Why Jurisdiction Matters in Contracts for Finance Industry
The choice of jurisdiction is no small decision when it comes to financial matters. The laws applied to your contractual relationship play a critical role in the required level of governance. In the financial industry, the choice of jurisdiction is even more important.
In this article, we discuss some relevant examples and points to consider in the contractual processes of financial service companies.
Geographic Location and Contractual Risk
While it is understandable that some locations have greater risk than others, some contract managers may forget to include appropriate clauses to protect their companies in situations in which jurisdiction may be challenged.
A great example is the airline insurance industry. The tragedy from Malaysia Airlines flight MH370 continues to stun the world. Even after the plane is finally found, the event will continue to make news as it is speculated that litigation could continue well into 2019. Some families from the victims may not even see compensation until 2024. Several of the victims are not able to contest the court rulings in their own jurisdictions and have to abide by the jurisdiction of a foreign court.
This same situation happens in the U.S. as well. For example, in 1949 an Eastern Airlines plane broke apart and one part fell in D.C. and the other in Virginia. The difference? One state had a cap of $15,000 for damages and the other one had no limit. If you’re the insurance company, what clauses are you including in your contracts to account for scenarios that expose your company to different jurisdictions?
Investment Management Agreements
Standard Investment Management Agreements, or IMA’s, are contracts between an investor and an investment manager. This is a great practice among financial institutions across the world. Given the importance of this framework for a contractual agreement, IMA’s can be found in most of the world, including Hong Kong, Europe, and North America.
However, can a standard IMA be blindly used in all types of contracts? The answer is clearly no. There are several specifics that should be clearly reviewed during the drafting process. Some key concepts to consider are:
- Target rate of return
- Benchmark used for investment evaluation
- Acceptable range of investment performance from benchmark
- Specific terms for:
- Securities lending
- Other terms as necessary
- Set of guidelines for dispute resolution
This is why your company needs to have a set of pre-approved templates for IMA’s, depending on geographic location. An effective way to ensure that teams spread across large distances are using the right and most up-to-date templates is through the use of an enterprise contract management system. While template creation is centralized to a single location, access is made available from several locations.
The Special Case of Investment Services
When it comes to drafting IMA’s, the area of investment services requires special attention. Hedge funds across the world are often faced with the dilemma of creating contracts that provide the right amount of detail for complicated transactions, while not overwhelming clients with unnecessary complexities.
Contract teams need to be ready for negotiating clauses with clients, one by one if necessary for large corporate clients. Under these circumstances, contract teams benefit from a large library of pre-approved clauses for plan A, B, and even C. A contract management software facilitates this process through drag-and-drop into a Word document. Additionally, the software keeps tracks of what team member used what clause(s), therefore ensuring accountability and creating documentation of the entire IMA drafting process.
In the financial services industry, contractual agreements need to be ready to negotiate across several jurisdictions and hedge against geographic contractual risk. The IMA is an useful tool to address these issues and prepare contract teams for negotiations across different locations.