The Legal Basis of Derivatives Documentation
Derivative financial instruments — swaps, forwards, options and similar contractual structures — rest in Georgian law on the principle of freedom of contract. Article 319 of the Civil Code is the provision that allows parties to build derivatives documentation freely: they define collateral, netting arrangements, payment mechanics, events of default and other commercial terms. Subjects of private law may, within the limits of the law, freely conclude contracts and determine their content. Understanding this freedom is the first step towards producing documentation that will hold up in court.
It is equally important to understand what the law does not do. The Civil Code does not impose a bespoke, detailed regulatory regime on these instruments; instead, it leaves the structuring of the relationship to the parties. The practical consequence is that the quality of derivatives documentation depends almost entirely on the care of the drafters: the more precisely the terms are recorded, the better the contract will survive a dispute.
Freedom of Contract and Its Limits
Article 319 permits subjects of private law to conclude contracts that are not specifically provided for by law, provided they do not contradict it. This single rule carries the entire edifice of derivative contracting in Georgia: even where an instrument has no dedicated statutory regime, the parties may still contract around it, as long as the arrangement remains within the boundaries of the law. Draftsmen should therefore begin every engagement by asking not whether the instrument is named in a statute, but whether any of its features conflict with mandatory rules.
The boundary of the freedom is compliance with the law. A contract must not contradict legislation, and where the validity of a contract depends on state permission for the protection of essential interests of society or of a person, that must be regulated by a separate law. Derivatives documentation should therefore always be screened for licensing, authorisation or approval requirements that a special statute may attach to the transaction.
The Obligation to Contract
Freedom of contract is not absolute. Where one party to a contract occupies a dominant position on the market, it bears, in that field of activity, an obligation to conclude contracts. Such a party may not, without justification, offer the counterparty unequal contractual terms. On the derivatives market this matters especially: institutions with market power cannot simply walk away from a counterparty or impose discriminatory conditions, because the law converts their dominance into a duty to contract on balanced terms.
At the documentation level this means that a dominant party must build the terms of a derivatives contract so that no unjustified inequality arises. Otherwise the counterparty may invoke the statutory protection and challenge the conditions, exposing the transaction to revision and the relationship to litigation risk.
Protection of Consumers and Non-Commercial Parties
The law extends particular protection to persons who acquire or use property and services for non-commercial purposes or to satisfy vital needs. Such persons may not be refused conclusion of a contract without justification where the other party acts within its entrepreneurial activity. While this protection is most visible in banking and retail financial services, it frames the environment in which derivatives documentation operates: financial institutions dealing with protected categories of clients must take the rule into account when structuring onboarding and contracting.
Drafters should record clearly who the parties are and which regime applies to them. Well-built documentation anticipates the possibility that a counterparty claims protected status, and defines the consequences for the formation and performance of the contract.
What a Derivatives Contract Should Contain
Because the parties define the content, practice has settled on a core set of provisions: the type of instrument, the underlying asset, notional amounts, payment schedule, collateral and margining rules, close-out and netting mechanics, and the law applicable to the relationship. Each of these elements should be drafted with enough precision that a court can interpret it according to the parties' actual intention, without needing to fill gaps the drafters left open.
Matters that the statute does not regulate should also be addressed expressly: dispute resolution, the mechanics of enforcement, and liability for breach. Since the law provides no detailed derivatives regime, the documentation itself becomes the act that fills that space, and its completeness directly determines how enforceable the arrangement will prove.
Frequently Asked Questions
Are derivative contracts permitted under Georgian law?
Yes. Subjects of private law may conclude contracts that are not provided for by law, provided such contracts do not contradict the law. A derivative contract is therefore permissible as long as its content stays within statutory limits.
Which provision is the legal foundation?
Article 319 of the Civil Code — freedom of contract and the obligation to conclude a contract. It allows parties to determine the content of their agreement freely, within the law.
Can a dominant market participant refuse to contract?
No. A party occupying a dominant position on the market bears an obligation to conclude contracts in that field of activity and may not, without justification, offer unequal terms to a counterparty.
Is a state permit required for a derivatives transaction?
Only where the validity of the contract depends on state permission for the protection of essential interests of society or of a person — and such a requirement must be established by a separate law.
Why does documentation quality matter so much here?
Because the statute grants freedom but does not supply a detailed protective regime. In a dispute the court looks at the document, so every term should be defined in advance and clearly.
How We Help on Legal.ge
The Legal.ge team assists both financial institutions and private companies in preparing and reviewing derivatives documentation. We analyse your transaction, test it against the requirements of the Civil Code, and draft a contract that fully protects your interests. Contact us for a consultation.