Indenture

Anindentureis a legalcontractthat reflects an agreement between two parties. Although the term is most familiarly used to refer to a labor contract between an employer and a laborer with anindentured servantstatus, historically indentures were used for a variety of contracts, including transfers and rents of land and even peace agreements between rulers.

Half of an indenture document of 1723 showing the randomly cut edge at the top

Historical usage

Charter of the Clerecía de Ledesma, 1252

Tripartite indenture betweenWilliam Shakespeareand theestateof the vendor ofNew Place,confirming the transfer of ownership to Shakespeare. The third portion (thefoot) was retained in the court.

An indenture is a legalcontractbetween two parties, whether forindentured labouror a term ofapprenticeshipor for certainlandtransactions. The term comes from the medieval English "indenture of retainer"—a legal contract written in duplicate on the same sheet, with the copies separated by cutting along a jagged (toothed, hence the term "indenture" ) line so that the teeth of the two parts could later be refitted to confirm authenticity (chirograph).Each party to the deed would then retain a part. When the agreement was made before a court of law atripartiteindenture was made, with the third piece kept at the court. The term is used for any kind ofdeedexecuted by more than one party, in contrast to adeed pollwhich is made by one individual. In the case ofbonds,the indenture shows the pledge, promises, representations and covenants of the issuing party.

Although other evidence indicates that the method has been in use from around the year 1000, the earliest surviving examples inEnglandare from the thirteenth century. These are agreements for military service, proving that a paid contract army was then in existence.Exchequerrecords ofHenry V's French campaign of 1415, which culminated in theBattle of Agincourton 25 October 1415, including the indentures of all the captains of the army agreeing to provide specified numbers of men and at what cost, may still be read.An indenture was commonly used as a form of sealed contract or agreement for land and buildings. An example of such a use can be found in theNational Archives,where an indenture, from about 1401, recording the transfer of themanorofPinley,Warwickshire,is held.

In the early history of the United States, many European immigrants served a period of indentured labour in order to pay the cost of their transportation. This practice was common during the 17th and 18th centuries, where over half of immigrants worked off an average of three years' servitude.

Modern usage

Bond indenture(alsotrust indentureordeed of trust) is alegal documentissued to lenders and describes key terms such as theinterest rate,maturity date,convertibility,pledge, promises, representations, covenants, and other terms of the bond offering. When theoffering memorandumis prepared in advance of marketing a bond, the indenture will typically be summarised in the "description of notes" section.

In the United States, public debt offerings in excess of $10 million require the use of an indenture of trust under theTrust Indenture Act of 1939.The rationale for this is that it is necessary to establish a collective action mechanism under which creditors can collect in a fair, orderly manner ifdefaulttakes place (like that which occurs duringbankruptcy).No trust relationship exists between the bondholder and the issuing corporation. These two are in a regular contractual,arm's length,non-fiduciary,non-equityrelationship. Rather, the trustee in a "trust indenture" is a third party, usually a specialist company, who is appointed by the issuer to handle and safeguard the interests of the numerous public bondholders, in events ranging from the usual distribution ofcouponsandprincipalpayments to dealing with the issuer's default, if any occurs.

See also

• Corporate finance
• Debt security
• Debt bondage
• Debenture
• Indentured servant
• Indian indenture system
• Irish slaves myth
• Prospectus
• Securities law
• Slavery
• Blackbirding