The 2002 ISDA Master Agreement Isn’t a Contract-Drafting Masterpiece

Recently someone reminded me of the ISDA master agreement, the widely used form of master contract for over-the-counter derivatives transactions. It was last updated in 2002, and after I found a copy of the 2002 version online here, I had a look at it.

My conclusion? The drafting is pretty ragged. No surprise there—I’ve looked at a few examples of model contract language promulgated by trade groups, and they’ve all been varying degrees of not-so-great, no matter how widely used. (For example, go here for my take on the American Arbitration Association’s standard arbitration clause.)

So below are a few comments based on my cursory review of the first four pages of the master agreement, out of 28 pages (not including attachments). These comments just scratch the surface. (For my analysis of another usage employed in the ISDA master agreement, see this post.)

Categories of Contract Language

The word will is sometimes used where I’d use the simple present: “The terms defined in Section 14 and elsewhere in this Master Agreement will have the meanings therein specified for the purpose of this Master Agreement.”

The first subsection of section 2 (Obligations) is given the subheading “General Conditions.” But the first two provisions under it are obligations, so that isn’t a helpful subheading.

Amounts are referred to as being “payable.” When considered in isolation, it’s not clear whether the party in question has discretion to pay those amounts or is obligated to pay them.

See section 2(c) for an example of awkward use of the passive voice: instead of “The election may be made … ,” I’d say “The parties may so elect …”

Defined Terms

For purposes of integrated definitions, in the 2002 version the defined-term parenthetical is routinely not placed at the end of the definition. For example, see the three defined-term parentheticals in the first sentence of the introductory clause:

have entered and/or anticipate entering into one or more transactions (each a “Transaction”) that are or will be governed by this 2002 Master Agreement, which includes the schedule (the “Schedule”), and the documents and other confirming evidence (each a “Confirmation”) exchanged between the parties or otherwise effective for the purpose of confirming or evidencing those Transactions.

Here’s the next sentence in the introductory clause: “This 2002 Master Agreement and the Schedule are together referred to as this ‘Master Agreement’.” It’s redundant, as is the defined term “Master Agreement,” in that the previous sentence specifies that the master agreement includes the schedule.

The reference in the introductory clause to “those Transactions” is illogical—there aren’t any other Transactions. I’d delete the word “those.”

In section 2(c), the defined term “Multiple Transaction Payment Netting” is created by means of neither an integrated definition nor an autonomous definition. That’s unorthodox.

Structure

Section 3 says that specified representations “will be deemed to be repeated by each party on each date on which a Transaction is entered into and, in the case of the representations in Section 3(f), at all times until the termination of this Agreement.” I like this use of “will be deemed,” which matches exactly use of that phrase in the representations lead-in that I recommend in The Structure of M&A Contracts. But saying that a representation will be repeated “at all times” is very odd.

Layout

The layout is based on a bastard hybrid of hanging indents and first-line indents.

Section 2(c) features dangling text and an unenumerated paragraph, both MSCD no-nos.

In section 2(d), a separate sentence, with its own set of tabulated enumerated clauses, it tacked on to the last of a set of tabulated enumerated clauses. Instead, the period at the end of the last of a set of tabulated enumerated clauses should be followed only by a  new section or subsection.

Drafting As Writing

The “and/or” in the introductory clause (“entered and/or anticipate entering into”) isn’t great.

Don’t beat about the bush. Here’s the current section 1(c):

All Transactions are entered into in reliance on the fact that this Master Agreement and all Confirmations form a single agreement between the parties (collectively referred to as this “Agreement”), and the parties would not otherwise enter into any Transactions.

Here’s my version (limiting my changes):

This Master Agreement and all Confirmations form a single agreement between the parties (collectively referred to as this “Agreement”).

Such is used instead of this, that, these, and those. That’s a hallmark of needlessly legalistic prose.

Abstract nouns bad, verbs good. For example, see section 2(b): “by giving notice to [read notifying] the other party …”

Section 2(d)(ii) contains the following: “… if Y has failed to comply with or perform any agreement contained in Section 4(a)(i), 4(a)(iii) or 4(d)).” I’d say “… if Y has failed to comply with section 4(a)(i), 4(a)(iii) or 4(d)).” Why both “comply with” and “perform”? And why refer to as an “agreement” an obligation contained within a given provision?

Section 3(a) uses the subheading “Basic Representations.” It’s unhelpful to offer opinions regarding the complexity of, or importance of, a set of provisions.

Section 3(e) and 3(f) refer to representations as being “accurate and true.” I’m sympathetic to use of “complete and accurate,” but not “accurate and true.” I’d use just “accurate.”

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.