Contract certainty

Contract certainty is the rule that all terms of a placement must be agreed before inception, and the contract document issued promptly afterward. It stands against the historical practice of the subscription market, where a line was taken on a slip and the full wording followed months later, sometimes after a loss had occurred. The problem it solves is the contract written after the fact: when the text is drafted with the loss already known, each side pulls the words toward its own interest, and a disagreement that would have cost an hour of negotiation up front costs years of proceedings. The discipline was imposed on the London market from 2005, with numerical targets and monthly measurement of the compliance rate. It has since spread through international underwriting and stands as one of the rare cases where an entrenched practice was reformed without legislation, purely by the public and repeated measurement of an indicator each participant saw compared with its competitors.

The London market measured a rate of contracts complete at inception of about 30 percent in 2004. The target set for the end of 2006 was 85 percent, and it was beaten, the rate running above 90 percent in the following years. The cost of the reform was largely administrative: monthly measurement, published by syndicate, achieved more than the previous decade of statements of principle.

Contract certainty, Certitude du contrat, Discipline contractuelle