INTRODUCTION:

Any relationship between two entities, be they persons or institutions, cannot be established except in accordance with some set of rules. These rules may be unenforceable norms or customs of a group or society, or some explicit laws that have binding and enforceable authority. A contract is a formal structure of a relationship between two or more parties, uniting them in a contractual relationship; and by imposing certain obligations on them and granting them certain rights among themselves. In case of any problem with these obligations or rights, the law of the land would come into action. But if the contracting parties belong to different lands, then the question would arise as to which law should take effect. If the contracting parties do not have prior consensus on this issue, then the issue is more likely to remain unresolved; and one or more parties would suffer the loss. Hence, the need to decide at the time of entering into the contract, as to which law would be followed.

CHOICE OF LAW ON LOANS AND SYNDICATED BONDS:

Similar is the case of the financial contract. ‘All legal issues under a financial contract must be determined in accordance with a legal system. One aspect of a contract cannot exist in a legal vacuum.'(1) Syndicated loans and bonds are mostly international in nature. They typically involve borrowers and lenders from multiple countries; and ‘the greater the number of countries involved, the greater the number of municipal legal systems that need to be considered’. (2) Since there is no single set of international laws that can effectively govern syndicated loans and bonds, it is necessary for the parties to these contracts to choose an agreed legal system.

A syndicated loan agreement is typically entered into between highly sophisticated institutions such as banks, corporations, state corporations, and even the sovereign states themselves. It involves a number of legal systems (even a single bank operating internationally may be subject to different legal systems)(3). International bond issues also involve issuers and investment banks from different countries. In some respects, international bonds (Eurobonds) are even more ‘international’ than syndicated loans, as they are sold to the general public, and bought and sold by individuals and other entities in numerous jurisdictions. During this course of business a series of transactions involving numerous legal documents takes place. With these transactions, rights and obligations move from one entity to another very frequently. When it happens in different legal systems, it creates ambiguity about which law should apply in which case. This ambiguity makes the business vulnerable to unpredictable situations. Finally, the entire business market is severely damaged.

“In order to minimize such uncertainty, an attempt is made in practice to apply one legal system to the transaction and to exclude as far as possible the applicability of other legal systems with which the transaction may have some connection. This is generally sought to be achieved in practice through a ‘choice of law’ clause that subjects to a governing legal system _ ‘proper law’ _ the validity, enforceability and interpretation of the contract and other legal documents constituting the transaction”. (4)

The convenience provides the opportunity for the lender to have preference in the ‘choice of law’, since in the event of a dispute, it is your money that would have to be recovered. In the case of euro bonds, where an investment bank helps sell securities(5), the situation becomes different, as lenders come on the scene after the bond is issued under certain terms, including the issue of the choice of law. In any case, when exercising the choice, it is preferable to opt for a system that is familiar to the parties, so that the tendency to use certain types of financial operations is not modified. In addition, the treatment of both legal and commercial issues could be convenient. It is also important that the chosen system is very mature and that the relevant jurisdiction has a good reputation for its impartiality. Political stability in that specific jurisdiction and the convenience of the language are also important factors in the choice of a certain system of law(6). The incident of the freezing of foreign currency accounts following the imposition of the emergency after the atomic tests in 1998(7), the stock market suffered such a huge loss that it took years to recover. In such a situation, no serious financial activity can grow without fear of the occult. Although the application forum is not a less important factor; The most significant factor in having the choice of law clause is the “isolation of the loan contract from legal changes in the borrower’s country.” (8)

When drafting the contract, some of the essential documents would be prepared; for example, in the case of a bond issue, the subscription agreement, the trust deed, the inter-manager agreement, the sales group agreement and the bond instruments themselves, and in the case of the syndicated loan, the loan contract. All these legal documents would require validity, enforceability and, where necessary, interpretation.(9) This could only be done under an agreed legal system.

The determination of rights and responsibilities and the interpretation of legal documents would involve a series of laws pertaining to different issues. These may include securities law, principles of contract, contract interpretation law, insolvency law, negotiable instruments law, and the like. All these laws must be related to a legal system, to make their interpretation and implementation possible.(10)

There are more than 310 jurisdictions in the world, which are grouped into nine classes, i.e. Traditional English, American Common Law, Mixed Roman/Customary, Germanic and Scandinavian Law, Mixed Franco-Latin/Germanic, Franco-Latin Traditional, Emerging Jurisdictions , Islamic Jurisdictions and Unassigned Jurisdictions(11). These categories are further combined into three main types: common law, Napoleonic, and Romano-Germanic jurisdictions.(12) Naturally, this large number of jurisdictions has the potential to create problems in the case of international syndicated bonds and loans where different legal systems would apply. involved. Therefore, it becomes imperative to have a ‘choice of law’ clause in legal documents.

CONCLUSION:

The term international, in syndicated loans and bonds, implies multiple laws, forums and jurisdictions. The conflict of laws, in such a case, is natural. Combining laws, given their different approaches, is not a viable proposition. The harmonization of financial laws at the international level remains an idealistic suggestion. So, to form, interpret and execute international contracts, it is necessary to adopt a single legal system. This, the parties to a contract can choose at the time of the conclusion of the contract. This is done to ensure the validity, enforceability and interpretation of all legal documents relevant to the syndicated loan and bond agreements. It helps to eliminate the uncertainty and unpredictability of the fate of a contract. Ideally, it is an external law, which has the potential to insulate the loan contract from legal changes, especially in the borrower’s country. English right worthy of playing such a role. There is another advantage of choosing it: it does not require any connection of the lender or the borrower with England.

The fundamental importance of the inclusion of the ‘choice of law clause’ in the international syndicated loan agreements and the legal instruments of the bonds, is to eliminate the uncertainty about the expectations about the contract, providing a viable legal mechanism to resolve all the legal issues that would arise from time to time.

REFERENCES:

1). Wood, PR (1995) Regulation of Loans, Bonds and International Securities; London: Sweet & Maxwell P-61

two). Slater R (1982) “Syndicated Bank Loans” presented at the Conference on ‘The Transnational Law of International Business Transactions’ in Bielefeld, West Germany, October 5-7, 1981, in Journal of Business Law pp 173-199

3). Cranston R (2003) Principles of Banking Law; 2nd Ed. Oxford: Oxford University Press; p438

4). Tennekoon R (1991) Law and regulation of international finance; London: Butterworths; p16

5). Mishkin F (1992) The economics of money, banking and financial markets; 3rd Ed. New York: HarperCollins Publishers; p.286

6). Paul C & Montagu G (2003) Banking and Capital Markets Fellow; 3rd Ed. London: Cavendish Publishing; p.94

7). Washingtonpost.com, at http://www.washingtonpost.com/wp-srv/inatl/longterm/southasia/stories/pakistan052998.htm accessed 05-14-2005

8). Wood PR (1995) Regulation of International Loans, Bonds and Securities; operation quote

9). Tennekoon R. op cit

10). Slater R (1982) op cit

eleven). Wood PR (1997) Maps of World Financial Law; London: Allen & Overy; p. 9

12). Wood, PR (2005) Oxford and Cambridge Introductory Lectures of Financial Law, op cit