THE ROLE OF THE LAWYER IN EXTERNAL DEBT MANAGEMENT
by Mr. Lee C. Buchheit
(Article Reference: Document No.5, October 1995)

I. The Fallacies (continued)

Fallacy Two: Legal issues don't really matter
Fortunate indeed is the borrower that has never had to forgo a new financing opportunity because this would violate the borrower's existing agreements, or had to seek a waiver or amendment of a troublesome provision in a loan agreement only to find that the lenders want something (money or otherwise) in return for giving the waiver, or had to send a notice to creditors reporting on some embarrassing situation that could, with the passage of time or the giving of notice or both, constitute an event of default. Blessed is the borrower that has never had to face the threat or the reality of a lawsuit by an aggrieved creditor, or seen its assets attached, or had to move its assets outside the reach of potential plaintiffs, or watched new investors be frightened off by the prospect of hostile creditor actions under existing loans. Happy is the borrower that has never paid more than it should have for a loan because it overlooked some nuance in the interest rate definition, the broken funding indemnity, the increased costs clause, the capital adequacy indemnity or the tax gross-up. Only borrowers in this position are likely to say that legal issues in credit documents don't really matter.

Fallacy Three: Lawyers are such quibblers
To the extent that a client views his lawyer as a necessary, but barely endurable, evil in a financing transaction, this may be more the fault of the lawyer than it is of the client. The truth is that some lawyers richly deserve then1 reputation as pig-headed, persnickety and pettifogging pencil-pushers. No sensible client would subject himself, the counterparty or the transaction to the ministrations of such a lawyer until the last possible minute.

When the lawyer is performing his function properly, however, the transaction will be facilitated, not hindered, by the active involvement of a lawyer from the earliest stages. It is true that the professional training of lawyers leaves them with a profound horror of imprecision. They are taught that a graceful ambiguity in a term sheet or mandate letter can result in heated accusations of bad faith and sharp dealing down the road, and that a gentle equivocation on some important issue in the final agreement serves merely as the prelude to an expensive litigation.

It is part of the lawyer's job to ensure that the business people are fully understanding each other when they negotiate a transaction. The lawyer is also responsible for seeing that the writing which memorializes that understanding is clear and comprehensive. These are skills that the client should seek in a lawyer and should honour when they are present. The desire for clarity is not quibbling, it is professionalism.

It is equally the lawyer's job, however, to help business people structure and implement the transaction without raising unnecessary drafting distractions or wandering off on legalistic tangents. In practical terms this means distinguishing, and helping the client to distinguish, between the important issues and the trivial or inconsequential points. In most business discussions, the negotiating capital of each party must be husbanded and carefully applied to issues that really matter to that party. It can be sad to watch a lawyer or a client expend this capital on insignificant points only to find, when an issue of some importance is encountered, that the counterparty is too exasperated to give any ground.

Fallacy Four: Lawyers are too aggressive
This complaint may also contain a grain of truth in certain cases. Some lawyers seem to have difficulty in determining where commendable zeal in the pursuit of a client's business objective ends and where gladiatorial excess takes over. This too is something of an occupational hazard for lawyers. From the moment they begin training for their careers, lawyers accept a responsibility to preserve, protect and defend the interests of their clients. Any client in trouble and any client burdened with a vexing problem will find this a particularly charming trait of lawyers.

The question is how this endearingly partisan instinct should be harnessed in connection with commercial transactions and document negotiation. An experienced lawyer knows that the bludgeon is rarely the instrument best suited to accomplishing a client's objectives in a commercial setting. Contract negotiation is, after all, an exercise in persuasion. Lawyers who rely too heavily on testosterone as their principal motivational hormone are often unsuited to commercial negotiation, particularly in a cross-cultural setting. An effective lawyer must convey a sense of reasonableness, equanimity and honesty. Most lawyers engaged in an international commercial practice understand one of their functions as being to reduce, not to exacerbate, friction and misunderstandings between the principals.

Fallacy Five: What do these lawyers know about financing, anyway?
The answer often is, quite a lot. An active borrower may go to the international capital markets five or six times a year and think itself, on the basis of that experience, highly sophisticated in the ways of the financial world. Outside counsel to that borrower, however, may work on 25 or 30 deals a year in different countries with different types of lenders and for different clients. Over time, the lawyer develops an intimate familiarity with many financial institutions and with many types of financing techniques. It is the depth of this experience that can make outside counsel so useful to a client in analyzing both the commercial and the legal merits of proposed new transactions. A client that deliberately circumscribes the role of its legal adviser to drafting documents upon request or issuing legal opinions after deals are signed may thus be squandering a particularly valuable asset.

In-house legal advisers frequently develop a similar expertise. They also, of course, enjoy the additional advantage of having a thorough knowledge of the client's business, policies and prior transactional history. Indeed, it is not unusual to find that the institutional memory of some organizations resides principally in their legal departments. There is something of a self-fulfilling prophecy at work here. A client that wants its in-house legal advisers to contribute in a meaningful way to the evaluation of financing proposals needs to be diligent in ensuring that those lawyers are consulted at an early stage in all such transactions. This exposure will gradually strengthen counsel's familiarity with external borrowing issues and that familiarity will hi turn fully justify the client's continuing consultation.


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