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DRAFTING FOR BREXIT: For the latest information on the impact of Brexit on the drafting, negotiation and enforceability of this Precedent, see Practice Notes: Brexit—drafting boilerplate clauses and Brexit—drafting commercial clauses.

This Agreement is made on [date]


  1. 1

    [Insert name of party] [of [insert address] OR a company incorporated in [England and Wales] under number [insert registered number] whose registered office is at] [insert address] (the Recipient); and

  1. 2

    [Insert name of party] [of [insert address] OR a company incorporated in [England and Wales] under number [insert registered number] whose registered office is at] [insert address] (the Discloser)

(each of the Recipient and the Discloser being a party and together the Recipient and the Discloser are the parties).


  1. (A)

    The Recipient is [insert details] and the Discloser is [insert details].

  2. (B)

    The Discloser intends to disclose Confidential Information to the Recipient for the Purpose.

  1. 1

    Definitions and interpretation

    1. 1.1


    2. In this Agreement:


      1. means any entity that directly or indirectly Controls, is Controlled by, or is under common Control with, another entity;]

      [Authorised Person

      1. means any of the officers, directors, members, partners, employees, consultants, agents, representatives, subcontractors or professional advisers of the Recipient [and of its Affiliates] and any other persons whom the Discloser designates in writing as authorised;]

      Business Day

      1. means a day other than a Saturday, Sunday or bank or public holiday in England or Wales;

      Confidential Information

      1. means the information listed in the Schedule to this Agreement excluding any information which:

        1. (a)

          is, or was already known or available to the Recipient, otherwise than pursuant to or through breach of any confidentiality obligation owed to the Discloser;

        2. (b)

          is, or will be, in the public domain other than through any breach of this Agreement (save that any publicly available information shall be classified as Confidential Information where it is compiled in a form that is not in the public domain);

        3. (c)

          is disclosed to the Recipient without any obligation of confidence to the Discloser by a third party who is not itself under or in breach of any obligation of confidentiality;

        4. (d)

          is developed by or on behalf of the Recipient in circumstances where the developing party has not had direct or indirect access to the information disclosed, provided that the Recipient provides satisfactory evidence of the same to the Discloser;

        5. (e)

          the Discloser agrees in writing does not constitute Confidential Information.


      1. means [the beneficial ownership of more than 50% of the issued share capital of a company or the legal power to direct or cause the direction of the management of the company OR has the meaning given in section 1124 of the Corporation Tax Act 2010] and Controls, Controlled and under common Control shall be interpreted accordingly;


      1. means the evaluation, negotiation and completion of the [state the purpose or project] in a proper manner, including [the carrying out of legal and financial due diligence, assessment of risks and the negotiation of a legally binding agreement to implement [state the purpose or project]];

    3. 1.2


      1. In this Agreement:

      2. 1.2.1

        a reference to this Agreement includes its schedules, appendices and annexes (if any);

      3. 1.2.2

        any table of contents, background section and any clause, schedule or other headings in this Agreement are included for convenience only and shall have no effect on the interpretation of this Agreement;

      4. 1.2.3

        a reference to a ‘party’ includes that party’s personal representatives, successors and permitted assigns;

      5. 1.2.4

        a reference to a ‘person’ includes a natural person, corporate or unincorporated body (in each case whether or not having separate legal personality) and that person’s personal representatives, successors and permitted assigns

      6. 1.2.5

        a reference to a ‘company’ includes any company, corporation or other body corporate, wherever and however incorporated or established;

      7. 1.2.6

        a reference to a gender includes each other gender;

      8. 1.2.7

        words in the singular include the plural and vice versa;

      9. 1.2.8

        any words that follow ‘include’, ‘includes’, ‘including’, ‘in particular’ or any similar words and expressions shall be construed as illustrative only and shall not limit the sense of any word, phrase, term, definition or description preceding those words;

      10. 1.2.9

        a reference to ‘writing’ or ‘written’ includes any method of reproducing words in a legible and non-transitory form [including OR excluding] email;

      11. 1.2.10

        a reference to legislation is a reference to that legislation as [in force at the date of this Agreement OR amended, extended, re-enacted or consolidated from time to time [except to the extent that any such amendment, extension or re-enactment would increase or alter the liability of a party under this Agreement];]

      12. 1.2.11

        a reference to legislation includes all subordinate legislation made [as at the date of this Agreement OR from time to time] under that legislation; and

      13. 1.2.12

        a reference to any English action, remedy, method of judicial proceeding, court, official, legal document, legal status, legal doctrine, legal concept or thing shall, in respect of any jurisdiction other than England, be deemed to include a reference to that which most nearly approximates to the English equivalent in that jurisdiction.

  2. 2

    Provision and use of confidential information

    1. 2.1

    2. The Discloser shall disclose Confidential Information to the Recipient and its Authorised Persons[ for the Purpose].

    3. 2.2

      In consideration of any disclosures of Confidential Information pursuant to clause 2.1[ and the payment by the Discloser of £1 (one pound) (receipt of which is acknowledged by the Recipient)] and subject to clause 3, the Recipient undertakes that it shall[, and will procure that its Authorised Persons and Affiliates shall]:

      1. 2.2.1

        [use best endeavours to ]keep all the Confidential Information confidential at all times and not disclose it to any third party;

      2. 2.2.2

        not use any Confidential Information in any way except to the extent reasonably necessary for the Purpose; and

      3. 2.2.3

        maintain[ reasonable standards of security and] secure arrangements to ensure the confidentiality of the Confidential Information.

    4. 2.3

      The Discloser represents and warrants that it has the right and authority to disclose the Confidential Information to the Recipient[ and its Authorised Persons], and to authorise the Recipient[ and its Authorised Persons] to use the Confidential Information[ for the Purpose] in accordance with this Agreement.

    5. 2.4

      The Discloser represents and warrants that the Confidential Information is true and accurate.

    6. 2.5

      The Recipient’s obligations under this Agreement shall continue in full force and effect during the term of the Agreement and [for a period of [specify eg ten] years from the date of termination of this Agreement OR until such time as the Confidential Information shall cease to be confidential in nature].

    7. 2.6

      The Discloser agrees that nothing contained in this Agreement and no Confidential Information supplied to the Recipient shall oblige either party to enter into any further agreement or negotiation with the other or to refrain from entering into an agreement or negotiation with any third party.

  3. 3

    Authorised disclosures

    1. 3.1

      [The Recipient may disclose any of the Confidential Information to any of its Authorised Persons provided that the Recipient:

      1. 3.1.1

        informs the Authorised Persons beforehand of the duties of confidence under this Agreement; and

      2. 3.1.2

        uses reasonable endeavours to procure that the Authorised Persons undertake to comply with clause 2.2 of this Agreement as if they were a party.]

    2. 3.2

      The Recipient may disclose any Confidential Information which:

      1. 3.2.1

        it is required to disclose by law, any court, any governmental, regulatory or supervisory authority (including any securities exchange) or any other authority of competent jurisdiction; or

      2. 3.2.2

        the Discl...

Read More > 5th Jun

This Practice Note sets out the factors that an in-house lawyer should consider when selecting an external law firm to advise in relation to a banking and finance transaction. It is written for in-house banking and finance lawyers working in banks or other financial institutions. It covers the selection of law firms from an existing legal panel, the circumstances where it might be appropriate to select an off-panel law firm and what to do where the bank or other financial institution in question does not have a legal panel. The Practice Note also sets out some general considerations that will apply to any proposed law firm selection, regardless of whether a legal panel is in place or not.

For information on issues to consider when agreeing the engagement terms for the selected external law firms, see Checklist: Agreeing engagement terms with external law firms—a checklist for in-house banking and finance lawyers.

Selection of external lawyers where a legal panel is in place

Using the legal panel

Most large banks and other financial institutions have established panels of legal advisers. These panels are reviewed periodically (often bi-annually) and provide in-house lawyers with a group of pre-approved external law firms which they can use to obtain legal advice.

Where a bank or other financial institution has a legal panel, instructing external counsel is likely to be a more straightforward process than where no panel exists, as a panel agreement or similar pre-agreed engagement terms should already be in place between the parties. This means the terms of dealing between them will be largely established and documented. However, it will still be necessary to document the terms of the particular matter on which advice is to be given, so that the full details (including fees and timescales) are formally recorded. There may be a template engagement letter for use in such situations, or it may be determined that an email may suffice. For more information on the relevant considerations, see Checklist: Agreeing engagement terms with external law firms—a checklist for in-house banking and finance lawyers.

The following factors should also be considered:

  1. there is likely to be a process which will need to be followed in order for an in-house lawyer to select and then instruct the firm in question. In-house lawyers should ensure that they are familiar with this process and understand who they should contact in relation to panel matters and what internal approvals need to be sought. For example, general counsel or other approvals may be required for a high level of legal spend

  2. it may be necessary for a minimum number of firms to be asked to quote or pitch for a piece of legal advice, particularly if the likely fee spend is high. It may not be possible in all circumstances to select one preferred advisor without going through the required process. It will also be necessary to ensure that all firms being asked to provide a quote are provided with the same information and level of detail about the services required to ensure a level playing field

  3. it is possible that not all firms on the panel will be eligible to act on all types of engagement. For example, it is not unusual for a bank or other financial institution to stipulate which firms can be instructed on certain types and sizes of transaction (divided by practice discipline, type of transaction or both) and/or by each front office team or department, and

  4. there may be systems or processes which monitor panel firm engagements, so that the bank or financial institution can ensure that legal spend is being allocated fairly between panel firms. In-house lawyers should ensure that they are aware of any processes to be followed and feedback on performance given where required

Selecting firms from outside the legal panel

In some circumstances, it may be necessary to use law firms which are not on the bank or other financial institution's legal panel. The reasons for this could include the following:

  1. particular legal expertise is required which is not within the remit of any of the firms on the legal panel

  2. legal counsel is required in a jurisdiction where the bank or other financial institution does not have any panel firms, or

  3. the appropriate panel firms are conflicted and unavailable to act on the matter in question

When an in-house lawyer needs to instruct a firm which is not on the bank or other financial institution's legal panel, the following factors should be considered:

  1. it is likely that there will be a process for selecting law firms which is not on the established legal panel, sometimes known as an 'off-panel' process. In-house lawyers should ensure that they are familiar with this and that the appropriate steps are followed. It is likely that an exemption will be required, possibly from the General Counsel or a senior lawyer, which will require justification of the decision to instruct a firm from outside the legal panel, and

  2. The considerations set out under Selection of law firms where there is no legal panel below will also apply.

Selection of law firms where there is no legal panel

If the bank or other financial institution does not have an established legal panel, there will typically be a process in place which needs to be followed i...

Read More > 5th Jun

This Practice Note details those aspects of the sale and purchase of superyachts that notably differ from similar transactions involving commercial ships. For more information on the position in relation to commercial vessels generally, see Practice Note: Sale and purchase of second-hand vessels.

Yacht builders will generally propose using their standard building contract for superyacht construction or alternatively the parties will negotiate a bespoke contract. For more on shipbuilding contracts for other types of vessel, see Practice Note: Shipbuilding contracts.

This Practice Note deals with the sale of a completed or second-hand superyacht, very frequently sold through a yacht broker. The standard sale form (See The MYBA form below ) is the most widely used form of contract for second-hand superyachts bought and sold in Europe. The standard form is based on the principle ‘caveat emptor’ putting the onus on the buyer to conduct due diligence. Following acquisition, the buyer’s choice of flag under which the superyacht is registered and the choice of owning company structure must take into account the owner’s convenience, proposed use of the superyacht and also potential exposure to tax.

The MYBA form

As mentioned above, The Worldwide Yachting Association's (MYBA) Form is the most common standard form Memorandum of Agreement (MOA) used for the sale and purchase of superyachts in Europe. Although parties are at liberty to choose an alternative standard form (perhaps an amended Norwegian Sale Form (NSF)), a form designed for commercial shipping could well require so many amendments as to over-complicate the procedure. British Marine produce a number of template contracts for their members which are tailored to yachting, including sale and purchase contracts, but these are less widely used for superyacht sales and purchases.

The MYBA MOA can be regarded as more seller than buyer friendly, and in addition to checking the key commercial terms, buyers should take specialist legal advice before proceeding, to avoid for example risking the loss of a deposit even before undertaking a survey. It is noteworthy that the buyer takes delivery of the yacht with no warranty from the seller as to the yacht’s condition ('as is where is') and it is therefore prudent for a buyer to exercise the right to a sea trial and survey so as to satisfy themselves as to the yacht’s condition. It is also critical to ensure the buyer secures clear legal title free from encumbrances.

A key aspect of the MYBA MOA is that, unlike the NSF which is invariably subject to heavy amendments or deletions, in contrast, industry practice particularly in Europe is that no amendments, or very few amendments, are made to the standard MYBA MOA. There is a warning on the form which notes 'any amendment…can affect the validity and operation…' of the form, meaning it should not be amended by the inexperienced. Instead, any amendments can be added as special conditions in box clause 13, or contained in a separate addendum. Furthermore the broker or brokers will be party to certain clauses of the MYBA MOA. Pertinent clauses are covered below.

Clause 15—seller’s warranty

This clause covers the Seller’s warranty. Most ship sale contracts contain this familiar condition. Third-party rights over a vessel may considerably affect the vessel’s value to a potential purchaser. This clause is divided in two parts; firstly the clause imposes a duty on the seller to deliver the superyacht free from the encumbrances listed and secondly it provides the buyer with remedies for breach of any such duty.

The clause lists such encumbrances as 'debts, claims, liens and encumbrances of any kind whatsoever' which some may argue is broad drafting, however against a commercial ship sale contract it may be viewed as limited. Therefore if a buyer has specific concerns they may wish to add further encumbrances to the list, for example delivery under arrest or port state control detention.

It is clear in the MYBA MOA that it is a condition precedent for the superyacht to be free or freed from any encumbrance upon delivery. 'If at the time of delivery… there is... any… encumbrance against the VESSEL… the SELLER shall pay the same as a condition to completion'.

If the encumbrance becomes known (to the seller) after completion, 'the SELLER will indemnify… the BUYER against all losses and expenses arising from any such… encumbrance'. The duty to provide for an encumbrance-free yacht becomes a warranty and the only remedy available is that of an indemnity. Where the seller is a limited company a buyer may request the seller’s beneficial owner to provide a personal guarantee.

Clause 16—inventory

Clause 16 requires an inventory of everything belonging to the superyacht which the seller must provide within seven days of the agreement, and which will be agreed by both parties. This contrasts with the NSF which does not provide for an inventory and instead requires everything belonging to the vessel to be delivered along with it.

Clause 17—sea trial/condition survey

This clause requires that the seller make the superyacht available for both a sea trial and condition survey. Clause 26 covers requirements of a sea trial (at the seller’s expense) following payment of the deposit. If the buyer rejects the superyacht (which must be within 24 hours of the sea trial and following the form agreed in Clause 43), his expenses are deducted from the deposit and the remainder returned to the buyer. Failure by the buyer to attend the sea trial or failure to provide notice of rejection will be deemed acceptance.

Clause 22—risk

Clause 22 sets out when risk passes. As is standard in most ship sale contracts, risk in the vessel passes from seller to buyer only upon completion. The MYBA MOA allows for a distribution of costs incurred by a broker or third parties should the superyacht be lost prior to completion but part way throug...

Read More > Produced in partnership with Ince and Co 5th Jun

This Practice Note considers the meaning and use of conditions precedent in commercial arrangements. It also considers typical conditions precedent and drafting issues.

What are conditions precedent?

A condition precedent in a commercial contract details an event which must take place before:

  1. a contract, or

  2. a party’s obligation(s) under a contract

comes into force. The contract, or the relevant obligation, does not become binding until the condition has been satisfied.

A condition precedent should be distinguished from a condition subsequent. A clause that details, in the case of an existing binding contract, an event following the occurrence of which the contract may be terminated, is known as a condition subsequent.

Not all conditions precedent are ‘true conditions’. Although an agreement may express something to be a condition precedent, it may in fact not be a true condition and therefore will not make the agreement conditional. Conditions which are not true conditions precedent include conditions:

  1. in the case of an acquisition, requiring all the consideration to be paid before the asset is transferred to, and therefore becomes the property of, the buyer, and

  2. a condition that can be waived by one party (on the basis that they can then require specific performance of the agreement), unless the condition precedent is exclusively for the benefit of that party

The precise wording used is not important. There is no need to use the words ‘condition precedent’ to create a condition. The use of the words ‘condition precedent’ is a label and such words are interpreted in a contract in the same manner as any other contractual provision in an agreement.

Typical conditions precedent


A party may, depending on the nature of the transaction, require approval or consent from:

  1. shareholders (eg public listed companies involved in mergers and acquisitions), partners or directors if the constitutional documents of the company require it, and

  2. regulatory bodies (eg competition authorities), environmental or other planning consents and specific industry consents by regulators (eg electricity, telecoms etc)

Connected agreements

An agreement may form one part of a series of connected agreements—for example, in a sale and purchase of a UK company one would expect to see a tax deed form part and parcel of the overall sale arrangements and there may also be service agreements and possibly property related documents included as part of an acquisition.


Conditions precedent relating to funding normally arise in the following circumstances:

  1. acquisitions—a buyer may require a financing condition precedent to ensure it has the funds necessary to purchase the relevant asset. In a sale of goods scenario a buyer may require letters of credit to be in place before committing to buy the goods, and

  2. financing transactions—it is common to find conditions precedent to each drawdown of a facility agreement. For more information on conditions precedent in financing transactions, see Practice Note: Conditions precedent

Drafting issues

Although no special form of words is required to establish whether a requirement is a condition pre...

Read More > 5th Jun

This Practice Note considers implied terms in contracts for goods and services, being the implied terms incorporated into contracts for the sale and supply of goods and contracts for the supply of services by the Sale of Goods Act 1979 (SGA 1979) and the Supply of Goods and Services Act 1982 (SGSA 1982). It considers what the implied conditions and the implied warranties under the SGA 1979 and SGSA 1982 are and whether it is possible to exclude or modify these implied terms by express provision in the contract for goods or services.

This Practice Note considers implied terms in contracts for goods and services in business-to-business contracts only. For information about implied terms in consumer contracts after 1 October 2015, see Practice Notes: Consumer Rights Act 2015—summary, Consumer Rights Act 2015—goods and Consumer Rights Act 2015—services. For consumer contracts entered into up to and including 30 September 2015, see Practice Note: Consumer remedies for faulty goods and services (pre 1 October 2015) [Archived].

The implied terms

There is no need to make express provision for implied terms, but it is essential to be aware of the impact that an implied term will have when drafting a commercial contract. Terms implied by statute aim to improve efficiency or provide protection for one of the parties to a contract. They can also save costs of negotiating specific obligations and provide a framework for a transaction. It may be possible to exclude or vary some implied terms by making express provision for them in the contract (see further below).

Sale and supply of goods

Contracts for the sale of goods are subject to the Sale of Goods Act 1979 (SGA 1979) under which four conditions are implied into the contracts. These are:

  1. the transferor of goods has the right to transfer title in them

  2. the goods will correspond with their description

  3. the goods will be of satisfactory quality and fit for purpose, and

  4. where goods are transferred by reference to a sample that they will correspond with the sample

Breach of an implied condition gives a customer the right to reject goods that do not meet the statutory standards. The right to reject the goods does not apply where the discrepancy is so minor as to make rejection of the goods unreasonable. Should that be the case, the condition will become a warranty and only entitle the customer to damages.

The SGA 1979 also implies warranties into a contract for the sale of goods. These are:

  1. the goods are free from undisclosed charges and encumbrances, and

  2. the customer will have quiet enjoyment of the goods

Breach of an implied warranty will entitle the customer to damages.

Supply of services

Contracts for the supply of services are subject to the SGSA 1982 under which terms are implied into such contracts. These are:

  1. services will be supplied with reasonable skill and care

  2. services will be supplied within a reasonable timescale, if a time is not expressly stated in the agreement, and

  3. where no price is agreed or no mechanism for calculating price is set out in the agreement a reasonable price will be paid

What is reasonable will depend on the specific circumstan...

Read More > 5th Jun

Coronavirus (COVID-19): This Practice Note contains guidance on subjects potentially impacted by procedural changes in response to the coronavirus (COVID-19) outbreak. For updates on key developments and related practical guidance on the implications for lawyers, see: Coronavirus (COVID-19) toolkit.

This Practice Note provides practical guidance on how to execute documents properly when one or more parties to a contract are not physically present. This is sometimes known as virtual signing or virtual closing.

Mercury Tax Case

The guidance is consistent with the Law Society's guidance, made on 16 February 2010 in response to the decision in the Mercury Tax case.

The Mercury Tax case considered the effectiveness of pre-signed signature pages. In that case, participants in a tax avoidance scheme signed signature pages in draft deeds which were then detached and attached to final, substantially different versions of those documents. HMRC’s challenge to the validity of those deeds was upheld by Underhill J who held that the parties must be taken to have regarded signature as an essential element in the effectiveness of the documents. The common understanding was that the document to be signed exists as a discrete physical entity (whether in a single version or in a series of counterparts) at the moment of signing.

In its guidance, the Law Society suggests that the Mercury Tax decision is limited to its facts. This has been questioned in Bioconstruct GmbH v Winspear where the Mercury Tax case was held to have potentially broader application.

The judge in Bioconstruct GmbH v Winspear did not find anything in Underhill J’s analysis in the Mercury Tax case to indicate that it was influenced by that case arising in the context of a tax avoidance scheme and that, further, there was no basis on which to so restrict that analysis. It was presumed, in the absence of evidence to the contrary, that the parties must be taken to have regarded signature of the same physical document as being essential to its effectiveness.

Pending further legal developments practitioners should take care to closely follow the statutory requirements for the execution of deeds and the Law Society’s guidance, particularly when executing deeds by virtual means using pre-signed signature pages. All parties must sign the very final, unaltered document. For more detail, see News Analysis: Deed invalidated by affixing pre-signed signature pages to altered document (Bioconstruct GmbH v Winspear).

For further information on the distinct topic of electronic signatures in the context of business-to-business commercial contracts (including the Law Commission’s 2019 report on the electronic execution of documents), see Practice Note: Electronic signatures.

For an example of a counterparts clause that provides for virtual execution, see Precedent: Counterparts clause.

If executing a deed which will form part of an application to HM Land Registry regard must be had to HM Land Registry requirements for the execution of deeds. Failure to execute a deed in the form required by HM Land Registry can lead to delays in the application for registration being completed or even to the application itself being cancelled.

For more information and links to current HM Land Registry guidance, see Practice Note: Execution of deeds—Land Registry requirements.

Initial considerations

Consider first which type of document your client is executing. Deeds, guarantees to be executed as deeds and contracts for the sale and transfer of real property may only be virtually executed using option 1, below. However, all three of the following options are appropriate in the case of guarantees that are not to be executed as deeds and simple contracts.

Note that these are guidelines that are applicable only to England and Wales. Where one or more signatories to a contract are executing or are incorporated outside England and Wales these guidelines may not fulfil requirements placed on those parties for the valid execution of the document. Practitioners should consult the legal advisers acting on behalf of the other signatories in order to ensure that virtual execution is possible and that the option chosen fulfils any requirements that the law of the other parties' jurisdiction places upon them.

The Law Society guidance does not comment specifically on the witnessing of deeds in a virtual context (for example, where that is required by section 1(3) of the Law of Property (Miscellaneous Provisions) Act 1989 (LP(MP)A 1989)). However, the Law Commission, in its 2019 report on the electronic execution of documents and Man Ching Yuen v Landy Chet Kin Wong, First-tier Tribunal (Property Chamber), 2020 (ref 2016/1089) (not reported by Lexis Nexis®) suggest that a witness should be physically present to witness the signature of a deed and that remote witnessing may not satisfy the requirements of LP(MP)A 1989, s 1(3). For more details see Practice Note: Execution formalities—witnesses and News Analysis: Can a deed be witnessed remotely and attested latterly? (Man Ching Yuen v Landy Chet Kin Wong).

Option 1—email of document and signed signature page(s)

When this option is appropriate

This option is appropriate for the execution of deeds, contracts for the sale and transfer of real property, simple contracts and all types of guarantee. It is only possible to use this option where the parties to the document have already agreed all of its terms and a finalized version, ready for signature, is available.

Process of execution

In order to validly execute a document:

  1. obtain the agreement of all parties (and/or their legal advisers) to use of the process and confirm which document format is preferable (Word or PDF format); for convenience, and especially where there are more than two signatories, the parties may agree that a single legal adviser be responsible for coordinating the execution, although this is not necessary

  2. forward the finalised version of the document, including signature page(s), to all parties, or their legal advisers, in the agreed format via e-mail (it may be preferable to include the...

Read More > 5th Jun

This Practice Note considers the key terms and conditions (or T&C, Ts&Cs or T&Cs) in contracts for business-to-business (B2B) transactions. It sets out the general drafting considerations for contracts. It also looks at the key operative clauses in contracts such as price and payment, duration, termination, liability, warranties and indemnities and boilerplate.

See also Practice Notes: Defining terms—The definitions and interpretation clause and Structure and form of commercial contracts.

General drafting considerations

One of the first issues to consider when putting in place a contract, is to ensure that there is a valid contract which is capable of being enforced. A contract should always satisfy the basic criteria for contract formation, ie it must comprise offer, acceptance and consideration and be executed by parties with the requisite capacity and authority to enter into the transaction. For more detail, see: Formation and interpretation—overview.

It is also fundamental that the written terms clearly and accurately set out the key elements of the contract and address all the material parts of the transaction. When advising a client or drafting a contract:

  1. state obligations expressly

  2. where possible, avoid terms such as 'best or reasonable endeavours', 'material breach' or 'all necessary care or skill' or define them clearly. It is preferable to specifically outline the scope of a term so that all parties clearly understand their responsibilities (see Practice Note: Reasonable and best endeavours and Drafting and negotiating an endeavours obligation—checklist)

  3. include a preamble (or recital) setting out the background to the transaction (see Precedent: Background clause)

  4. consider whether pre-contract enquiries ought to be made relating to pre-existing agreements or arrangements and covenants (see, eg, Practice Note: Due diligence in outsourcing)

  5. consider whether company searches or bankruptcy searches are appropriate or whether a bank or parental guarantee is needed (see Practice Note: Parent company guarantee)

  6. mark all pre-contract correspondence 'subject to contract' (see Practice Note: Pre-contractual representations and statements)

  7. include an express rejection of the other party's standard terms and conditions (see Practice Note: Standard terms and conditions—incorporation), and

  8. consider the definitions and interpretation provisions carefully, ensuring that all applicable terms are correctly defined (see Practice Note: Defining terms)

Operative provisions

The operative clauses are the mechanics of the transaction. They should include key provisions in respect of:

Subject matter

A contract will only be enforceable if it is sufficiently certain. It is therefore important for the parties to a contract to identify in clear terms the transaction which forms the subject matter of the contract in order to ensure the contract is enforceable and to reduce the risk of dispute.

Price and payment terms

Price and payment terms need to be clear. Consider the inclusion or exclusion of:

  1. VAT (see Practice Note: VAT contract review)

  2. postage and packing

  3. insurance

  4. delivery, and

  5. fitting or assembly

Where price is split into bands, consider whether a list should be appended to the contract. What about disbursements and expenses? Consider periodic price increases (but include with consent of the customer) and consider linking any increases to RPI or average earnings index.

In addition, list payment terms, such as 30 days from date of invoice or payment prior to shipment of an order.

Since 1998, suppliers have had a right to charge statutory interest on late payment of debts but often apply a lower rate. The usual rate is somewhere between 2 and 4 percentage points above a relevant bank's base rate. Time for payment should not be of the essence, see Practice Note: Time of the essence.

Consider whether to include a procedure for dealing with disputes about price and whether either party may claim set-off or withhold payment pending resolution of a dispute, see Practice Note: Price, payment terms and interest and Drafting and negotiating a price clause—checklist and Drafting and negotiating a payment clause—checklist.

External influences can also affect price. A change in the law may affect price in either direction. Consider whether a specific term is needed requiring the cost of such a change to be borne by the supplier or customer.

Intellectual property rights and confidentiality

Clauses protecting rights such as intellectual property rights (IPRs) and goodwill require consideration of the ownership of such rights and the need to maintain their value. For more information see Practice Notes: Introduction to copyright & associated rights, Introduction to designs, Know-how—protection and licensing, Introduction to patents and Trade mark assignment and licensing.

Practitioners should ensure that they understand how intellectual property is to be used under the transaction and set out any requirement to reserve ownership or license its use as appropriate.

If either party is to disclose confidential information to the other it will need protecting by a non-disclosure clause. It will be necessary to limit disclosure to an identifiable list of people, allow disclosure to a court or regulatory body, limit the number of copies that can be taken and specify what happens to the confidential information if the agreement is terminated.

Data protection

Where either party processes the personal data of the other, include a clause requiring compliance with relevant data protection legislation. Regulation (EU) 2016/679, the General Data Protection Regulation (the GDPR) became directly applicable and fully enforceable in all EU Member States on 25 May 2018 and introduced substantial amendments to data protection law. For more information and links to guidance on drafting GDPR compliant provisions, see Practice Notes:

  1. List of data protection clauses and agreements for commercial transactions and personal data processing and sharing—GDPR compliant

  2. Supply chains under the GDPR—arrangements between controllers and processors

  3. Data sharing between controllers under the GDPR

For further information on the GDPR, see:

  1. Data protection regime—overview

  2. Data sharing and transactions—overview

  3. Data breaches, sanctions and enforcement—overview

  4. Data protection in specific activities—overview

  5. Practice Note: The General Data Protection Regulation (GDPR)

Liability and limitation of liability

Practitioners should consider the nature of liability that may be incurred and the damage that may arise in the event of breach. This will depend on the nature of the transaction documented by the agreement. Ensure that the contract provides the injured party with sufficient remedies.

Liability can be limited by:

  1. a capped amount, which once called upon in full extinguishes any future liability

  2. the number of claims, which can be further restricted by year or cumulatively over the term of the agreement

  3. the type of loss suffered, such as indirect and consequential losses, or loss of profit or goodwill, and

  4. the time period in which a claim can be made

Liability for death or personal injury caused by negligence...

Read More > 5th Jun

BREXIT: As of 31 January 2020, the UK is no longer an EU Member State, but has entered an implementation period during which it continues to be treated by the EU as a Member State for many purposes. As a third country, the UK can no longer participate in the EU’s political institutions, agencies, offices, bodies and governance structures (except to the limited extent agreed), but the UK must continue to adhere to its obligations under EU law (including EU treaties, legislation, principles and international agreements) and submit to the continuing jurisdiction of the Court of Justice of the European Union in accordance with the transitional arrangements in Part 4 of the Withdrawal Agreement. For further reading, see: Brexit—introduction to the Withdrawal Agreement. This has an impact on this Practice Note. For guidance, see Practice Note: Brexit—impact on finance transactions—Brexit planning and impact—key issues for debt capital markets transactions and Brexit—impact on finance transactions—Derivatives and debt capital markets transactions—key SIs.

What is asset-backed commercial paper?

Commercial paper (CP) is a short-term debt security (see Practice Note: Commercial paper and euro-commercial paper).

Where CP is generally only issued by highly-rated corporate entities or by finance vehicles, asset-backed commercial paper (ABCP) can be issued by companies with a wide range of credit ratings. This is because it is secured by underlying assets, usually receivables that produce a regular stream of cashflows. These assets are what the investors focus on—not the issuer.

A variety of receivables can be used, for example:

  1. credit card debts

  2. residential mortgages

  3. commercial loans

  4. trade receivables

As with CP, it is typically issued through a programme, which is expensive to establish but results in low issuance costs in the long-term.

The Securitisation Regulation (EU) 2017/2402 sets out criteria for non-ABCP and ABCP simple, transparent and standardised (STS) securitisations (see Practice Note: Securitisation Regulation—essentials).

Why use ABCP?

The reasons for issuing ABCP are similar to those which motivate securitisation issuance. See: Key features of securitisation and asset based lending—Rationale for more information.

Lower cost of borrowing

ABCP is used by companies seeking access to the capital markets, but who may not have the requisite credit profile to issue unsecured CP. As an ABCP issue is backed by underlying receivables, these issuers may borrow more cheaply than would otherwise be possible. Such companies also avoid the scrutiny, cost and onerous covenants that may be involved in taking on a bank loan (see The facility agreement—overview).

Potentially enhanced credit-rating and reduced concentration

As investors in ABCP look primarily to the receivables for repayment, they are more concerned with the creditworthiness of the underlying obligors than they are with the issuer. Depending on the quality of underlying obligors, it is possible for an ABCP issue to carry a higher credit rating than that of the issuer. This means, as above, that the issuer gets access to funds more cheaply than it otherwise would.

Equally, because the credit risk is analysed on the basis of the relevant portfolio of receivables, the existence of multiple underlying debtors helps dilute the credit risk and avoids its concentration in one entity (ie the issuer).

Balance sheet improvement

Banks and financial institutions that originated such assets could use these vehicles to improve their balance sheets by moving the assets off their own balance sheets into SIVs and ABCP conduits and thereby only keep the capital charge for any liquidity line associated with the vehicle and increase return on equity.

Principal ABCP markets

The largest ABCP market is the US, followed by Europe. As issuers are free to issue ABCP into the market of their choice, many EMEA issuers opt for the larger US market.


ABCP plays a central role in a number of types of vehicles which are founded on the concept of 'maturity transformation'—borrowing short term money cheaply from the money markets and investing in long dated, higher yielding debt on a 'buy and hold' basis. The most important of these are structured investment vehicles (SIVs) and ABCP conduits.

The core strategy of these structures is to generate a higher return on the assets in their portfolio than they pay on the debt securities issued by themselves.

SIVs and ABCP conduits have much in common. They both make use of bankruptcy-remote special purpose vehicles (SPVs).

For the structure to benefit from a lower cost of funding, there are a number of key factors:

  1. bankruptcy remoteness

  2. credit enhancement, and

  3. liquidity support

These are the same techniques that are used in securitisation. See: Features of a SPV for an explanation of how this lower funding is obtained.

Structure of an ABCP transaction

In the context of a typical securitisation transaction financed by ABCP, the business that wishes to raise funds via an ABCP issue is called the 'originator'.

Most often, the originator sells the receivables it wishes to finance to an SPV which is set up specifically for the ABCP programme. SPVs are usually set up in a tax efficient jurisdiction to obtain greater tax efficiency for the overall securitisation structure. For more information on SPVs, see Practice Note: The insolvency remote SPV in structured finance.

The originator is paid a purchase price by the SPV for the portfolio of receivables. The SPV finances this purchase of receivables by issuing junior notes to the originator (for the purposes of credit enhancement) and senior notes to an ABCP conduit, which is sponsored by an investment bank. Such a bank may also provide facilities to deal with short term or unexpected cash flow difficulties.

The ABCP conduit issues ABCP to its investors to finance the subscription for such senior notes, which are backed by the underlying receivables. Often, the originator continues to act as servicing agent in respect of the receivables it has sold to the SPV. Owing to its existing relationship with its obligors, the originator is best placed to collect payments due and manage the receivables which are now owned by the SPV.

An ABCP conduit is usually set up by a major institution such as a bank. Where a ...

Read More > 5th Jun

ISDA documents

The 1992 and 2002 ISDA Master Agreements (the Master Agreements) are standard form documents produced by the International Swaps and Derivatives Association, Inc (ISDA).

In this Practice Note, references to Sections of a Master Agreement and Parts of a Schedule are references to the 2002 ISDA Master Agreement and schedule unless otherwise stated.

For general information about negotiating ISDA Master Agreements, see: Introduction to negotiating ISDA documents.

What are representations?

In Section 3 (Representations) of the Master Agreement, the parties make a number of representations to one another.

Representations are pre-contractual statements of fact made by a party to a contract which induce another party to enter into that contract. If a representation is incorrect or misleading, it may give rise to a claim for misrepresentation under general contract law, the remedy for which will be rescission and/or damages depending on the type of misrepresentation. In addition, most documents used in commercial finance transactions contain specific remedies for misrepresentation (see: Section 3—Representations, below).

For information about the purpose of representations in commercial finance transactions (primarily loan transactions, although the same principles apply to ISDA agreements), see Practice Note: Representations and warranties.

Section 3—Representations

The representations in Section 3 (Representations) of a Master Agreement are important since a misrepresentation will give rise to an Event of Default under Section 5(a)(iv) (Misrepresentation). Each representation is considered to be repeated each time a new transaction under the Master Agreement is entered into.

The representation made at Section 3(b) (Absence of Certain Events) of the Master Agreement, whereby the parties represent that no Event of Default or Potential Event of Default has occurred and is continuing, feeds back to Section 2(a)(iii) of the Master Agreement, where the party making the payment can rely on the representation being accurate.

The representation made at Section 3(c) (Absence of Litigation) of the Master Agreement deals with both actual and threatened litigation against its parties, any credit support providers or specified entities (as listed in the schedule). The 2002 Master Agreement is narrower in scope than the 1992 Master Agreement which covers affiliates in general. This could be problematic for larger entities who might have many affiliates. Parties will generally ...

Read More > 5th Jun

A certificate of title (also known as a certificate on title) is a particular species of report on title.

When solicitors are instructed to investigate title to land (for instance, when land is being acquired or offered up as security), they will write a report on title for their client, which sets out the findings of the investigation. Those findings will include, for example, details of any rights of which the land has the benefit and any charges, easements or other third-party interests or potential interests that burden the land.

The process of title investigation is also known as legal due diligence. See Real estate in corporate transactions—overview for further information.

On occasions, solicitors will be instructed by their client to write a report on title for someone other than the client itself, for instance for a mortgage lender or a buyer of shares in a company that owns the land, or in connection with a company flotation or a tender transaction where there are a number of bidders.

Such a report addressed to a third party is usually termed a certificate of title. This is more formal terminology suitable for the more formal circumstances that give rise to the certificate.

There is usually no contract between the solicitors giving the certificate and the third-party recipient. However, if the givers of the certificate fail in their duty of reasonable care and skill in its preparation, they can (if not in contract) be sued by the third party for the tort of negligence.

Why are certificates of title used?

Why would a buyer of land or shares, or a mortgage lender, or some other third party, ever be willing to accept a certificate of title in respect of the relevant land from someone else's solicitors?

The answer is that it may not always make sense for the third party to go to the expense of appointing their own solicitors to investigate and report on title. If someone else's solicitors happen to be carrying out full due diligence on behalf of their client, they may as well be asked, in addition, to produce a certificate for the third party. In general, the certificate ought to be cheaper and easier to produce than for a duplicate due diligence exercise to be carried out by the third party's own solicitors.

Standard forms of certificate of title

The legal profession has produced various standard forms of certificate of title.

Such uniformity can help streamline transactions. For instance, it reduces the time taken up by preliminary negotiations over the precise wording of the certificate in any particular transaction. It will reduce the time taken by the recipients' professional advisers in interpreting the certificate. It will also reduce the preparation time taken by the solicitors giving the certificate, because their task is mainly limited to making any qualifications (reporting by exception) that may be needed, in respect of the subject property, to the generic statements contained in the standard certificate.

Chief among the standard forms (for commercial transactions) is the City of London Law Society's (CLLS) Long Form Certificate of Title (7th edition 2016). A number of Scottish firms have collaborated in producing a certificate equivalent to the CLLS Certificate for use in Scotland. See: Property Standardisation Group Certificate of Title.

For commercial properties held under a rack rent lease with no material capital value, the most appropriate standard form of certificate is the CLLS Short Form Report on Title (currently in its 3rd edition—available at CLLS—Certificate of Title and related documents).

This short form certificate is also intended to be used in relation to straightforward owner-occupied leasehold and freehold properties that do have a capital value. But practitioners rarely use the short form for such properties, preferring, instead, to stick with the long form in all such circumstances.

The CLLS has also provided a CLLS Certificate of Title 7th edition 2016 Update wrapper for report on title for use where eg a property has been purchased and the purchaser's solicitors prepared a report on title in relation to the acquisition of the property addressed to the purchaser. Within a short period of time after the purchase, the purchaser wants to re-finance the property and the lender requires a certificate. In such a scenario there may be good sense in re-issuing the report to the lender but since a certificate is required, the front end must 'wrap' around the report and certain additional confirmations have to be given by the certifier to ensure the funder ends up with the equivalent of a certificate.

There is also a standard form of certificate for use in residential transactions. This is the Law Society and Council of Mortgage Lenders approved certificate of title (previously called a Rule 6(3) certificate). See the next section for details.

Are the standard forms compulsory?

In no circumstances is it compulsory to use either the short form or the long form CLLS certificates referred to above. Rather, they (the long form, at least) have somehow acquired general acceptability among lawyers and lenders, through widespread use, as the industry-standard form.

Although no longer the case, there used to be a requirement that particular forms of certificate of title needed formal approval from the Law Society before they could be used in secured lending transactions (ie where the borrower's solicitor addresses a certificate of title to the lender).

Under the SRA Code of Conduct 2011 there was one exception to this for residential mortgage lending where the borrower's solicitor was also acting for the lender. Indicative Behaviour 3.7 (IB 3.7) in the SRA Code of Conduct 2011 sanctioned acting for both lender and borrower on the grant of a mortgage only where:

  1. the mortgage was a standard mortgage (ie one provided in the normal course of the lender's activities, where a significant part of the lender's activities consisted of lending and the mortgage was on standard terms) of property to be used as the borrower's private residence and

  2. the solicitor was satisfied that it was reasonable and in the clients' best interests for the solicitor to act for both parties and

  3. the certificate of title required by the lender was in the form approved by the Law Society and the Co...

Read More > 5th Jun

What is a forward start facility?

A forward start facility (FSF) is a syndicated facility under which lenders which have already provided funding to a borrower under a facility arrangement commit to provide further funds for the specific purpose of refinancing (in whole or in part) the existing facility upon its maturity date. An FSF is essentially an extension of maturity upon substantially similar terms to the existing facility.

FSFs developed following the 2008 'crunch', to address the resulting shortage of liquidity available from banks to borrowers. They have been used more frequently in investment grade transactions, as these do not have the various layers of security and intercreditor arrangements which are typically a part of acquisition finance transactions and which could result in complicated consent and default issues when putting in place an FSF which needs to co-exist and tie in with these existing arrangements.

An FSF will commonly be agreed at any time from a few months to up to two years in advance of the existing facility's maturity date.

Key features of forward start facilities


The parties to an FSF will be the borrower and some of the lenders under the existing facility. If all of the lenders are willing to take part, there will be no need to enter into an FSF—an amendment to the existing facility arrangements (including, for example, extending the maturity date) would be the appropriate course of action (see Practice Note: Amending a facility agreement). This is because all the lenders are usually required to consent to an extension of a loan's maturity (see for example clause 35.2(b) (All Lender matters) of the Loan Market Association's Multicurrency Term Facility Agreement). If this consent is achieved, the resulting amendment is known as an 'amend and extend'. If not all lenders are willing to extend the maturity of a loan, an FSF could enable those lenders who do wish to extend the maturity of the loan to contract to provide funding to the borrower in the future, independently of the dissenting lenders.

Where a number of existing lenders do not want to be involved in the FSF, the other lenders may decide to take on extra commitments themselves or new lenders may be invited to join the existing group to make up any shortfall (although this will add extra complications in preparing the facility documentation).


An FSF is only available to be drawn on the maturity date of the existing facility. This reduces the risk to the lenders of any double exposure to the borrower and it is important that the documentation is drafted to reflect this. As a result, for the period between the signing of the FSF and the maturity of the existing facility, both facilities will be in place but only the existing facility can be drawn. The FSF will be committed from the signing date.


The FSF will typically be for an amount that is at least equal to the amount of the existing facility. The terms of the FSF will be based on the existing arrangements and the conditions precedent (on the whole) are likely to reflect those previously agreed. The documentation prepared will reflect the terms of the existing facility except in the case of key terms such as purpose, availability, maturity and pricing. In addition, if there have been changes to market practice since the date the existing facility was entered into, lenders may also take the opportunity to update the facility documents to reflect these but it is important that the terms of the FSF do not breach those of the existing facility (see 'Relation to existing facility' below). In addition, any event of default under the existing facility (whether it has been waived or not) will also commonly be an event of default under the FSF.

Treatment of payments and fees

A lender under an FSF will typically receive:

  1. an upfront arrangement fee in relation to its commitments under the FSF

  2. top-up commitment fees which are payable in respect of the lender's commitment under the existing facility and which will reflect the difference in the market pricing at the time the FSF is signed and the fee levels that existed when the existing facility was entered into

  3. an additional payment in respect of amounts drawn under the existing facilit...

Read More > 5th Jun

This Practice Note explains the features of three common types of loan facility:

  1. overdrafts

  2. term loans, and

  3. revolving credit facilities (RCFs)

It also considers the advantages and disadvantages of each type of loan facility from a borrower's perspective.


An overdraft is the most common form of bank lending and is used to help solve short-term, day-to-day cash flow issues. As such, an overdraft facility is sometimes referred to as a 'working capital facility'.

An overdraft is a loan—it enables the borrower to borrow on a designated account up to a specified amount.

An overdraft can be 'planned' or 'authorised' (ie expressly agreed) or 'unplanned' or 'unauthorised' (ie arise from an implied request for an overdraft arising from the borrower giving a payment instruction that would take it beyond its agreed overdraft limit (if any)). The lender does not have to let the borrower become overdrawn.

The key features of an overdraft are that it:

  1. is generally uncommitted ie it can be withdrawn by the lender at any time

  2. is repayable on demand ie the lender can require that it is repaid immediately, even if the borrower has not defaulted in any way, and

  3. has interest payable on the amount overdrawn—interest is calculated at the close of each business day and is based on the closing balance of the designated account

The lender will usually review the status of an overdraft facility at least once a year. Although an overdraft facility is repayable on demand, in practice an overdraft will not usually be called in unless the lender is concerned about the financial condition or activities of the borrower.

The advantages of an overdraft facility for the borrower include:

  1. flexibility

  2. interest will be calculated on a daily basis, which means that in the event of downward fluctuation in the amount borrowed, the borrower may pay lower overall interest than if interest was charged on the upper amount required for the duration of an interest period, as with a term loan

  3. the fact that it is usually simple and quick to arrange, particularly as it is often put in place with an existing lender and documented on a lender's standard terms and conditions

  4. the straightforward (and often standard) nature of the documentation will typically result in lower legal fees for the borrower, and

  5. no commitment fee is payable

The disadvantages of an overdraft facility include:

  1. high borrowing costs due to the flexibility of the arrangement and greater risk to the lender (interest is usually charged at a fixed percentage above the lender's base rate)

  2. lack of certainty as to the when the amount borrowed must be repaid, and

  3. the fact that there is usually little room for negotiation of the overdraft facility terms as it will generally be provided on the lender's standard terms

An overdraft is not suitable for all business transactions, particularly those where funds need to be committed for a fixed period eg the acquisition of a business or real estate assets.

Term loans

A term loan enables the borrower to borrow sums for a specified period of time, known as the 'term'. The purpose of the loan will influence the length of the term.

The key features of a term loan are that it:

  1. is typically a committed facility under which, once the facility agreement has been executed and the relevant conditions precedent have been met, the lender will advance funds to the borrower

  2. is available for a fixed term and is repayable in line with an agreed repayment schedule—it can only be repayable prematurely on an event of default or the occurrence of certain other events

  3. cannot be re-drawn once it has been repaid by the borrower (unlike a revolving credit facility), and

  4. may be made available in a range of pre-agreed currencies (known as a 'multicurrency term loan')

After the facility agreement has been entered into, the borrower has a specified period of time during which it can draw down the loan. This period is known as the 'availability' or 'commitment' period. If the loan is to be made available to the borrower in more than one drawdown (known as 'tranches'), the borrower will be entitled to draw down the loan during the availability period up to the agreed maximum amount of the loan. For information about how a...

Read More > 5th Jun

A lender's primary concern is that it is repaid. Even if a lender obtains a judgment for payment of the sum owed to it by its borrower, this does not mean that a lender will be repaid in full or even in part, eg if the borrower is insolvent, the lender may have to share the borrower's available assets with other creditors and only receive part of what it is owed as a result.

Lenders will often take security as support for a borrower's obligations under a loan. Taking security means that they will have certain rights over the secured assets in the event that the borrower fails to repay the loan.

This Practice Note explains:

  1. what security is

  2. why lenders take security

  3. the key features of the four types of security recognised under English law

  4. the distinction between legal security and equitable security

What is security?

A security interest confers rights in the security provider's assets in favour of the secured party as security for its own or a third party's obligation. The nature of the rights conferred by a security interest will depend on the type of security taken.

Security is different to quasi-security which only creates rights against a person (see Practice Note: Difference between security and quasi-security).

Why do lenders take security?

The main advantages to a lender in taking security from a security provider are to give the lender, as the secured party:

  1. rights against specific assets of the security provider

  2. priority over unsecured creditors and lower ranking secured creditors of the security provider in respect of any enforcement proceeds

  3. a more efficient way of recovering amounts owed by the security provider

  4. the right to appoint an administrator or receiver over the assets of the security provider if certain conditions are met

Types of security

English law recognises four types of security interest:

  1. mortgages

  2. charges

  3. pledges, and

  4. liens

Each type of security grants different types of rights to the secured party and it is important to distinguish these.

One way of distinguishing between the different types of security is to divide the security types into:

  1. security which is created by the transfer of title (legal or equitable) of the secured assets (see Practice Note: Mortgages)

  2. security which confers an encumbrance over the secured asset but title and possession remain with the chargor (see Practice Note: Fixed and floating charges)

  3. security which is constituted by the transfer of actual or constructive possession of the secured asset (see Pledges and Liens)

Mortgage Charge Pledge Lien
Constitutes a transfer of title by way of security No transfer of title—creates an encumbrance over the charged assets No transfer of title—created by a transfer of possession No transfer of title—constitutes the right to hold the asset (but no right to use the asset)
Can be legal or equitable and effected by assignment in the case of intangibles Arises in equity only unless it is a statutory charge:
—eg a charge by way of legal mortgage in respect of land (not really a true charge)
—other statutory charges are rarely encountered
Confers a limited legal interest in the pledged asset
Confers a limited interest in the asset.
Can be legal or equitable.
Delivery of mortgaged assets is not required Delivery of charged assets is not required Delivery (actual or constructive) of pledged assets is required.
Delivery of possession is made for the purpose of granting security (ie there is an intent to pledge).
Actual delivery of assets is usually required for legal liens but not for equitable liens.
Liens are usually asserted over assets which are already in the possession of the creditor, eg the repairer's lien.
Assets commonly mortgaged include land, ships and aircraft (legal mortgage), intangibles such as contractual rights, receivables (equitable or statutory assignment) Assets commonly charged include shares, cash, stock in trade, equipment Assets commonly pledged include documents of title over goods and chattels such as artwork Goods, deeds etc

Distinction between legal and equitable security

The security interest conferred on the secured party will be either legal or equitable. Certain security interests can be either legal or equitable, some are always legal and others equitable. This will depend on the type of security taken and in the case of mortgages, whether the criteria for a legal mortgage is met. For more information, see Mortgages below.

Mortgages can be legal or equitable but charges, which do not involve the transfer of legal title to an asset, are always equitable (other than statutory charges). Pledges are always legal and liens can be legal or equitable.

The key advantage in obtaining a legal rather than equitable security interest is that a later legal security interest will take priority over an earlier equitable one if the later interest was taken in good faith and without notice. However, in certain circumstances, obtaining an equitable interest is preferable to obtaining a legal interest (eg it is more usual to take a charge over shares rather than a legal mortgage due to the additional administrative burden and risk involved with becoming the legal owner of the shares (see Taking security over shares — When is an equitable mortgage or charge of shares appropriate?)).

For further detail, see Practice Note: Legal versus equitable security interests and Priority between legal versus equitable interests.


A mortgage is created by the transfer of title to an asset by way of security for a debt or the discharge of certain obligations. It is subject to an express or implied condition which requires the mortgagee (ie the party to which the mortgage is granted) to re-transfer title back to the mortgagor (ie the party who provided the mortgage) when the obligation for which the mortgage was created is discharged.

A legal mortgage is created by the transfer of the legal title to the asset from the mortgagor to the mortgagee o...

Read More > 5th Jun

[On the headed notepaper of the creditor’s solicitors]

FAO [Insert name of debtor]

[Name of debtor’s solicitors]

[Address line 1]

[Address line 2]



Dear [insert organisation name]

[Insert creditor’s name] AND [insert debtor’s name]

Letter of claim

[We write further to our letter dated [insert date].]

We note that, notwithstanding our requests for payment of [insert amount] from your client in respect of [insert brief details of debt], our client has yet to receive payment. In the circumstances, our client is no longer prepared to leave this matter in abeyance and requests payment of the sum[s] set out below failing which, we are instructed to commence proceedings.

This is our client’s letter of claim sent in accordance with the Pre-Action Protocol for Debt Claims (the Protocol), a copy of which is enclosed. We draw your attention to the final section of this letter, which sets out the deadline by which your response is required and the consequences of failing to respond within that time.

We set out below details of our claim against your client and enclose copies of the key documentation which we consider to be central to that claim.

We also enclose an Information Sheet, Reply Form and Standard Financial Statement. In replying to this correspondence, the Reply Form should be used. [We would advise you to take legal advice in respect of the contents of this letter.]

[Your client should notify their insurer of this claim immediately. We would be grateful if you could kindly confirm the identity of your client’s insurer by return.]

  1. 1

    Overview and basis of claim

    1. 1.1

      Our client entered into a contract with your client pursuant to which your client was obliged to pay the sum[s] of money to our client as identified below, in return for which our client would [insert details of the goods and/or services service provided by client counterparty].

    2. 1.2

      [That OR Those] payment[s] were due to be made by your client to our client by [insert date(s)].

    3. 1.3

      Your client has failed to make payment of [all OR any] of the sum[s] due to our client in accordance with their obligations under the contract to our client.

    4. 1.4

      Accordingly, our client now seeks payment of [all OR the] sum[s] due to [it OR him OR her][, together with applicable interest,] as detailed below.

  2. 2

    Identity of the parties

    1. 2.1

      The parties to this dispute are our client, [insert client’s name] as creditor, and your client, [insert prospective debtor’s name], as prospective debtor.

  3. 3

    Relevant facts

    1. 3.1

      [Insert a clear summary of the facts. The following is offered as a guide] As noted above, on [insert date] your client entered into an agreement [on the terms and conditions enclosed therewith] with our client (the Agreement).

    2. 3.2

      Under the terms of the Agreement, our client agreed to provide to your client [identify the nature of the goods and/or services that your client was to provide under the Agreement] in return for which your client agreed to pay [insert details of the payment obligations of the debtor under the Agreement].

    3. 3.3

      In accordance with the terms of the Agreement, our client [insert the details confirming that your client has met its obligations under the Agreement, eg by providing the goods or services in question and when your client did so].

    4. 3.4

      During the course of the Agreement and pursuant to its terms, our client rendered various invoices to your client in respect of [goods OR services] supplied, as described above. However, [those invoices OR certain of those invoices] remain unpaid. Details of the unpaid invoices rendered to your client are set out below[, together with details of the funds received]. [Copies are also enclosed.]

  4. 4

    Our client’s claim—the debt due to our client

    1. 4.1

      The table below sets out invoices that our client has sent to your client which remain unpaid[ together with detail...

Read More > 5th Jun

There are five main types of set-off:

  1. independent set-off (sometimes known as legal set-off or statutory set-off)

  2. transaction set-off (also known as equitable set-off)

  3. contractual set-off

  4. insolvency set-off, and

  5. banker's set-off (sometimes known as current account set-off)

This Practice Note examines the characteristics of the five main types of set-off.

For information on set-off in general, see Practice Note: What is set-off and when is it available?

Independent set-off

Independent set-off operates as a procedural defence which can be used in court proceedings. It is used to set-off reciprocal claims which (unlike Transaction set-off) are independent of each other and unconnected.


Independent set-off is sometimes described as legal set-off or statutory set-off.

The term independent set-off is usually used to encompass:

  1. statutory set-off (also known as legal set-off)—a form of set-off available under rules carried over from 18th century legislation known as the Statutes of Set-Off, and

  2. set-off arising by analogy with the Statutes of Set-Off (ie where all of the conditions for statutory set-off are present but one of the claims is equitable, rather than legal)

Statutory set-off was originally contained in the Insolvent Debtors Relief Act 1729 and the Debts Relief Amendment Act 1735 (known together as the Statutes of Set-Off). Both of those statutes have been repealed but their effect has been preserved by the Civil Procedure Rules (CPR 16.6) which give a defendant the right to assert its cross-claim for a debt as a defence to a claim against it for a debt it owes.

Key features of independent set-off

The key features of independent set-off are that:

  1. it can generally only be exercised in judicial proceedings and not outside court—it cannot be used as a self help remedy. It is to be used as a shield not a sword

  2. it operates at the point of judgment

  3. both of the claims must be liquidated (ie capable of being ascertained with certainty) at the time when the defence is filed—for more information, see Practice Note: Independent set-off and transaction set-off—Independent set-off—claims must be liquidated or capable of being ascertained with certainty at time defence is filed

  4. both of the claims must be due and payable at the time when the defence is filed—for more information, see Practice Note: Independent set-off and transaction set-off—Independent set-off—claims must be due and payable at time when defence is filed, and

  5. the claims must be mutual but they need not be connected—for more information, see Practice Notes: What is set-off and when is it available?—The requirement for mutuality of debts and Independent set-off and transaction set-off—Independent set-off—reciprocal claims which are unconnected to and independent of each other

For more information, see Practice Note: Independent set-off and transaction set-off.

Transaction set-off

Transaction set-off arises when two claims are so closely connected that it would be unjust to allow one party (X) to enforce its claim without giving credit for the claim of the other party (Y) where Y has been wronged.

For example, an equitable right of set-off often arises where the claimant has defaulted in performing the obligation for which it is seeking payment. For example, a seller who has delivered defective goods should not be able to claim the full purchase price from its purchaser-debtor. Instead, the seller should take into account the purchaser-debtor's cross-claim for damages for breach of contract to reduce the seller's primary claim to its real value.

The effect of transaction set-off is to produce a net balance in favour of one party. Where transaction set-off is available, the defendant relying on the set-off is not legally obliged to pay the claimant's claim in full, but only has a legal liability to pay the net balance (if any) in the claimant's favour.


Transaction set-off is also known as equitable set-off.

Many judges and commentators prefer to use the term 'transaction set-off' over 'equitable set-off' because in most cases it arises out of transactions between the two parties (although the claims need not arise out of the same transaction). However, note that the term transaction set-off is also often used to refer to both equitable set-off and abatement.

The term equitable set-off can be used to refer to several types of set-off rights which are based in equity but it's most common usage relates to the set-off of mutual cross-claims which arise out of the same contract or out of closely connected contracts.

Key features of transaction set-off

The key features of transaction set-off are that:

  1. there must be an inseparable connection between the claim and the cross-claim and it must be manifestly unjust to refuse the set-off—for more information, see Practice Note: Independent set-off and transaction set-off—Transaction set-off requires inseparable connection between the claim and the cross-claim

  2. the claims must be mutual—for more information, see: Practice Note: What is set-off and when is it available?—The requirement for mutuality of debts

  3. unlike independent set-off, the claims do not have to be liquidated—for more information, see Practice Note: Independent set-off and transaction set-off—Transaction set-off—claims need not be liquidated

  4. it can operate outside (as well as inside) legal proceedings—for more information, see Practice Note: Independent set-off and transaction set-off—Transaction set-off can be exercised outside court

For more information, see Practice Note: Independent set-off and transaction set-off.

Contractual set-off

Contractual set-off arises where a right of set-off is created by contract between the parties. It can be used to confer set-off rights in circumstances where they would not otherwise be available.

For example, contractual set-off can be used to:

  1. permit set-off of claims w...

Read More > 5th Jun

This Practice Note identifies a number of common assignment scenarios and key considerations when involved in such scenarios, such as intra-group assignment, assigning debts and warranties. For guidance on what constitutes a valid assignment of a contract, see Practice Note: What constitutes a valid assignment of a contract?

Intra-group assignment

Companies within a group will usually want the right to transfer rights between them without consent.

This may arise, in particular, where any assignee may subsequently cease to be a member of the assignor's group. It may be that, in such an instance, the assignee is required to assign the rights back to the assignor or another member of the assignor's group immediately upon ceasing to be a member of the relevant group.

For analysis of some of the issues that may arise as a result, see Practice Note: Common issues in an intra-group reorganisation.

Assignment of debts

A bank, or other institution, providing finance to a buyer on a share or assets acquisition may require the benefit of an agreement to be assigned to it as part of its security from the buyer. An assignee cannot recover from the debtor more than the assignor could have done had the assignment never taken place.

The issue of assigning debts can give rise to particular problems where the original contract between the assignor and the debtor contains specific provisions which may enable the debtor to challenge a demand on the debt. This was seen clearly in the case of Bibby Factors v HFD. A supplier had assigned its customer debts to Bibby (a factor). Unbeknownst to Bibby, the supplier-customer contracts giving rise to the debts allowed for the debtor to claim a rebate. Over the thirteen year period in which Bibby had been in communication with the customer, which included the customer providing information on the status of debts to Bibby, no mention was ever made of the rebate. When the supplier went into administration, Bibby brought a claim against the customer for the unpaid debts, totalling just over ‎£280,000. The customer responded with a cross-claim based on its rebate entitlement in its contract with the supplier. The amount of the rebate claimed was not far short of the sum claimed by Bibby. The Court of Appeal upheld the first instance decision giving summary judgment in favour of the customer on its rebate cross-claim. In so doing, the Court of Appeal noted that, absent fraud, there was no obligation on the customer (as debtor) to inform Bibby (as assignee) of the pre-existence of any contractual arrangements, such as the rebate, which the customer might have with the supplier (assignor). For our analysis of this decision, see News Analysis: Court of Appeal permits rebate cross-claim by way of equitable set off in debt-factoring (Bibby Factors v HFD Limited).

Assignment of Receivables

Parties seeking to prevent assignment may generally expressly prohibit it. However, the Business Contract Terms (Assignment of Receivables) Regulations 2018, SI 2018/1254 (the Assignment of Receivables Regulations) render ineffective any clause to the extent it prohibits or imposes a condition or restriction on the assignment of a receivable. A ‘receivable’ is the right to be paid any amount under a contract for the supply of goods, services, or intangible assets. The Assignment of Receivables Regulations apply to agreements between businesses which are governed by the laws of England and Wales or Northern Ireland, entered into on or after 31st December 2018. The Assignment of Receivables Regulations will also apply if it can be established that the parties have chosen a foreign governing law to evade their effect.

The Assignment of Receivables Regulations do not a...

Read More > 5th Jun

This Practice Note discusses the common law doctrine of privity of contract; the equitable and statutory exceptions to it; how the doctrine affects enforcing a contract against a third party and what happens when, notwithstanding the lack of privity, a contract has an indirect effect on a third party. For guidance on contracts and third parties more generally and on the Contracts (Rights of Third Parties) Act 1999, respectively, see:

  1. Contracts and third party rights

  2. Third party rights—the Contracts (Rights of Third Parties) Act 1999

What does privity of contract mean?

'Privity of contract' is a common law doctrine, which provides that you cannot either:

  1. enforce the benefit of, or

  2. be liable for any obligation under

a contract to which you are not a party.

Therefore, if your client is not a party to a contract (ie they are a third party) then they cannot sue or be sued under that contract.


A promises to B that he will pay a sum of money to C—C cannot sue A for that sum if A fails to pay.

Beswick is considered to be the modern statement of the doctrine. Here, a coal merchant transferred his business to his nephew who promised him that he would, after the uncle's death, pay an annuity to the uncle's widow. After the uncle's death, the widow became his administratrix. She brought an action to enforce the nephew's promise, suing both in her own right and as administratrix. The House of Lords assumed the correctness of the generally held view that, at least at common law, a contract can be enforced only by the parties to it.

Since then, the House of Lords has indicated a willingness to reconsider the position (see Woodar at 591) but this has not yet happened.

The scope of the doctrine is limited: it means that a person cannot acquire rights, or be subjected to liabilities, arising under a contract to which they are not a party.

The exceptions to the doctrine of privity of contract

The exceptions to the doctrine of privity of contract are numerous. They include:

  1. specific rules in relation to assignment of contracts, see Practice Note: Assigning contracts—common scenarios and considerations

  2. specific rules regarding agency relationships, see Practice Note: Contracts and third party rights — Third party or agency?

  3. specific rules regarding covenants relating to land

  4. equitable exceptions, see Third party rights—the common law doctrine of privity of contract — Privity—the equitable exceptions

  5. the exceptions allowing the enforcement of third party rights, as seen in the C(RTP)A 1999, see Practice Note: Third party rights—the Contracts (Rights of Third Parties) Act 1999

  6. statutory exceptions (in addition to the C(RTP)A 1999), see Third party rights—the common law doctrine of privity of contract — Privity—the statutory exceptions

Privity of contract—the equitable exceptions

Under the rules of equity, where A has made a promise to B for the benefit of C and B has constituted himself as trustee of A's promise for C, then C, as third party, may enforce the promise against A.


  1. C (a broker) negotiated a charterparty in which the shipowner (A) promises the charterer (B) to pay commission to C. The court found that B was the trustee of A's promise for C and so C could enforce the promise against A.

In order to take advantage of this 'trust of promises' exception using the rules of equity:

  1. B must have the intention to create a trust before they can be regarded as a trustee for C (whether or not such intention can be proved is a complex area of law, with contradictory findings in the case law, although the more recent case law has found the courts more reluctant to imply a trust in such circumstances)

  2. C must join B as a party to their action against A

Where equity finds such a trust to exist, then, generally speaking, the promisee (B) has no right to any money received from A and, instead, holds it on trust for C.

To date, the trust of promises exception to the privity doctrine has been applied to cases involving the payment of money or the transfer of property only.

Privity of contract—the statutory exceptions (The Contracts (Rights of Third Parties) Act 1999 and other statutory exceptions)

There are a number of statutory exceptions to the doctrine of privity, which exist in addition to the C(RTP)A 1999 (on which, see Practice Note: Third party rights—the Contracts (Rights of Third Parties) Act 1999). They are:

  1. Law of Property A...

Read More > 5th Jun

Self-regulatory regime in Scotland

Apart from some limited statutory provisions, charity fundraising in Scotland is self-regulated. Since July 2016, the regulatory regime has been referred to as enhanced self-regulation following a review of the regulatory regime carried out on behalf of the Scottish Government.

Enhanced self-regulation places the initial onus on charities when complaints about fundraising practice arise. The expectation is that fundraising staff (where there are any) will attempt to resolve a complaint about a charity’s fundraising in the first instance. If this is unsuccessful, the second stage in any complaint about fundraising would be a direct complaint to the charity trustees.

Role of the Scottish Fundraising Standards Panel

If a complaint requires to be escalated beyond a charity’s trustees, the third and final step in the process is to take a fundraising complaint to the Scottish Fundraising Standards Panel (the Panel). The Panel was established for the specific purpose of dealing with such escalated complaints and to oversee fundraising standards in Scotland.

Complaints raised with the Panel are adjudicated against the Code of Fundraising Practice (the Code), which is held and maintained for the whole of the UK by the Fundraising Regulator which is based in London. Once adjudicated, complaints may be published by the Panel on its website, and the outcome of complaints may be referred further to the Office of the Scottish Charity Regulator (OSCR), the Institute of Fundraising, the Information Commissioner’s Office (ICO), or to such other regulatory body as may be appropriate.

Although the Panel’s aim is to seek to resolve all fundraising complaints which are brought before it, the Panel can refer complaints to the OSCR where they tend to show some wider failure in charity trustee duties or in relation to charity law or regulation more generally.

As the Panel’s decisions do not have the full force of law, its sanctions are non-statutory and are technically non-binding. However, any failure to comply with Panel-imposed sanctions would be viewed very dimly by OSCR, the Institute of Fundraising and other regulatory bodies, and could lead to formal action against recalcitrant charity trustees or fundraising staff by those other regulators. In the event that the Panel’s sanctions were not adhered to on a persistent basis, the Scottish Parliament reserves the right to institute a more formal regulatory regime. The expectation is therefore that charities will comply with the Panel’s non-statutory sanctions if the sector wishes to preserve the system of self-regulation in Scotland.

Status of the Code of Fundraising Practice in Scotland

While the Code is held and maintained by the Fundraising Regulator, the Code is treated as the sector standard for the whole of the UK. The Code has specific chapters dealing with Scots law and regulation in relation to fundraising, and the Scottish elements of the Code are reviewed and revised in conjunction with the Panel among others to ensure that they remain fit for purpose in Scotland. Aside from its role in relation to maintenance of the Code, the Fundraising Regulator has no further jurisdiction in Scotland.

Cross-border fundraising complaints

Complaints about fundraising in Scotland (as with other parts of the UK) are dealt with according to a lead-regulator principle.

A fundraising complaint raised in any part of the UK which relates to a charity established in Scotland with OSCR as its lead regulator will be referred to the enhanced self-regulation model for Scotland and where relevant, to the Panel.

A fundraising complaint raised in any part of the UK which relates to a charity whose lead regulator is the Charity Commission for England and Wales even if the charity is also registered with OSCR will be referred to the Fundraising Regulator.

Since June 2017, fundraising complaints about charities whose lead regulator is the Charity Commission for Northern Ireland are also referred to the Fundraising Regulator, on the same basis as fundraising complaints about English and Welsh charities. This applies even where the Northern Irish charity is also registered with OSCR.

Street collections

One of the most closely regulated areas of fundraising practice in Scotland is that of street collections. A street collection is defined as the solicitation of contributions from passersby in a public place. A public place for these purposes means any place, whether or not it is a thoroughfare, to which the public has unrestricted access. This includes doorways or entrances abutting such a place, common passages or courts, and the common areas including common gardens of tenement properties. The rules are contained in section 119 of the Civic Government (Scotland) Act 1982 (CG(S)A 1982) and the Public Charitable Collections (Scotland) Regulations 1984 (1984 Regulations), SI 1984/565.

It is possible for charities to register as exempt promoters if they organise collections over the whole or a substantial part of Scotland. Applications for exempt promoter status are made to OSCR and they carry annual reporting obligations to OSCR, including audited accounts of collections carried out, along with other specified reporting and audit requirements.

If a charity wishes to carry out a street collection and it is not registered as an exempt promoter, then it must obtain a licence in advance of the street collection from the relevant local authority in whose area the collection is to be made. Applications must be made by giving at least one month’s notice of the collection, or such longer period as the local authority may specify.

Collectors taking part in a street collection must comply with certain detailed regulations if the collection is to be carried out lawfully. These regulations include:

  1. collectors must be a minimum of 14 years of age

  2. collections are normally always carried out by means of sealed collecting boxes

  3. donations must be placed into the sealed collecting box by the donor and not by the collector

  4. collectors must sport visible identity badges showing the registered name of the organization benefiting from the collection and its charity number

  5. collectors should carry with them their certificate of authority, provided by the promoter of the street collection, showing the name and address and charity number of the charity benefiting from the collection, the name and address of the collector, and the place in which and period during which the collector is authorized to collect. The certificate of authority must be signed by the collector

Rules relating to solicitation statements must be complied with in the course of a street collection, unless the collector is a volunteer fundraiser.

Detailed rules about the proceeds of collections and how they are to be counted and reported on are set out in the 1984 Regulations and are expanded upon in the Code.

Failure to comply with the detailed rules on street collections can amount to a criminal offence punishable by a fine. Most offences are punishable with a maximum fine of £500, although the Scottish Parliament has the ability to increase the level of fines. Penalties for breaches of the 1984 Regulations are in fact extremely rare, which suggests that street collections are either largely compliant with the rules, or ...

Read More > Produced in partnership with Gavin McEwan of Turcan Connell 5th Jun

General nature of beneficiaries’ rights

The right of the beneficiaries of a trust is generally considered in Scots law to be only a personal right, but there are instances where the beneficiaries have rights akin to a real right of property.

In some respects, it is akin to a real right in that the beneficiaries’ right is preferred to the claims of a trustee’s personal creditors in the event of the trustee’s sequestration. Similarly, trust property cannot be affected by the diligence of a trustee’s personal creditors. Also, the beneficiaries’ right is not defeated by the alienation of trust property in breach of trust where the person acquiring it has not given full value for the property, or they have acquired it with actual or constructive knowledge of the trust.

Nevertheless, the beneficiaries’ right does not go as far as a real right because it can be defeated by a bona fide transferee who purchases for value. The right is also not a real right because the beneficiaries cannot enforce their rights against a third party, but can merely compel the trustees to take action against a third party. (Sharp v Thomson 1995 SLT 837 (appeal allowed on a point of statutory interpretation 1997 SLT 636) (not reported by LexisNexis®)).

In the law of England and Wales, a distinction is made between legal title and beneficial title—see Practice Note: Nature and classification of trusts—the nature and classification of trusts.

Scots law makes no such distinction. Beneficiaries of Scottish trusts cannot be said to have a beneficial or equitable interest in the trust property.

Rights on trustee’s insolvency

A beneficiary’s rights in trust property survive a trustee’s sequestration or liquidation. That is usually straightforward where the trust property has remained in the hands of the trustee in an unchanged state.

Problems arise where trust property has been mixed with the trustee’s own personal property, or has used the trust property to acquire other property, or has granted real rights over the trust property in favour of a third party.

In such cases, the beneficiary’s rights survive over trust property in the hands of the trustee, or any acquirer from the trustee, as long as it remains identifiable as trust property. This is subject to the second principle, which is that the beneficiary’s rights will be cut off if the property in question has found its way to a bona fide onerous transferee without notice of the trust.

The identifiability test should be a practical one. It will suffice that it is possible to point to a fund or an item of property in the hands of the trustee or a transferee from them which contains trust property, or was bought using trust property, or represents the proceeds of trust property. It should not matter how many transactions the trust property or its proceeds have passed through, nor what types of transactions they were, as long as the identifiability test is satisfied.

Mixed funds

Most of the cases on trustee’s insolvency have involved funds, often the trustee’s bank account, into which both trust money and the trustee’s personal money have been paid. The general rule applicable to such cases is that the court will attempt to separate the trust fund from the private monies, and award the former to the beneficiaries. (Jopp v Johnston’s Trustees 12 SLT 279 at 283 (not reported by LexisNexis®)).

Where a trustee has made payment out of the account for their own purposes, it is presumed that these are made from the trustee’s private money. What is left, or as much of that as is necessary, is passed back to the beneficiaries. The trustee has the onus of establishing which part of a mixed fund belongs to the trustee personally.

Where trust money is paid into the trustee’s overdrawn bank account and the bank, having no notice of the trust, applies the payments in reduction of the trustee’s overdraft, that trust money will become the property of the bank and the beneficiaries’ rights will be defeated. In this case, the bank is a bona fide onerous transferee without notice of the trust. If the account is at credit, the bank is not an onerous transferee, and the beneficiaries can trace the trust property. Equally, if the bank knows of the trust, it would then lack good faith. (Style Financial Services Ltd v Bank of Scotland 1996 SLT 421, 2nd Div (further proceedings reported 1998 SLT 851, OH) (not reported by LexisNexis®)).

Trust money may be mixed with the funds of persons other than the trustee. When the funds of two separate trusts are mixed and administered together, it has been held that the mixed fund should be divided pro rata between the trusts, according to the amounts derived from each; income and capital should be divided separately to reflect the different periods during which the property of each trust has been part of the common fund.

When trust money is in mixed with the funds of a non-onerous bona fide third party, the result should be the same. In such cases, if the third party removes more than their share from the mixed fund, the excess could be recovered on behalf of the beneficiaries of the trust, since the third party is not an onerous transferee.

Liferent trusts

In a liferent trusts, there are two different classes of beneficiary, each with different rights. The general idea of a liferent is that the liferenter enjoys the ‘fruits’ of the trust property and the fiar will eventually take the trust p...

Read More > Produced in partnership with Yvonne Evans, Law Lecturer, Solicitor (non-practising), TEP, University of Dundee 5th Jun

BREXIT: As of 31 January 2020, the UK is no longer an EU Member State, but has entered an implementation period during which it continues to be treated by the EU as a Member State for many purposes. As a third country, the UK can no longer participate in the EU’s political institutions, agencies, offices, bodies and governance structures (except to the limited extent agreed), but the UK must continue to adhere to its obligations under EU law (including EU treaties, legislation, principles and international agreements) and submit to the continuing jurisdiction of the Court of Justice of the European Union in accordance with the transitional arrangements in Part 4 of the Withdrawal Agreement. For further reading, see: Brexit—introduction to the Withdrawal Agreement. This has an impact on this Practice Note. For guidance, see Practice Note: Brexit—impact on finance transactions—Brexit planning and impact—key issues for debt capital markets transactions and Brexit—impact on finance transactions—Derivatives and debt capital markets transactions—key SIs.

Debt securities, such as bonds, medium-term notes and commercial paper, are financial instruments which acknowledge a debt (see Practice Note: Types of debt securities). Issuing debt securities in the debt capital markets is a means of raising large-scale finance (see Practice Note: Introduction to the debt capital markets).

This Practice Note examines some of the different forms that debt securities can take and explains the meanings of, and differences between:

  1. a bearer security versus a registered security, and

  2. a security issued in definitive form versus a security issued in global form

The focus of this Practice Note is on the features of definitive debt securities. It should be read in conjunction with Practice Note: Form of debt securities—global securities which explains:

  1. the features of global debt securities

  2. the differences between a temporary global security versus a permanent global security, and

  3. the differences between a standard global note structure versus a new global note structure and new safekeeping structure

Bearer securities versus registered securities

Debt securities can be issued either in bearer form or in registered form.

Bearer securities

Bearer securities share characteristics with another well-known bearer instrument: cash.

The key characteristics of bearer securities are that:

  1. a bearer security is a negotiable instrument containing a promise to pay the bearer any amounts due under the security

  2. title to a bearer security passes by delivery of the physical document (there are no restrictions on transfer and the issuer of the security does not have to be informed about it), and

  3. the holder of a bearer security is entitled to vote at meetings of security-holders

Bearer securities can be issued in definitive or global form (see Definitive securities versus global securities, below).

Registered securities

The key characteristics of registered securities are that:

  1. a registered security is a certificate evidencing ownership containing a promise to pay the person whose name appears on the register of security-holders any amounts due under the security

  2. a registered debt security is transferred by execution of a written transfer instrument and updating of the register (transfer of the debt security instrument by itself does not transfer ownership of the security), and

  3. the person entitled to vote at meetings of holders is the person whose name appears on the register of security-holders

Registered debt securities can also be issued in definitive or global form (see Definitive securities versus global securities, below).

In practice, the distinction between bearer securities and registered securities is of limited relevance because the majority of debt securities are held by investors though central securities depositories (CSDs) and not directly by individual investors themselves. See Practice Note: Debt securities market infrastructure—introduction.

The distinction between bearer and registered debt securities only really becomes important if the securities are to be issued to investors in certain jurisdictions, such as the USA (where, subject to certain exemptions, they must be in registered form), or if global securities are going to be exchanged for definitive securities (see Form of debt securities—definitive securities — Definitive securities versus global securities, below).

Definitive securities versus global securities

Although debt securities can be issued in either definitive form or in global form, in practice, all debt securities issued in the international capital markets are issued in global form.

One of the key differences between definitive securities and global securities is that:

  1. definitive debt securities are separate certificates representing each security that, together, represent the whole issue, whereas

  2. a global debt security is, generally, a single document representing the whole issue

Both definitive and global securities can be issued in bearer or registered form.

Global securities are examined in Practice Note: Form of debt securities—global securities.

Bearer securities in definitive form

Bearer securities were traditionally issued in physical form (a definitive security), created when the securities were issued, containing a promise to pay the bearer the amounts specified in the terms and conditions of the security (printed on the reverse of the security instrument).

As noted above, owner...

Read More > 5th Jun


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