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Derivatives

The Importance Of Consent-To-Record Provisions In ISDA Master Agreements

Derivatives transactions generally are entered into via telephone conversations and subsequently confirmed in writing.

 

Derivatives transactions generally are entered into via telephone conversations and subsequently confirmed in writing. Reflecting this market practice, most ISDA Master Agreements include a provision in the Schedule whereby the parties can consent to the recording of telephone conversations between their trading and marketing personnel. This Learning Curve examines the components of a typical contractual consent-to-record provision and some of the issues to consider in deciding whether to include such a provision in a Master Agreement and in drafting such a provision.  

The ISDA Consent-To-Record Provision

Part 5(n) of the 2002 Master Agreement Form of Schedule, the standard consent to record provision, contains three separate agreements regarding the recording of telephone conversations. Part 5(n) provides:

In addition, the contracting parties frequently also agree to deliver a copy of any recordings to the other side upon request or in the event of a dispute.

Although market participants often view consent to record provisions such as those in Part 5(n) as innocuous boilerplate, the drafting choices made (or overlooked) can have important legal consequences. The following section takes a closer look at the agreements made in consent-to-record provisions and how some of these may influence the admissibility of sound recordings as evidence.

The Agreements

Consent To Record

Obtaining the other party's consent to record telephone conversations may be necessary in order to use the recording as evidence in a legal dispute. Moreover, in some circumstances, a party conceivably could face major legal consequences for recording a conversation without obtaining the consent of the other party being recorded.

For example, Title III of the Omnibus Crime Control and Safe Streets Act of 1968, as amended (18 U.S.C. §2520(a); 18 U.S.C. §2511(1)(a)-(d)), gives individuals a private right of action for any improper taping of their conversations to which they did not consent. There is an exception for business telephone calls when the monitoring of the calls and taping over an extension phone is done in the ordinary course of business. Given the range of financial services firms' policies on recording of telephone conversations, whether monitoring and taping is done in the ordinary course of business may not be an easy question to answer in the derivatives' context.

Further, Title III provides for both civil and criminal penalties for anyone who intentionally (i) "intercepts, endeavors to intercept, or procures any other person to intercept or endeavor to intercept" any oral communications; (ii) uses an "electronic, mechanical, or other device" to intercept any oral communication; (iii) discloses or endeavors to disclose the contents of such intercepted communication to any other person; or (iv) uses or endeavors to use the contents of such intercepted communication.

State law presents additional issues. Some states, such as New York, are one-party consent states, meaning that the consent of only one party to a conversation is necessary to lawfully record an in-person or telephonic communication. Other states, including California and Florida, are two-party consent states, which means the consent of both parties to a conversation is required in order to lawfully record. (Recall the prosecution of criminal charges against Linda Tripp for secretly recording her conversations with Monica Lewinsky. Although the charges later were dropped, the case demonstrates the perils of recording conversations in two-party consent states.)

Therefore, if the parties do not include a consent-to-record provision in their Schedules, a party located in a two-party consent state may claim the recording should not be admitted in evidence because the conversation was not lawfully recorded. The risk of having the recording excluded from evidence becomes even greater if the legal proceeding is commenced in the two-party consent state. However, a consent-to-record provision in the Schedule qualifies as the requisite consent and the admissibility of the recording will not depend on whether a lawsuit is filed in a one-party consent state or a two-party consent state.

 

Obligation To Obtain Consent From Relevant Personnel

As noted above, under Part 5(n) of the ISDA Master Agreement Form of Schedule, the parties agree to obtain any necessary consent of, and give any necessary notice of such recordings to, relevant personnel. A party should not agree to such a contractual provision unless, through its personnel policies or otherwise, it is able to comply with these obligations. Failure to meet that obligation potentially may subject a party to a civil suit by an employee located in a two-party consent state whose conversation was unlawfully recorded (though such failure should not affect the admissibility of the recording as evidence in a case between the two parties).

 

Submission Of Recordings In Evidence

Part 5(n) also provides that the parties may submit recordings in evidence in any legal proceeding. When a recording is definitive regarding a disputed issue, this provision may actually encourage the parties to settle without litigation, since the recording could be used as evidence at trial.

The ISDA form, like most consent-to-record provisions, states that "each party agrees, to the extent permitted by applicable law, that recordings may be submitted in evidence in any proceedings." Therefore, a party is not waiving any objections it may have as to relevance, or even unfair prejudice, such as under Rule 403 of the Federal Rules of Evidence. Moreover, a party may still object on authenticity grounds, or that the tape does not contain the full discussion or has been edited.

In New York, a sound recording usually is admissible in evidence if it is relevant and is established as genuine and unaltered. In People v. Ely, 68 N.Y.2d 520, 528 (1986), the Court of Appeals identified various alternatives to authenticate sound recordings of conversations:

* testimony of a party or witness to the conversation that the recording is complete and accurate and has not been altered;

* testimony of a party to the conversation together with proof by an expert witness that analysis of the recording did not reveal any alterations; or

* evidence concerning the making of the tape and identification of the speakers, together with testimony from all who have handled the tape as to its custody and unchanged condition (chain of custody).

When the recording contains only portions of a conversation or is substantially inaudible, it will not be admitted into evidence even if all the Ely requirements are satisfied. Therefore, a provision allowing parties to submit recordings of conversations into evidence does not guarantee that a sound recording will be admitted into evidence, but prevents it from being rendered inadmissible solely on the basis of its status as a sound recording.

 

Obligation To Deliver A Copy Of The Recording

Many consent to record provisions also include the parties' agreement to deliver a copy of any recordings to the other side upon request or in the event of a dispute. Under this type of provision, if a contracting party requests a copy of a taped sound recording and is unable to obtain such a copy because it was destroyed pursuant to the recording party's internal document-retention policies, the party that destroyed the tape may face sanctions for what is known as spoliation if a court decides that the destruction was done either in bad faith or negligently. Consequently, when negotiating a Master Agreement, to avoid court sanctions for the destruction of sound recordings, it is essential to understand the terms of your document retention policy and to know the law of your jurisdiction as well as the law applicable to your counterparties.

The obligation to preserve evidence is especially important for in-house, as well as outside counsel, because courts have held that "Once on notice [that evidence is relevant], the obligation to preserve evidence runs first to counsel, who then has a duty to advise and explain to the client its obligations to retain pertinent documents that may be relevant to the litigation." Telecom International Am. Ltd. v. AT & T Corp., 189 F.R.D. 76, 81 (S.D.N.Y.1999). Thus, until a dispute arises or, based on conversations or correspondence between the parties, it appears that one is reasonably likely to arise, parties may continue to implement their standard document retention policies. When a dispute does arise, it is critical for in-house and/or outside counsel to get involved as early as possible, as any delay in implementing a potential litigation hold on the destruction of any sound recordings could be costly both in terms of a counterparty's litigation position and in terms of potential sanctions.

 

This week's Learning Curve was written by Claude Szyfer, a partner in the litigation practice group, Sherri Venokur, special counsel in the commodities and derivatives practice group, and Eileen Martinez, an associate in the litigation practice group, at Stroock & Stroock & Lavan.

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