Legal Perspective: Terms, details in bonds to be spelt out clearly

Each bond shall include certain details and terms that are commonly found in international bonds. To begin with, it should explain to the issuer the following terms - value received, promises to pay to the bearer the amount of the bond and to pay interest at the prescribed rate in accordance with the detailed terms and conditions enclosed on the back of the bond.

These terms should be read very carefully by potential investors. Normally there are coupons that are attached to the fixed rate bonds, and each of these is for an interest payment in a fixed amount. These coupons are normally detachable and separately negotiable.

The bonds, generally speaking, state that they are issued subject to and with the benefit of the specified fiscal agency agreement that is available for inspection at any of the paying agents.

In some cases there is a need to issue a formal trust deed. It is also stated that bondholders and coupon holders are bound by and deemed to have notice of their terms.

With reference to the English Law there is no objection to binding a bondholder to terms by reference. In such instances this term should not be misrepresented in any offering material even if bondholders have a right to inspect the bonds.

In this connection, and in relation to terms by reference, one must bear in mind the varying international position particularly with reference to surprise clauses incorporated by reference and the attitude to unfair contract terms and terms imposed by standard contracts.

In most jurisdictions, and legally speaking, rules are found whereby exculpation clauses and harsh provisions in contracts that are signed with parties of little sophistication or weak bargaining power are subjected to close judicial scrutiny and may be nullified.

Many of these provisions are now encapsulated in consumer protection clauses or apply only to contracts involving consumers. However, we have to explain that this is not the case in all times.

The contracts that are particularly under attack are standard terms of business imposed on a party who have neither the bargaining power nor the sophistication to resist their terms. In such a case it could not be said that freedom of contract exists.

In many countries, the courts limit the impact of these clauses by covert means, i.e., that a party is not found by surprise terms contained by reference in his contract, and the rules whereby exclusion clauses are construed strictly against the party relying on them.

In other words, to insist that negligence or liability for a fundamental breach which goes to the root of the contract cannot be excluded except by very clear words that are drawn to the attention of the other party at the time or before signing the contract.

Attacks are more likely to happen in relation to bonds which are bought by members of the public, as opposed to sophisticated investors, who are well able to look after themselves.

In any event, the best policy is that any unusual or adverse terms should be reflected in the bonds themselves and they should be clearly explained, in black and white, to all investors before starting any business that is related to the bond in question.