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NEGOTIATION OF SPECIFIC CLAUSES OF LOAN AGREEMENTS
by Vinod K. Agarwal ***
(Article Reference: Document No.10, May 2000)
Summary
External commercial borrowing is a complicated process. It is not the loan agreement alone that is sufficient. It involves a number of other documents. The exact kind and number of documents to be executed in an external commercial borrowing depend on various factors including the nature of the lenders, that is, whether it is an international financial institution, a financial institution of a country, an export import bank, a commercial bank or a syndicate of such banks. The extent and the period for which the funds are required by the borrower also play an important role in the process. The purpose of the borrowing is also significant. Further, the different lending institutions follow different practice in the matter of lending funds and the documentation. Of all the international financial institutions, the lending by the Word Bank involves a large number of complicated documents. Main documents, as are relevant for our purpose, are as follows:
- Loan Agreement (between the Borrower and the Bank)
- General terms and conditions (wherever applicable)
- Project Agreement (between the Bank and the Project Authority)
- Guarantee by the Guarantor
- Subsidiary Loan Agreement (between the Borrower and the Project Authority)
- Guidelines: Procurement under IBRD Loans and IDA Credits
- Standard Bidding Documents: Procurement of Goods
- Standard Bidding Documents: Procurement of Works (smaller contracts)
- Standard Bidding Documents: Procurement of Works
- Guidelines: Selection and Employment of Consultants by World Bank Borrower.
GENERAL CONDITIONS APPLICABLE TO LOAN AGREEMENTS - Some International financial institutions have adopted the practice of dividing the documents of loan into two parts. The first part consists of the General Conditions and the other part consists of the main loan agreement and other documents. They have standardized some of the terms and conditions of loan and have printed them as General Conditions applicable to Loan and Guarantee Agreements. These General Conditions are made applicable, through a condition in the loan agreement, to every loan agreement entered into by these financial institutions. Similarly, the General Conditions also provide that they apply to every loan agreement. The advantage of standardization is that terms and conditions which are of common nature need not be negotiated and mentioned in every loan agreement by the lenders. Standardization also saves time and energy. It helps in achieving uniformity in lending and borrowings. Further, the borrowers know them in advance when they prepare for a loan from the Word Bank. The disadvantage to the borrower is that once the terms and conditions are standardized, they become non-negotiable. The lending institutions do not allow any change in the said conditions on the pretext that they have not been prepared for any particular borrower but are applicable to all the loan agreements and to all the borrowers. If they will allow negotiation and consequential changes in the said standardized terms and conditions in one case, they will have to allow negotiations in other cases as well. This will lose the very purpose of standardization of such terms and conditions.
Since these General Terms and conditions are part of the loan agreement, it is necessary to have their knowledge and understanding. They may not be negotiable in the case of some of those international financial institutions which have standardized them. But in the case of other lenders, where these terms and conditions have not been standardized, they form part of the loan agreement and like any other condition of the loan agreement, they are also open for negotiations.
It is not possible to discuss the General Terms and Conditions of all the international financial institutions. The General terms and conditions of most of the institutions are very much similar. Of course, as will be demonstrated, they are not exactly identical. There are some variations in them also. I have selected some representative financial institutions and propose to discuss the General Terms and conditions of these institutions. The first is the International Bank for Reconstruction and Development, commonly known as the World Bank. Its General Conditions Applicable to Loan and Guarantee Agreements contains 12 Articles. Each Article has a number of sub articles. They are as follows:Article 1. - Application to Loan and Guarantee Agreements.
Article 2. - Definitions; Headings
Article 3. - Loan Account; Interest and other Charges; Repayment; Place of Payment.
Article 4. - Currency Provisions
Article 5. - Withdrawal of Proceeds of Loan
Article 6. - Cancellation and Suspension
Article 7. - Acceleration of maturity
Article 8. - Taxes
Article 9. - Cooperation and Information; Financial and Economic data; Negative Pledge; Project Implementation
Article 10.-Enforceability of Loan Agreement; Failure to Exercise Rights; Arbitration.
Article 11.-Miscellaneous Provisions
Article 12.-Effective Date; Termination.You will see that most of the relevant provisions relating to a loan transaction have been incorporated in the General Conditions. Therefore, the loan agreements are very skeletal. They contain only a few articles, namely 6 or 7 articles as follows:
Article 1. - General Conditions; Definitions
Article 2. - The Loan
Article 3. - Execution of the Project; Other Covenants
Article 4. - Remedies of the Bank
Article 5. - Effective Date; Termination
Article 6. - Addresses
*** Secretary General, International Centre for Alternative Dispute Resolution, New Delhi. This script was prepared for presentation to the participants in the Workshop on the "Legal Aspects of Debt Negotiations" held in Hanoi, Vietnam. This is not an exhaustive commentary on various clauses but only an illustrative commentary.
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