The terms of commercial transactions are set by the parties according to market trends. In this reality, lawyers play the role of legal architects during the transactional design process. To the extent that the parties have at their disposal one or more talented, strategic, and experienced legal architects, the conditions are more favorable for any transaction to be elegant, structured, solid, and with moderate risks of loss in the likely event of a transactional default.
Along these lines, law firms or individual transactional lawyers, during the process of designing transactions, whether usual or atypical, sophisticated, or simple, large or small, whatever the case may be, must ensure that the final product of the transactional design has as a common denominator a transaction that is easy to “enforce” in the likely event of a default.
Transactional design has a subjective and objective component, the former being knowing the customer and the latter knowing the customer’s transaction. The terms that are ideal for A may be unfavorable for B. Determining which clauses are appropriate in each case can only be achieved by considering the specific conditions of each customer and their operation. Transactional design must therefore be based on two fundamental questions:
- who are we advising? and who are we advising against? (know the subjects of the transaction). The language and terms suggested for a transaction will not be the same when advising a seller vs. a buyer; lessor vs. lessee; foreign house vs. representative, agent or distributor, as well as the individual conditions that characterize the client and the counterparty (reputation, competitiveness, solvency, market position, etc.).2. What are the ideal terms of the transaction (know the business)? To determine the appropriate commercial conditions that can be offered to or demanded from the counterparty, we should not start from “aspirations” or “wishes”, but from what the client or counterparty can objectively fulfil according to their own reality (prices, terms, locations, etc.), if we ask ourselves these fundamental questions, we increase the probabilities of designing a solid, feasible and effective transaction.
- What are the ideal terms of the transaction (know the business)? To determine the appropriate commercial conditions that can be offered to or demanded from the counterparty, we should not start from “aspirations” or “wishes”, but from what the client or counterparty can objectively fulfil according to their own reality (prices, terms, locations, etc.), if we ask ourselves these fundamental questions, we increase the probabilities of designing a solid, feasible and effective transaction.
Transactions are negotiated with the objective of being honoured; however, they must be designed to secure the client’s position in the undesired but likely event of a transactional default.
Given this reality, there are a few notes that can be taken into consideration:
- Avoid “one size fits all” practices: In commercial transactions, it is common to find “generic” or “standardised” terms or clauses that are used as a reference in multiple contracts. However, this practice should be seen as the exception, not the norm. Rather than adopting a standard approach, we suggest adopting a tailor-made approach, whereby each transaction is designed according to the uniqueness of the transaction in question.This implies adapting the contract according to the parties involved and the particularities of the negotiation and transaction, so that the reality and nature of the business is accurately reflected.
- Implement preventive and corrective transactional design: This involves anticipating possible scenarios of non-compliance and designing appropriate contractual clauses to address conflicts and disagreements. By adopting this approach from the collaborative contract formation phase, with clear and precise rules, we will be better prepared to deal with future contingencies. Thus, when disputes arise, whether minor or major, we will have a solid contractual basis for resolving them.
- Consolidate or split the transaction according to the collateral: Where the terms of the counterparty or level of risk of the transaction dictate the need to require collateral, care should be taken to ensure that such collateral is enforceable simultaneously rather than successively. An example of this is to consolidate all the guarantees in a single instrument, with the limitation that they cannot be executed simultaneously, for example, the execution of a personal guarantee and a security or mortgage guarantee cannot be accumulated, since only one enforceable title would be held, which is not divisible; unless the transaction has been divided into different instruments that allow the different types of guarantees to be executed simultaneously (since the different types of execution, whether monetary, chattel, mortgage, to give, to do or not to do, cannot be accumulated). Therefore, in the case of credit operations that accumulate different types of collateral, in the likely event of default, it is advisable to split the operation according to the types of collateral granted (mortgage, chattel or personal), to ensure that all collateral is enforceable simultaneously.
- Establish interest according to the risk of the operation within the permissible limits: It is market practice that the interest rate increases as the risk of the operation increases; however, the task of the transactional lawyer is to ensure that the current or default interest rate agreed upon is within the legal limits.
- Avoid procedural waiver clauses: It used to be a practice to establish “procedural covenants” as “procedural waivers” in favor of only one of the parties. For procedural purposes, a waiver of domicile, or any other “procedural waiver” clause that violates the principle of constitutional equality, is not valid. The design of the settlement should ensure that the procedural covenants are established as a common agreement, replacing the waiver of domicile by an express submission that is binding on both parties, including as a common agreement, the various procedural covenants, some of them being:
- Automatic default without judicial or extrajudicial intimation.
- Assuming the risks associated with unforeseeable circumstances or force majeure.
- Not exercising the right of extension.
- The appreciation of the collateral or mortgage.
- Simultaneous or successive exercise of claims; among other procedural covenants that are permissible under the law, if they are not drafted for the exclusive benefit of one of the parties or violate the principle of constitutional equality.
- Remove midnight clauses (with inapplicable or outdated terms): Avoid including generic or forced clauses in contracts. Borrowing terms from other agreements during the midnight fatigue, without tailoring them to the specific case, can generate significant risks (by using inapplicable terms or derogated procedural rules). To mitigate this danger, it is imperative to eliminate these practices and to draft precise clauses tailored to the needs of each transaction. For example, it is impractical to include an “arbitration clause” in an instrument which, by its nature, entails direct enforcement.
With these brief notes, the key role of the legal architect is clear, who must advise on the transactional design in the probable event of default, a position that requires creating trust and synergies between the client and the lawyer, which aims to prevent a simple transaction from turning into a complex legal process. Designing a transaction with moderate risks of loss requires strategic legal advisors with certain legal skills, which is why the Litigation & Arbitration Department of Consortium Legal, is at your service to explore the art of transactional design, starting from the beauty of articulating elegant, structured, solid transactions with moderate risks of loss, which have as a common denominator, that all transactions are easy to execute in court in the undesired, but probable event of a breach.