| INTRODUCTION: | | | | serious financial activity can grow without fear of |
| Any relationship between two entities, either | | | | the unseen. While the enforcing forum is not less |
| persons or institutions, cannot be established | | | | important a factor; the most significant factor of |
| except in accordance with some set of rules. | | | | having the choice of law clause is the "insulation of |
| These rules may be unenforceable norms or | | | | the loan contract from legal changes in the |
| customs of a group or society, or some explicit | | | | borrower's country."(8) |
| laws having a binding and enforceable authority. A | | | | While outlining the contract some of the essential |
| contract is a formal structure of a relationship | | | | documents would be prepared; for example, in |
| between two or more parties, binding them | | | | case of a bond issue, the subscription agreement, |
| together into a contractual relationship; and | | | | the trust deed, the agreement between |
| imposing upon them certain obligations and | | | | managers, the selling group agreement and the |
| granting them certain rights over each other. In | | | | bond instruments themselves, and in case of the |
| case of any problem with these obligations or | | | | syndicated loan, the loan agreement. All of these |
| rights, law of the land would come into action. But | | | | legal documents would require validity, |
| if the contracting parties belong to different lands, | | | | enforceability and when needed interpretation.(9) |
| then there would arise a question as to law of | | | | This could only be done under an agreed system |
| which land should come into force. If the | | | | of law. |
| contracting parties have no earlier consensus over | | | | Determination of rights and liabilities and |
| this issue, then it is more likely that the problem | | | | interpretation of the legal documents would |
| would remain unresolved; and one or more parties | | | | involve a number of laws relevant to the different |
| would suffer the loss. Hence, the need to decide | | | | issue. These may include the securities law, |
| at the time of making contract, as to which law | | | | principles of contract, interpretation of contracts |
| would be followed. | | | | law, insolvency law, negotiable instruments law, |
| CHOICE OF LAW IN SYNDICATED LOANS AND | | | | and the like. All these laws should relate to one |
| BONDS: | | | | system of law, so as to make their interpretation |
| Similar is the case of the financial contract. 'Every | | | | and implementation possible.(10) |
| legal issue under a financial contract must be | | | | There are more than 310 jurisdictions in the |
| determined in accordance with a system of law. | | | | world, which are grouped into nine classes i.e. |
| An aspect of a contract cannot exist in a legal | | | | Traditional English, American Common Law, Mixed |
| vacuum.'(1) Syndicated loans and bonds are | | | | Roman/common law, Germanic and Scandinavian, |
| mostly international in their character. They usually | | | | Mixed Franco-Latin/Germanic, Traditional |
| involve borrowers and lenders from various | | | | Franco-Latin, Emerging Jurisdictions, Islamic |
| countries; and 'the greater the number of | | | | Jurisdictions and Unallocated Jurisdictions(11). These |
| countries involved the greater the number of | | | | categories are further combined into three major |
| municipal systems of law which have to be | | | | types: Common Law, Napoleonic and |
| considered.'(2) As there is not single set of | | | | Roman-Germanic jurisdictions.(12) This much |
| International laws that could effectively govern | | | | number of jurisdictions naturally has a potential to |
| the syndicated loans and bonds, it is necessary | | | | create problems in case of international syndicated |
| for the parties to these contracts to choose an | | | | loans and bonds where different systems of law |
| agreed system of law. | | | | would be involved. So, it becomes imperative to |
| A syndicated loan agreement normally is | | | | have 'choice of law' clause in the legal documents. |
| contracted between the highly sophisticated | | | | CONCLUSION: |
| institutions like banks, corporations, state | | | | The term international, in the syndicated loans and |
| corporations, and even the sovereign states | | | | bonds, entails multiple laws, forums and |
| themselves. It involves a number of systems of | | | | jurisdictions. The conflict of laws, in such a case, is |
| law (even a single bank operating internationally | | | | natural. Combination of laws, given their different |
| can be subject to different systems of law)(3). | | | | approaches, is not a workable proposition. |
| The international bond issues, too, involve issuers | | | | Harmonization of financial laws at international level |
| and investment banks from different countries. In | | | | is still an idealistic suggestion. So, to form, interpret |
| some respects, international bonds (Eurobonds) | | | | and execute the international contracts, there is a |
| are even more 'international' than the syndicated | | | | need to adopt a single system of law. This, the |
| loans, as they are sold to the public at large, and | | | | parties to a contract can choose at the time of |
| the individuals and other entities buy and sell them | | | | the concluding of the contract. This is done to |
| in numerous jurisdictions. During this course of | | | | ensure the validity, enforceability and |
| business a number of transactions involving | | | | interpretation of all the legal documents relevant |
| numerous legal documents take place. With these | | | | to the contracts of syndicated loans and bonds. It |
| transactions rights and liabilities shift from one | | | | helps eliminate the uncertainty and unpredictability |
| entity to another very frequently. When it | | | | of the fate of a contract. Most ideally, it is an |
| happens in different systems of law, it creates | | | | external law, having a potential to insulate the loan |
| ambiguity about which law should apply in which | | | | contract from legal changes, especially, in the |
| case. This ambiguity makes the business | | | | borrower's country. English law worthy of playing |
| vulnerable to unpredictable situations. Eventually | | | | such a role. There is another advantage of |
| the whole business market suffers serious | | | | choosing it: it doesn't demand any connection of |
| damage. | | | | the lender or borrower with England. |
| "In order to reduce such uncertainty to a | | | | The fundamental importance of the inclusion of |
| minimum, an attempt is made in practice to apply | | | | 'choice of law clause' in the international syndicated |
| one system of law to the transaction and to | | | | loan agreements and the legal instruments of the |
| exclude as far as possible the applicability of other | | | | bonds, is to get rid of the uncertainty concerning |
| systems of law with which the transaction may | | | | the expectations about the contract, by providing |
| have some connection. This is generally sought to | | | | a workable legal mechanism to resolve all the legal |
| be achieved in practice by a 'choice of law' clause | | | | issues which would arise from time to time. |
| which subjects to one governing system of law _ | | | | REFERENCES: |
| 'the proper law' _ the validity, enforceability and | | | | 1). Wood, P R (1995) International Loans, Bonds |
| interpretation of the contractual and other legal | | | | and Securities Regulation; London: Sweet & |
| documents which constitute the transaction."(4) | | | | Maxwell P-61 |
| The practicality provides the opportunity to the | | | | 2). Slater R (1982) "Syndicated Bank Loans" |
| lender to have preference in 'choice of law', as in | | | | presented to the Conference on 'The |
| case of a dispute, it is his money that would need | | | | Transnational Law of International Commercial |
| to be recovered. In case of the Euro bonds, | | | | Transactions' at Bielefeld, W. Germany, October |
| where an investment bank helps in selling | | | | 5-7, 1981, in the Journal of Business Law pp |
| securities(5), the situation becomes different, as | | | | 173-199 |
| the lenders appear on scene after the bond is | | | | 3). Cranston R (2003) Principles of Banking Law; |
| issued under certain terms including the matter of | | | | 2nd Ed. Oxford: Oxford University Press; p 438 |
| choice of law. In any case, while exercising the | | | | 4). Tennekoon R (1991) The Law and Regulation |
| choice, it is preferred that such system is chosen | | | | of International Finance; London: Butterworths; p |
| that is familiar to the parties, so that the | | | | 16 |
| tendency of using certain type of financial | | | | 5). Mishkin F (1992) The Economics of Money, |
| transactions needs not to be changed. Further, | | | | Banking, and Financial Markets; 3rd Ed. New York: |
| the dealing with legal as well as business issues | | | | HarperCollins Publishers; p 286 |
| could be convenient. It is also important that the | | | | 6). Paul C & Montagu G (2003) Banking and |
| system chosen is greatly mature and the relevant | | | | Capital Markets Companion; 3rd Ed. London: |
| jurisdiction enjoys good reputation for its | | | | Cavendish Publishing; p 94 |
| impartiality. Political stability in that specific | | | | 7). Washingtonpost.com, at visited on 14-05-2005 |
| jurisdiction and convenience of language are also | | | | 8). Wood P R (1995) International Loans, Bonds |
| important factors in choosing a certain system of | | | | and Securities Regulation; op cit |
| law(6). The incident of freezing of foreign | | | | 9). Tennekoon R.. op cit |
| currency accounts following imposition of | | | | 10). Slater R (1982) op cit |
| emergency after the atomic tests in 1998(7), the | | | | 11). Wood P R (1997) Maps of World Financial |
| stock market suffered such a huge loss that it | | | | Law; London: Allen & Overy; p 9 |
| took years to recover. In such a situation no | | | | 12). |