Legal Perspective: Conditions precedent in international finance

Banks and financial institutions play a paramount role in international finance by providing and arranging financial facilities to needy potential borrowers.

The financiers normally look for certain guarantees and securities to safeguard their interests, particularly the repayment of the loan and accrued interest. There are many legal and banking means to secure loans in international finance. However, we will focus this week on what is known as "conditions precedent".

The concept means that a bank or financial institution would not lend or finance any project unless certain conditions are met and satisfied.

Anyone who discusses, for example, any loan agreement with the World Bank and other international or regional financial institutions would notice that there are many "conditions precedent" that should be met before receiving the first installment of the loan.

These conditions, in World Bank and the like contracts, are standard clauses and mostly applicable to all potential borrowers.

Legally speaking, it is important to mention that there are "conditions precedent" to all loans being big or small ones.

These clauses normally provide that the banks or financial institutions are under no legal responsibility to make or pay any loan or any part of it unless certain things are received, and implemented to their satisfaction such as:

* Preparation of the rep-aired guarantee or guarantees for the loan,

* Presentation of legal and constitutional documents of the borrower and its authorisations, such as establishment laws giving the borrower the necessary legal entity to borrow and repay the loan. Otherwise it could be sued.

* Presentation of official/ government consents such as free transferability of funds or exchange control exemptions, free or non-interference in the management of the project.

* Presentation of necessary legal opinion regarding the legality and validity of all matters related to the borrower and the loan regarding the security of the loan.

The "conditions precedent" clauses may include the following points:

* Evidence of legal title for the land, ship, movable property and that they are free from any incumbrances.

* Evidence of registration if there is title register, such as land register or ship register.........etc

* Transfer of any document representing the collateral, such as bill of sale, title deed, share certificate, conveyance........etc

* Legality of the security, such as it's registration in the official register and perfection of other formalities

* Evidence of proper insurance documents, warranties and other conditions therein.

In addition to the above there could be other conditions precedent that are specifically tailored for each loan and each project.

As an example, we could say that in case the finance is for an oil or gas project, the financiers could require certain studies to show that there are enough reserves and they could put this clause as a "condition precedent", because if there is no enough reserves the project will fail.

Most agreements normally provide that the financier is not obliged to make a loan unless, at the time of the request for the loan and the borrowing of the loan, and immediately after the loan is made that:

* The representations and warranties given by the borrower are true and on updated basis.

* No event of default or event which with giving of notice, lapse of time or other conditions would constitute an event of default has occurred.

* No material adverse change in the borrower's financial conditions. A bank should not be liable to lend or release any payment if a subsequent legal defect has arisen at anytime. Introduction of an exchange control, for example, prohibiting the borrower from making payments to foreign creditors.

Here the bank is released from the legal contract due to the condition precedent prohibiting imposition of exchange control regulations.

* The borrower to present certificate evidencing the above.

We could say that "conditions precedent" make a legal support and comfort to the financiers who are free at the time of negotiation to provide for all clauses they deem necessary to protect their interest.

However, in all cases, the borrower should not accept any condition precedent that he will not be able to perform or achieve. Conditions precedent should be thoroughly discussed between the parties on a realistic basis. And each party should understand what type and nature of conditions precedent he is standing for or against.

The writer is a legal consultant on banking and stock market laws.