THE ROLE OF THE LAWYER IN THE INTERNATIONAL DEBT OPERATIONS OF DEVELOPING COUNTRIES
by Professor Daniel D. Bradlow
(Article Reference: Document No.6, July 1999)

III. The Stages of a Debt Transaction and the Role of the Lawyer (continued)

D. Negotiation and Approval

This stage consists of two distinct phases. The first phase is the negotiation of the terms of the debt transaction. Assuming that the debtor and creditor can reach agreement on these terms, the parties will sign the contract and each will submit it to their own internal approval processes. The second phase therefore involves the internal approval process that the borrower must follow in order for the loan to become effective. Each of these phases will be discussed separately.

(i) Negotiation of the Loan Agreement - It is important to note that in reality the parties have been engaged in negotiations from the moment that they first began discussing the possibility of a loan. However, the negotiations become more intense and focused once the parties have decided to enter into a loan agreement.

The primary purpose at this stage of the negotiations is to convert the agreement in principle of the debtor and the creditor to enter into a financing transaction into a workable and legally binding and enforceable contract. During this phase of the transaction, the parties will spell out the precise mechanics of the way in which the lender will disburse funds to the borrower and the borrower will pay the lenders the interest and fees associated with the loan and will repay the loan principle. The parties will also stipulate the terms and conditions associated with the debt and will assign all the identifiable risks associated with the transaction to one or the other party[3].

At the end of the negotiations the parties should have reached an agreement that provides the borrower with funds for the period of time, at the price, and on the conditions that the borrower considers consistent with its basic business, policy or strategic objective. The agreement must also provide the lender with a transaction that produces an acceptable rate of return at a manageable level of risk. If both these objectives cannot be satisfied the parties are either unlikely to be able to successfully conclude an agreement or, if they do reach an agreement, there is a high risk of it not being satisfactorily executed.

The lawyer can play a number of different roles during the negotiation of the loan transaction. The lawyer's fundamental task is to draft the terms of the contract. This involves, first Grafting precise language that stipulates how the loan will operate. It also requires the identification of all the risks associated with the transaction and, through the provisions of the contract, the allocation of these risks to one of the parties to the transaction. The borrower's lawyer will be most effective in performing this function if he/she fully understands the transaction and his/her client's objectives in the transaction. If the borrower's lawyer has such an understanding he/she should be able to help identify all the risks associated with the transaction and to give advice on the alternative ways in which these risks can be allocated. In this regard, it should be noted that while the norm is that most of the risks associated with loan transactions are allocated to the borrower, the borrower can attempt to limit the scope of its assumption of these risks through the precise language used in the provisions of the loan contract. A borrower's lawyer who understands financial transactions, the borrowers objectives and the concerns and interests of the lenders may be able to negotiate and draft contractual terms that limit the scope of the borrower's assumption of the risk to acceptable levels, while still addressing the legitimate concerns of the lenders. For example, while the borrower may need to accept restrictions on its ability to pledge its assets against future debt obligations, the clause can be drafted to limit its application to only certain types of debt transactions.

In discussions over the drafting of the provisions of the loan contract, the lawyer should keep in mind the basic dynamic that operates in any financial transactions. A loan agreement differs from many business arrangements in that the performance of the parties' obligations are substantially separated in time. The lender fully performs its obligations at the beginning of the loan when it disburses the funds to the borrower. The borrower, on the other hand, does not fully perform its obligations until the end of the loan when it has fully repaid the principal of the loan to the creditor. This means that the essential characteristic of a loan transaction is that the lender is converting its hard asset-cash-into the borrower's promise that it will repay the cash, with interest, at some time in the future.

The result of this temporal separation of the parties' performance of their contractual obligations is that the lender is very nervous about giving up its cash. Consequently, a key function of the loan agreement is to bolster the lender's confidence in the borrower's promise and in the lender's ability to protect itself in the event that the borrower proves to be unable to live up to its promise.

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[3] The issues that arise in the drafting of the provisions of the loan agreement and the precise arguments that the parties may raise during the drafting of these clauses are outside the scope of this paper.

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