Yes. I agree that the EBA’s approach of specifying components rather than a specific form of clause is the better approach. It would be almost impossible to draft a single clause which is appropriate for use in every type of financial contract.
Not entirely. Taking each component in turn:
I question the formulation “acknowledgment and acceptance” and whether it would be better to simply say “agree”. The clause will form part of a financial contract where it will already be clear that the parties are agreeing to the contractual provisions. I query also what the intended difference is between the parties giving an acknowledgment and also accepting the relevant component since the two verbs seem to me to overlap considerably.
Secondly, component 1 only contemplates a single resolution authority. It is possible that more than one resolution authority will be acting in relation to a particular contract, for example if the contract is between two banks and both become subject to resolution measures. The premise of the drafting appears to be that a separate clause would be required for each resolution authority that may be relevant to a particular financial contract. The RTS could clarify whether this is indeed required.
This component requires a description of the applicable law which underlies the contractual stay clause. More guidance would be helpful as to the level of detail required since descriptions of such a complex area of law could be lengthy. In general, contractual clauses do not include descriptions of the applicable law on which they rest, since the purpose of the contract is not disclosure but rather to memorialise the contractual intention of the parties. For example a financial contract often includes clauses relating to things such as sanctions, process agent appointments and representations on compliance with law. The drafting assumption is that parties are aware of the underlying law and so descriptions of the relevant laws to which the clauses relate are omitted. I query why the same approach cannot be taken with contractual stay clauses. I submit that the appropriate place for a mandatory description of contractual stay laws is in the risk factor section of prospectuses (if any) and not in the financial contracts themselves.
This refers to the parties agreeing that they will endeavour to ensure the effective application of resolution powers. I query whether this is an appropriate undertaking to obtain from a counterparty given the extraterritoriality and other concerns this raises. How is a counterparty to “ensure the effective application” of the powers of its counterparty’s resolution authority? Does this undertaking require a party to expend money and positively support the resolution authority through public statements and court action, even if such actions are to its commercial detriment? What if the counterparty is outside the EU or itself subject to resolution measures at the same time which are inconsistent with the resolution measures being taken by its counterparty’s resolution authority? I submit that this aspect of component 3 is tilted too much in favour of the EU resolution authority. It potentially restricts parties from protecting their legitimate interests and is unnecessary since parties have already separately agreed that their rights are subject to the lawful actions of an EU resolution authority.
I agree with the requirement that the stay clause must be paramount in order to override the various other contractual provisions to the contrary. However I query the situation where each party to a cross border contract is potentially subject to inconsistent resolution measures. For example, if a UK bank is contracting with a German bank, then resolution authorities in the UK or in the EU could take resolution measures which impact on the financial contract. If the parties have included both a German stay acknowledgment and a UK stay acknowledgment in a separate clause then a question arises as to how the German clause could be paramount over the UK clause, and vice versa. I suggest that for comity component 4 should contemplate this scenario.
In relation to the use of the formulation “acknowledgment and acceptance” please see my comments on component 1 above.
Please see my comments to question 3 below.
No I do not believe that having the art.71a BRRD clause governed by the laws of an EU jurisdiction would improve the likelihood that it would be effective and enforceable before the courts of the relevant third country jurisdiction. To the contrary I believe it is undesirable to introduce this requirement for several reasons. The aim of the contractual stay clause is to increase the likelihood that a third country court will not disregard actions taken by a foreign resolution authority. The contractual stay clause is thus a method for extending the reach of EU law in circumstances where the non-EU law has not recognised the action under another mechanism, such as in the case of the UK, a recognition instrument under Section 89H of the Banking Act 2009. That reach is diminished if the clause itself is governed by EU law. Furthermore, if the stay clause is governed by an EU law then the governing law of the contract is going to be bifurcated whenever the financial contract is governed by a non-EU law. This adds complexity to any litigation because it requires a non-EU court to consider how the clause is to be interpreted as a matter of the relevant EU law. It also opens questions concerning renvoi and other private international law rules which could be avoided by keeping the governing law the same as the remainder of the contract.
It is premature to answer this question because the standard clauses will be developed by the industry over time once the RTS requirements are settled. I expect that various forms of clauses will be developed in different parts of the market.