespoke terms, you know: this is a client service business! We cannot dictate!”
 
Quite so: and to get you through the livelong day we commend [[serenity’s prayer]] to you.
 
You cannot control everything, it is true. But there are some things you ''can'' control: the starting point for your own docs, for one thing — and some things certainly cannot be able to: the customer’s pet peeves. 
 
But pet peeves have the general quality of being correct: few people are peeved at a failure to pay clause.
 
If you configure your human system to constantly ''sand off'' rough edges when you encounter them then these pet peeves serve as a kind of carborundum.
 
It is a curious fact that augmentations to a template — scar tissue from previous wounds —have a habit of sticking to your  legal forms, whereas simplifications do not. This is a cultural matter. It is in your gift to change it. You just need to take hearts and minds with you.
 
If you start off with something you know to be offensive do not be surprised when they do not accept it.
 
A useful rhetorical, seldom posed, is:
{{Quote|If someone presented this term to me, would ''I'' accept it?}}
 
Rebase your documents to be acceptable to the person on the Clapham omnibus, at least ''in concept'', from the off. Legal advisors are already incentivised to seek changes as a means of demonstrating their [[legal value|value]]. Why start with a form with which any sane advisor would ''have'' to take issue?
 
====“Platinum plating”====
A common gambit here is a sort of “quality triage”: it is a truism that a few special, “[[Platinum client|platinum]]” customers will generate disproportionate revenues for the firm, and a large morass will be reliable but unremarkable. The thinking goes that one should therefore offer “platinum” customers better terms than regular ones, to the point where some firms even offer different starting points to different clients.
 
In its unstated assumption that tedious legal wrangling is a kind of punishment for mediocrity, this has things precisely backward: platinum customers generate that colossal revenue by ''taking the most risk'' with the bank’s money. They may be better run, with more powerful systems and heavier infrastructure, but that doesn’t mean they can’t blow up, and if they do they will leave a much bigger crater. These are precisely the clients with whom your legal agreements should be ''strongest''.
 
The converse is this: if your [[platinum client]] documentation is fit for the big risk-takers, then ''it is fit for everyone else too''. You don’t need better terms with smaller fry. The purpose of legal documentation is sometimes opaque but it is not ritualistic punishment. Offering “platinum terms” to regular customers will also reduce how much time you spend — ''[[waste]]'' — haggling with customers who will present you less risk and generate less revenue.


Nor does lowering your starting bid weaken your negotiating position. Brokerage is not a [[zero-sum game]]. There are no points for securing stronger risk terms than you need — it does not necessarily translate to less risk — and your walk-away point remains your walk-away point however close you start to it. From a resourcing perspective, the sooner you get to agreement, or the walkaway point, the better.
This is, in theory, odd. After all, between good-faith traders in the marketplace, commercial negotiation is no [[single round prisoner’s dilemma]]. To show fairness is not to show weakness, but ''strength''.  


And if you are diligent, consistent and rigorous in this approach, your customers and their advisors will figure this out. They will tire of banging their heads against a brick wall for the sake of improving what is already a reasonable position.
So why the hostility? Puzzles like this often boil down to variations of the [[agency problem]]. They can usually be untangled by asking, ''[[cui bono]]''? Usually, we will find a well-meaning professional adviser “making herself useful” by “[[for the avoidance of doubt|avoiding doubt]]”. This is no exception.  


=== Simplicity ===
JC is, by lifelong experience, a [[sell-side]] guy: his clients are ''providers'' of financial services who contract with people who ''want'' them. Merchant and customer are, here as in any marketplace, generally aligned: at the limit, their interests conflict, but gently: the merchant wants a big [[commission]], the customer wants to pay a little one, but beyond that, each wishes earnestly for the other’s continued prosperity.  
{{Drop|A|ll else being}} equal, make it ''simple''. This, of course, depends on your counterpart: you can’t clap one-handed, and a dogged pettifogger who takes pride in convolution — there are many of these — will not be assuaged by your best intentions, however noble. She will have her [[severability]] boilerplate, and that is that.


But [[Pragmatist’s prayer|Serenity’s Prayer]] is your friend, all the same. Sure; there are things you cannot change — bear them with good grace and a joyful heart — but just as many yet that you ''can'': you may have to live with whatever pedantry is flung back to you but do not ''court'' it by needlessly complicating what you send out.
Things ''can'' get chewy at the extremes when large sums of money are involved — but most dealers and most customers never get near a [[tail event|chewy extreme]].


Convolution causes confusion. Confusion causes fear and requires explanation. Explanation leads — perhaps, eventually — to resolution, but takes time, burns resources, and comes at the cost of variance from your ideal. All this mucking around invites pedantry, should your counterparty’s advisers be given to pedantry. Lawyers, by nature, are given to pedantry.
We occasionally engage directly with ostensible ''hostiles'' — competitors, for example — but even then, we do so under an unspoken pact of [[good faith]] for the limited ends which have brought us together. We must, at some level, trust those with whom we contract, even if they are rivals. We must have some common interest. If we did not, we would not contract at all. {{maxim|No-one enters a contract she expects her counterparty to break}}.


In essence: having to explain something that ''could'' have been clear in the first place, without loss of emphasis is, at least, wasted energy.
Sidenote: the late [[David Graeber]] made a fascinating point when discussing the ''non''-origin of money from [[barter]]: [[barter]] is an arm’s length trade of equivalent goods between parties who are dispositionally ''rivals'' and not partners.
Once the exchange happens, nothing is left on the table; there is no presumption of goodwill, no expectation of further business, no obligations are undischarged. This is a [[delivery-versus-payment]] exchange between untrusting aliens. This is not needed within a community of trust. Where there is trust we need not extract a pound of flesh: there is a give and take; we let obligations lie undischarged on faith they will be performed later. Our gestures acquire a moral quality. These are the ties that bind — the imperative becomes to ''avoid'' fully discharging our dues to each other and thereby undoing those ties.  


Use plain language. Short sentences, modern language. Use “you must ~” rather than “Party B shall be obligated to ~”; Use “we may ~” rather than “Party A shall be entitled but, for the avoidance of doubt, not obliged to ~”.
This is the relationship we should aspire to with our customers. We trust them to pay later — we extend ''credit''. We do them favours, they appreciate it, and reward us with social, not economic, capital in the shape of more business. Hence, says [[David Graeber|Graeber]], money emerged not from barter with strangers, but to memorialise mutual debts among friends. You don’t extend credit to your enemies.


Write ''agreeably''. You have choices in how your institution expresses itself: these can influence the critical path of your negotiation. ''Don’t poke your customer with a [[sharpened stick]]''. Take lessons from Dale Carnegie: try to win friends and influence people. There are polite, agreeable and damnable ways of saying the same thing.  
So, we presume [[good faith]] in any negotiation: ''some'' level of trust. We don’t negotiate with terrorists. If you can’t trust your counterparts, you fall into the “{{plainlink|https://www.bbc.co.uk/iplayer/episode/m001w2dd/the-traitors-australia-series-2-episode-9|traitor’s dilemma}}”. This makes for good TV, but bad business.


Compare:
The “merchant-to-customer” contract is, by a landslide, the most common kind. Once signed, these are filed somewhere and never again reviewed — it is bad form to pay too much attention to the letter of a deal, even should there later be an argument.<ref>{{maxim|if you have to go to the contract, you’ve already lost}}.</ref>


{{Quote|Customer shall be obliged forthwith upon demand and from time to time unconditionally to indemnify and hold the Bank harmless, without set-off, limitation or counterclaim, in the event the Bank or any one or more of its affiliates, agents, nominees or sub-custodians, howsoever described, suffers or incurs, or determines in its absolute discretion that it is or may be likely to suffer or incur, any custom, duty, excise, taxation, stamp or withholding, levy, deduction or charge of whatsoever nature, including penalties, costs, charges and legal expenses incurred in respect thereof, with regard to or in respect of any of Customer’s assets held by or in the name of or in the custody network of the Bank in connection with this Agreement or otherwise.}}
[[Inhouse counsel]] with experience of bona fide, non-existential, customer disputes know one thing: if there is any doubt — and frequently, even when there isn’t — ''the business will roll over''. No-one takes a point with a [[Insolvency|solvent]] client.


with:
This is no more than [[commercial imperative|commercial common sense]]: you stand to gain far more by preserving your relationship, even where that means excusing a customer the occasional gaffe, and ''trading'' on it than you do by taking a literal stance on technical indiscretions. That is ''[[barter]]'' behaviour.


{{Quote|“If we incur any tax while holding assets for you under this contract, you must reimburse us upon request.”}}
This instinct amongst business people to “just let it go” is so pronounced, indeed, as to unnerve regulators and [[compliance]] departments, who have contrived ways to stop it, for fear it “induces” — a fancy way of saying “bribes” — clients to continue giving business.<ref>Were it not for the deeply embedded [[agency problem]] inside most organisations, by dint of which these  arrangements could well be, this would be a bit silly. As it is, it probably isn’t. There it goes: the good old [[agency problem]], again.</ref>


Simple, too, aids easy comprehension at a time when things are going to hell.
In any case, the [[commercial imperative]] is so overwhelming that there is little point in asking for, let alone achieving, terms in contracts that go beyond “fair”. ''You will never use them''. Seeing as, all other things being equal, you will conclude a fair contract faster than an unfair one — {{maxim|the ideal negotiation is no negotiation}} — it behoves you to have a fair template.


Almost all the tools you need are in the master. It bears repeating that, in these days of daily [[variation margin]], it will be a rare day when your only option to close out a loss-making ISDA will be a [[NAV trigger]] or a [[key person clause]].
Make your templates ''fair''.

Latest revision as of 19:59, 24 February 2024

So, what makes for a good ISDA? What makes any commercial contract good?

Bear in mind that a contract fulfils different purposes for different constituents during its life. For Sales, it is a tool of persuasion. For Credit, a long-range defensive strategy. For Operations, a manual. For the Legal Eagles, a crust.[1]

Crystalline legal exactitude is but one quality and, in most cases an oddly insignificant one in that, once a contract is signed, the overwhelming likelihood is that no-one will ever look at it again. Not even Ops, once they have punched the collateral eligibility criteria into their systems.

The ISDA Master Agreement being what it is — a stone tablet hewn, by conventional wisdom, from holy granite so as to avoid controversy — it goes without saying “the sacred fourteen” are already immaculate: we mean, of course, “what makes a good ISDA Schedule”. For it will be toiling over that grubby mortal appendix — a crazed shadow thrown by guttering light across Plato’s craggy cave —that a negotiator will live out her days.[2]

It should have five basic qualities: fairness, confidence, clarity, consistency and simplicity. These qualities interact with and, in large part, depend on each other.

Fair agreements must be clear for customers to realise they are fair.

Clear agreements will inspire confidence, in your own staff, thus distracting them from the temptations of Casanova’s principle and toward fairness.

Clarity and fairness lend themselves also to consistency since, armed with it, you will be able to treat your customers the same way — with equanimity — and they will find less cause to object.

Clarity, fairness, confidence and consistency make for simplicity: a simple record that is easy to create, maintain, roll out and, heaven forfend, enforce.

Fairness

“There could be no negotiating with terrorists.”

—Attributed to Richard Nixon

Fairness as an abstract quality seems like one of those lip-servicey, all-very-well-in-theory ideas that got you good grades in alternative dispute resolution class but will ship a haymaker to the jaw on first contact with reality. We are taught to treat legal negotiation as a kind of trench warfare: as if we are facing a mortal foe and not a valued customer. It is true that customers tend to be similarly disposed, so fairness never gets a chance to break out.

This is, in theory, odd. After all, between good-faith traders in the marketplace, commercial negotiation is no single round prisoner’s dilemma. To show fairness is not to show weakness, but strength.

So why the hostility? Puzzles like this often boil down to variations of the agency problem. They can usually be untangled by asking, cui bono? Usually, we will find a well-meaning professional adviser “making herself useful” by “avoiding doubt”. This is no exception.

JC is, by lifelong experience, a sell-side guy: his clients are providers of financial services who contract with people who want them. Merchant and customer are, here as in any marketplace, generally aligned: at the limit, their interests conflict, but gently: the merchant wants a big commission, the customer wants to pay a little one, but beyond that, each wishes earnestly for the other’s continued prosperity.

Things can get chewy at the extremes when large sums of money are involved — but most dealers and most customers never get near a chewy extreme.

We occasionally engage directly with ostensible hostiles — competitors, for example — but even then, we do so under an unspoken pact of good faith for the limited ends which have brought us together. We must, at some level, trust those with whom we contract, even if they are rivals. We must have some common interest. If we did not, we would not contract at all. No-one enters a contract she expects her counterparty to break.

Sidenote: the late David Graeber made a fascinating point when discussing the non-origin of money from barter: barter is an arm’s length trade of equivalent goods between parties who are dispositionally rivals and not partners. Once the exchange happens, nothing is left on the table; there is no presumption of goodwill, no expectation of further business, no obligations are undischarged. This is a delivery-versus-payment exchange between untrusting aliens. This is not needed within a community of trust. Where there is trust we need not extract a pound of flesh: there is a give and take; we let obligations lie undischarged on faith they will be performed later. Our gestures acquire a moral quality. These are the ties that bind — the imperative becomes to avoid fully discharging our dues to each other and thereby undoing those ties.

This is the relationship we should aspire to with our customers. We trust them to pay later — we extend credit. We do them favours, they appreciate it, and reward us with social, not economic, capital in the shape of more business. Hence, says Graeber, money emerged not from barter with strangers, but to memorialise mutual debts among friends. You don’t extend credit to your enemies.

So, we presume good faith in any negotiation: some level of trust. We don’t negotiate with terrorists. If you can’t trust your counterparts, you fall into the “traitor’s dilemma”. This makes for good TV, but bad business.

The “merchant-to-customer” contract is, by a landslide, the most common kind. Once signed, these are filed somewhere and never again reviewed — it is bad form to pay too much attention to the letter of a deal, even should there later be an argument.[3]

Inhouse counsel with experience of bona fide, non-existential, customer disputes know one thing: if there is any doubt — and frequently, even when there isn’t — the business will roll over. No-one takes a point with a solvent client.

This is no more than commercial common sense: you stand to gain far more by preserving your relationship, even where that means excusing a customer the occasional gaffe, and trading on it than you do by taking a literal stance on technical indiscretions. That is barter behaviour.

This instinct amongst business people to “just let it go” is so pronounced, indeed, as to unnerve regulators and compliance departments, who have contrived ways to stop it, for fear it “induces” — a fancy way of saying “bribes” — clients to continue giving business.[4]

In any case, the commercial imperative is so overwhelming that there is little point in asking for, let alone achieving, terms in contracts that go beyond “fair”. You will never use them. Seeing as, all other things being equal, you will conclude a fair contract faster than an unfair one — the ideal negotiation is no negotiation — it behoves you to have a fair template.

Make your templates fair.

  1. ↑ There is an expanded riff on this for, premium subscribers, here.
  2. ↑ What is the difference between a schedule, an appendix and an annex?
  3. ↑ if you have to go to the contract, you’ve already lost.
  4. ↑ Were it not for the deeply embedded agency problem inside most organisations, by dint of which these arrangements could well be, this would be a bit silly. As it is, it probably isn’t. There it goes: the good old agency problem, again.
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