Difference between revisions of "Project Financing Documentation"

Revision as of 23:34, 30 January 2019

Role of documentation

The essence of project financing is the apportionment of project and other risks amongst the various parties having an interest in that project. The way in which this risk allocation is implemented is, essentially, through the complex matrix of contractual relations between the various project parties as enshrined in the documentation entered into between them. There is no general body of law in England (or elsewhere) that dictates how projects must be structured or how the risks should be shared amongst the project parties. Rather, each project must fit within the legal and regulatory framework in the various jurisdictions in which it is being undertaken or implemented. Accordingly, the contracts between the various project parties assume a huge significance and it is these documents that are the instruments by which many of the project risks are shared amongst the project parties. As will be apparent, there is no such thing as a standard set of project documents. Each project will have its own set of documents specially crafted for that particular project. Set out below is a brief description of some of the key documents found in many project financing structures. These documents can conveniently be grouped as follows:

• Shareholder/sponsor arrangements
• Loan and security documents
• Project documents.

Shareholder/sponsor documentation

Pre-Development Agreements

These are agreements entered into by two or more companies that have agreed to undertake a feasibility study in relation to a proposed project. As the arrangements between the parties will not usually be sufficiently well developed to warrant a formal shareholders’ agreement, this document can conveniently deal with such matters as initial decision-making and allocation of tasks in relation to investigating a particular project or proposal. Typically, the agreement would be for a limited duration and would be quite specific about the scope of the proposed arrangements and the terms upon which a party could withdraw from the arrangements. It would also deal with appointment of advisers and general cost sharing. One might also expect to see provisions relating to confidentiality and restrictions on competing. Similar agreements may also be entered into where parties join together to bid for a particular contract or concession and do not want to incur the cost or expense of a formal joint venture agreement or shareholders’ agreement unless they are successful in their bid.

Shareholders’ Agreement/Joint Venture Agreement

In those projects where the project is being undertaken using a special purpose vehicle owned by two or more shareholders, those shareholders will usually regulate the relationship between them by entering into a shareholders’ agreement. On the other hand, where a joint venture structure is used, a joint venture agreement will usually be entered into. A shareholders’ agreement in relation to a project will not differ greatly from a shareholders’ agreement relating to the ownership of any other company and will need to deal with items such as:

• Injection of share capital; how much, when and in what form
• Funding of the project company
• Voting requirements for particular matters
• Resolution of disputes
• Dividends policy
• Management of special purpose vehicle
• Disposal of shares and pre-emption rights.

A joint venture agreement will contain many of the same provisions although will not need to deal with those matters concerning the setting up and management of a special purpose vehicle. It will, however, have to deal with management of the project and voting in connection with the project generally

From the point of view of the project lenders, they are likely to be concerned with a number of issues with regard to the sponsors/shareholders. Perhaps the key issues for them will be:

• The identity of the sponsors/shareholders and their experience and creditworthiness. Where shareholders/sponsors nominate a subsidiary to undertake any responsibilities or obligations with regard to a particular project, then the project lenders may well demand guarantees from the parent companies to support their subsidiaries until the project debt is repaid
• If the shareholders/sponsors are committing management resources and/or expertise for the special purpose vehicle and/or the project, then the lenders will want to see these obligations spelt out in very clear terms and to know which shareholder/sponsor will be providing which services and on what terms. Quite often, these arrangements are set out in a separate management/supervision agreement
• If the shareholders/sponsors agree to put up further equity at a later date, then the terms and conditions upon which this equity is put up will need to be spelt out very clearly (in many, if not most, cases the lenders are likely to require that the shareholders put up their funds first or at least proportionate to loan drawdowns). From the perspective of the lenders, rather than take an assignment by way of security of such a commitment owed by the sponsors/shareholders to the project company, the lenders are likely to require direct equity undertakings from the sponsors/shareholders for a number of reasons. Amongst these is the fact that an assignee cannot claim for a loss in excess of that of the assignor and it might very well be the case that the lenders’ actual loss is considerably greater than that of the project company should the sponsors/shareholders default. It may also be the case that set-offs/counterclaims could exist between the project company and the sponsors/shareholders, which would have the effect of reducing the sponsors’/shareholders’ obligations. A further weakness is that an obligation to subscribe for equity in the project company will not survive the project company’s liquidation thus depriving the lenders of this source of funds when they might most need it. Further, any claims by the lenders for breach of such equity commitments would be a damages-based claim which suffers from the weaknesses, from a lender’s perspective, that the normal common law rules as to causation, remoteness and mitigation of damages will apply (see section 1.3 for a more detailed explanation of this issue). For the lenders it would be better for an equity commitment to be constructed as a financial guarantee or indemnity albeit limited to the amount of the equity commitment although this may well be resisted by the sponsors/shareholders.

If, as is often the case, the project company is a party to the shareholders’ agreement and is the beneficiary of any rights and/or benefits under this agreement, then the project lenders are likely to want an assignment by way of security of the benefit of this agreement as part of their overall security package.

Sponsors Shareholders Support Agreement

In some project financings, the sponsors/shareholders will enter into a support agreement with the project company and the lenders. This agreement is likely to contain a number of commitments that the lenders require of the sponsors/shareholders with respect to the project and the project company (some of which might otherwise be found in a sponsors’/shareholders’ agreement), including:

• A requirement to provide management and technical assistance (including, where necessary, secondment of key employees)
• A requirement to provide funding, whether through subscription for equity or by the provision of loans (it is likely that the lenders will require any loans to be unsecured and subordinated to the project loans)
• Restrictions on the ability of the sponsors/shareholders to dispose of their shares in the project company
• Any completion guarantees or cost overrun guarantees to be given by the sponsors/shareholders (or any of them)
• Any security requirements from the sponsors/shareholders supporting their commitments to provide equity at a later stage

Loan and security documentation

Project Loan Agreement

In most projects this will be a syndicated loan agreement entered into between the borrower, the project lenders and the facility agent. It will regulate the terms and conditions upon which the project loans may be drawn down and what items of project expenditure the loans may be used for. The agreement will contain the usual provisions relating to representations, covenants and events of default found in other syndicated loan agreements but expanded to cover the project, project documents and related matters. The provisions relating to the calculation and payment of interest will be similar for standard Euro-currency, loans except that in most projects interest will be capitalised during the construction period or until project revenues come on stream. [IMAGE] AgreementRepayment terms will vary from project to project and will often be tied to the receipt of project cash flows and/or the dedication of a minimum percentage of the project’s cash flow towards debt service. The agreement will normally provide for all project cash flows to flow through one of a number of project accounts maintained by the agent (or a security trustee or account bank) and charged to the project lenders. There will be detailed mechanics relating to the calculation of project cover ratios and the preparation of banking cases and forecasting information with respect to the project (see section 8.5 for a more detailed discussion of cover ratios). There will also be provision for the appointment of consultants, advisers and technical experts by the project lenders. The balance of the agreement will contain boilerplate provisions customarily found in Euro-currency loan documentation adapted, as appropriate, for a project financing.

Security Documents

A security agreement is a document that provides a lender a security interest in a specified asset or property that is pledged as collateral. In the event that the borrower defaults, the pledged collateral can be seized and sold. A security agreement mitigates the default risk the lender faces.

The form of these will vary from jurisdiction to jurisdiction and will depend on the nature and type of assets that are the subject of the security. A more detailed description of the type of assets and security found in project financings is set out in section 6. In common law based jurisdictions the taking of security in relation to project financing is usually through a fixed and floating charge covering all of the property and assets of the project company. In civil law based and other legal systems, however, the position is usually more complex, with different documents being required for different categories of assets.

In those jurisdictions that recognise trusts, it is usually convenient to appoint a trustee (often one of the banks) to hold the security on trust for the lenders as this not only insulates the security from the insolvency of the institution holding the security but also facilitates the trading of rights and obligations by the banks without the risk of disturbing the security.

Where a security trustee is appointed by the project lenders, this is usually under a separate security trust deed which sets out the terms of appointment, rights, duties and obligations of the security trustee, as well as provides for the usual indemnity and exculpatory provisions for the benefit of the trustee. Also, the security trust deed may deal with the order of application of payments amongst the various groups of lenders, although this is frequently dealt with in a separate intercreditor agreement. The applicable governing law for a security document will depend to a great extent on the location of the asset over which security is being taken. The basic rules for determining the correct governing law for security assets is set out in section 6.9.

Project documents

Concession Agreements/Licences

In many projects, particularly Build-Operate-Transfer (“BOT”) projects, the concession agreement will be the key project document as it is the document that will vest in the project company the right to explore, exploit, develop or operate, as appropriate, the concession or other relevant rights to the project. At the other end of the spectrum, all that may be needed for a project company to be vested with the necessary legal rights to exploit is a licence. Thus, for example, in an oil and gas financing in the UK continental shelf, the project vehicle will be a beneficiary of (or the beneficiary of a share of) a licence issued by the Department of Energy and Climate Change which entitles it to explore for and exploit hydrocarbons on the terms set out in the licence (and certain model clauses applicable to the licence). On the other hand, in a BOT project, it will invariably be the case that the project vehicle (or its sponsors) will be granted a concession by the host government (or one of its agencies) with respect to the project. The concession agreement, often comprising a BOT obligation, but sometimes a build-own-operate obligation, is popular particularly in countries where political or budgetary constraints prevent governments from developing essential and increasingly expensive infrastructure in the public sector. A concession can offer the host government certain advantages, including:

• Minimising the impact of the project on its capital budget
• Introducing increased efficiency into the project
• Encouraging foreign investment and the introduction of new technology.

The BOT structure ends with the transfer back of the project to the relevant state authority at some future date. This may result in the state receiving a useful operational project, although sometimes the transfer is not provided to occur within the economic life of the project. The terms which may commonly be found in concession agreements are covered in some detail in section 4, but key features are:

• The grant of a concession for a designated period of time (from the lenders’ perspective this will need to exceed the term of the project loan by a comfortable margin)
• The duties and obligations imposed on the project company with respect to the project and the concession
• Certain undertakings given by the concession grantor, e.g. as to non-competition, provision of utilities and other services provisions concerning certain changes in law
• Where appropriate, payment of concession fees
• Default and forfeiture terms
• Assignments and transfers (the project lenders will want to be certain that they can have the benefit of the concession assigned to them by way of security)
• Termination terms, including handover provisions (e.g. education and training where applicable).

In addition to some of the points noted above, the project lenders will be concerned to ensure that the concession grantor cannot unilaterally vary or terminate the terms of the concession, that the concession is transferable to any purchaser of the project (or project vehicle) and that the concession grantor should also assume at least certain risks associated with change of law and/or force majeure circumstances. Depending on the circumstances of a particular project, the project lenders may want to enter into a direct agreement with the concession grantor to address a number of the above and other concerns (see section 6.6).

Construction Contracts

In an infrastructure project where the project lenders are taking all or any part of the construction/completion risk, the construction contract will be one of the key project documents. There are a number of standard form construction contracts in use but it is unlikely any of them will be suitable for a project-financed contract without significant amendment. The closest to a suitable international standard contract is probably the “Orange Book” published by FIDIC.

The most common arrangement is a turnkey contract, in which a single “general” contractor assumes all risk of on-time completion of a project which meets guaranteed performance standards. In a turnkey contract, the owner specifies overall performance and reliability standards for the plant, and the turnkey contractor assumes full responsibility for design, construction, supply, installation, testing and commissioning of the plant so as to enable it to meet those specified requirements. Subject to important limitations which the contract will contain, the turnkey contractor essentially provides an overall guarantee of the performance of all components and sub-contractors.

As an alternative arrangement to a turnkey contract, sponsors may consider that they have the necessary experience to manage the design and construction of the project facility and may wish to undertake this themselves, or to leave certain responsibilities for it with the project company. Sponsors may perceive that they will be able to achieve an overall cost or time saving if they perform a role in relation to some or all of the design or construction of the facility. If construction management responsibilities are undertaken by the project company or sponsors, lenders will need to be satisfied with their technical capacity and resources. They may wish to have additional sponsor support to ensure adequate cover against the absence of a single contractor that has overall responsibility and the likely consequences of mismanagement during design and construction.

Even less popular with lenders is a project management structure whereby a project management agreement is entered into with one project managing company which will then arrange for individual contractors to enter into contracts with the project company. In this case each of these individual contractors would carry out different parts of the project. One of the reasons lenders have a very strong preference for turnkey contracts is that they reduce the risk of claims arising between the different contractors and of unallocated responsibilities relating to the project. If a turnkey contract is not utilised, then the project lenders will need to spend considerably more time analysing the construction contracts and the risks arising from the construction arrangements.

The key provisions of a typical construction contract, and its significance for the arrangement of project finance, can be summarised as follows:

Price and payment terms

Contractors usually prefer to be paid by stage payments. Contracts for the provision of industrial plant commonly provide for a substantial advance payment upon or soon after contract signing and thereafter for agreed instalments of the price to be paid against achievement of specific progress “milestones”.

Contractors will tend to have a preference for minimising the transfer of risk under the contract, so that its terms provide for the price to be adjusted if unforeseen circumstances or events render the assumptions on which the original price was quoted inapplicable. Not surprisingly, project lenders, on the other hand, prefer as much certainty as possible about the price. They will seek to maximise the transfer of risks to the contractor and to maximise its liability for breaches of contract, at least sufficient to preserve the project company’s projected cash flow.

Lenders are likely to look at any provision for variation of the price very carefully as this may increase the risk for the project lenders by making it uneconomic for the project lenders to complete the project should they have to take it over following a default by the project company. Lenders will, for example, seek to require that their consent be obtained before the project company exercises its rights under the construction contract to instruct variations in the works being produced, or to suspend the work

The sponsors’ interests will not be exactly the same as those of the lenders. Sponsors will seek not only certainty of price, but also a competitive price. As regards the contractor’s liability for breaches of contract, sponsors will seek the optimum balance against price.

Completion

Construction contracts often permit the completion date to be postponed if the contractor is unable to comply with the construction contract date for reasons beyond its control. Project lenders prefer as much certainty as possible, but will usually accept postponement in limited specified circumstances. However, any provisions for postponement will need to be mirrored in the other project agreements, so that failure to achieve completion under the construction contract does not lead to the project company being in breach of the concession agreement and other relevant project agreements where a specified completion date is relevant.

The lenders will expect the contractor to be obliged to pay liquidated damages for any delay at a level which will at least cover interest payable under the project loan agreement during the period of delay, together with (ideally) a sum sufficient to cover operating costs of the project vehicle during the period of delay. Most contractors will seek to include some form of limit on their liability for liquidated damages and, clearly, project lenders will need to take a view on an appropriate limit if this is acceptable in principle.

The construction contract will usually provide that completion occurs on the date upon which an independent consultant (usually appointed by the project company, subject to the lender’s approval) certifies that the facility is complete and all commissioning and performance tests have been successfully passed.

Force majeure

Force majeure is a concept used to excuse a party to a contract from performing its obligations when prevented from doing so by events or circumstances beyond its control. There is further discussion of the significance of this with respect to project financing in section 3.5.

Unforeseen ground risk

This is the risk that construction may be slowed down or stopped and/or that changes in design or work methods may be required because the geotechnical condition of the site is not as could reasonably be expected. It can be used to trigger an increase in price or to delay the date by which completion takes place. The lenders will usually expect the contractor to take this risk.

Warranties

The contractor will normally be required to warrant the quality and fitness for purpose of its work. If the project company has given warranties of a construction nature to the concession grantor, the project lenders may want those warranties to be matched by corresponding warranties from the contractors.

Insurance

Insurance is important in a financing context, not least because the project lenders view insurance as part of their security. In the construction phase of a project, the contractor may be responsible for insuring the interests of the project company and lenders in addition to its own and sub-contractors’ interests in respect of “contractors all risks”. See section 7 for a more general discussion of project insurances.

Consents

The construction contract or contracts will usually provide who is responsible for obtaining the governmental consents and permits required to carry out the project. Amongst the key consents may be the consents or approvals from the regulatory authorities/host government in the host country that all local health and safety, environmental, fire and building regulations and requirements have been satisfied at “completion”.

Limitations on liability

Contractors will usually attempt to limit their liability for breach of contract. Liability may be limited to a specified amount in respect of particular breaches or in some cases excluded completely. Project lenders will prefer either no limit at all or very high limits.

Operating and Maintenance Agreements

Once the project is completed and commissioned it will then move into the operation stage. The operation of most projects will require an experienced and skilful operator and the performance of the operator in the performance of its tasks will be crucial to the overall success of the project. Both the project company and the lenders will be keen to ensure that the chosen operator is a company that has a proven track record of operating similar projects. Sometimes it is the case that the project company itself will operate the project although the lenders will want to be satisfied that it has both the experience and the necessary staffing, in place to undertake this role. More often, the operator is a third party that specialises in project and facilities operation and management and who will enter into an operating and maintenance agreement on arm’s-length terms with the project company. The usual objectives of an operating and maintenance agreement will include:

• Allocating the risk of operating and maintaining the project to the operator (and thereby insulating the project company and the lenders from this risk)
• Ensuring that the project is operated in a manner that maximises the revenue-earning capacity of the project
• Ensuring that the facilities are operated and maintained at levels and according to budgets agreed with the project company and the lenders.

There are three basic structures for an operating and maintenance agreement.

Fixed price structure

Under this structure the operator is paid a fixed price for operating the project. If there are cost overruns on the operating budget, then the operator will bear this risk. Conversely, if the operator is able to save costs, then it will earn greater profits. Because the operator in this structure is bearing the operating risk, fixed price contracts tend to be more expensive.

Cost plus structure

Under this structure the project company will pay the operator an agreed fixed fee together with the costs incurred by the operator in operating the project. The fixed fee will represent the profit for the operator, who will look to pass on all the costs of operating the project to the project company. Under this structure, therefore, the project company is assuming the risk of increased operating costs. In view of this, the project company would require the right to terminate the contract at relatively short notice if the operator was not operating the project on budget or efficiently. In most cases, however, a degree of operating risk will be assumed by the operator in order to incentivise the operator to perform efficiently and cost-effectively.

Incentive/penalty structure

Under this structure the operator’s remuneration will be tied to strict performance targets so that should the operator achieve the agreed targets it will be paid a bonus. Conversely, should the operator fail to achieve the agreed performance targets, it will suffer a penalty in the form of reduced compensation. The performance targets will be agreed in advance and set out in detail in the contract and will cover all principal aspects of the operation and maintenance of the project for which it is agreed the operator is responsible. It is usually the case that the maximum level of bonuses or penalties is capped in the contract.

Lenders invariably have a strong preference for the incentive/penalty structure as this not only insulates the project company from much of the operating risks associated with a project but also offers the best prospect of the project being efficiently operated on budget.

Fuel Supply Agreements

Many projects will rely on an essential supply of fuel such as coal, oil, gas or wood in order to operate the facility. Both the project company and the lenders will be concerned to ensure that the project has access to a reliable and secure source of fuel for the entire duration of the project. Having obtained a secure source of fuel supply, the next key issue will be whether the project company is able to contract with an agreed supplier on a long-term basis on a pre-agreed price structure. If the project company is unable to achieve this, then it will be forced to purchase its fuel requirements on the spot market, which will expose it to both fuel availability and fuel price risks.

Having secured an agreed fuel supply, the project company will then need to make the necessary arrangements for the supply of the fuel to the project. This may involve a third party or the fuel supplier may assume this responsibility itself.

There are, broadly speaking, two different types of fuel supply agreements commonly used in project financing.

Take-or-pay contracts

Under this arrangement the project company agrees to take delivery of an agreed volume of fuel at an agreed price over a specified period. If the project company does not take delivery of the agreed level of fuel, then it must nevertheless pay for it, although there is usually provision in the contract for the project company to take all or an agreed amount of such forgone fuel in a subsequent period. The fuel supplier’s obligation is to supply the agreed level of fuel at the stipulated price.

Sole supplier contracts

Under this arrangement the project company agrees with a single supplier that it will purchase the project’s entire fuel requirement from that supplier. However, the actual amount of the fuel requirement and the price to be paid for it will not necessarily be specified and, in any event, the project company will only pay for the fuel it actually takes. The fuel supplier, on the other hand, may or may not be obliged to supply all the project’s fuel requirements.

Lenders are likely to prefer take-or-pay contracts as this secures for the project a secure source of supply at an agreed price.

Sales/Offtake Agreements

These will be important where the project is dependent upon a guaranteed offtake for the project’s products. A long-term sales contract may provide for sales on arm’s-length terms, with the price calculated by reference to market prices at the relevant time,but not commit the purchaser to buy. Ideally, and this is what the lenders will be looking for, the project company would require a guaranteed cash flow from which to repay the project loan. Different types of sales agreement have been developed to guarantee the amount and/or continuity of cash flow. The most popular of these are:

• “Pass through agreements”
• “Take-or-pay agreements”

Where charges are calculated on a pass-through basis, they are calculated by reference to the costs incurred by the project company which are passed through to the buyer. This is a common structure in power projects. Typically, the costs passed through to the buyer can include the whole or any part of the costs of purchasing fuel or other commodities required for the project, repayments of principal to the project lenders, payments of interest to the project lenders, operating and maintenance costs, administrative costs, insurance costs and an amount representing the sponsor’s return on capital. In each case, the costs passed through are those relating to the period to which the payment by the purchaser/offtaker relates.

In a take-or-pay agreement, as is noted above, the buyer pays for supplies of the project company’s product, provided that they are available for delivery even if the buyer does not require them. There will often be a “hell or high water” provision which will attempt to establish that the buyer must pay despite non-performance by the seller or the existence of circumstances which would otherwise frustrate the contract. The type of sales/offtake agreement will depend, to a large extent, on the product in question. For example, in the gas industry, long-term offtake contracts are very common, whereas in the oil industry they are rare, most oil being traded spot or in the short futures market.

One of the issues that needs to be addressed when considering the use of take-or-pay (and similar) contracts is the enforceability of them. There are two potentially problematic areas. First, there is a risk that in some jurisdictions they may be attacked on the basis that they comprise a penalty. Second, they may be attacked on the basis of inadequacy of consideration. So far as English law is concerned, the better view is probably that most take-or-pay agreements will not be viewed as amounting to the imposition of penalties. On the consideration point, English law does not concern itself with the adequacy of consideration. However, other jurisdictions may (and probably do) take a different view on these issues and both the project company and the lenders will be concerned to check the exact legal position.

Other Project Documents

Other relevant project documents, depending on the project, might include through-put agreements, tolling agreements, technology/operating licences, consultancy contracts, utility agreements, refining agreements and transportation contracts.

In all cases, however, it will be crucial to ensure that, so far as possible, all of these agreements fit together so that if, for example, the project company assumes obligations to one party, it is able to pass those obligations on to another party. It must be borne in mind that any residual liabilities resting with the project company will ultimately incurred by either the project sponsors or the project lenders, as appropriate. Indeed, both of these parties will be keen to ensure that any such liabilities are in fact incurred by the party most able to manage and/or avoid them.

Force majeure

The legal concept of force majeure is not a part of the English common law - it is a civil law concept that can be found in the Napoleonic Code. English law on the other hand has a doctrine of frustration of contracts. There are important differences. The doctrine of frustration is much narrower and occurs only when, without fault of either party, the contractual obligation in question has become incapable of being performed because the circumstances in which performance is called for would render it a thing totally different from that which was contemplated by the contract. In these circumstances, the parties will be discharged from all their future obligations under the contract and, in most cases, the loss as a result of such termination will lie where it falls- a result that may be neither fair nor appropriate.

Force majeure, on the other hand, is a less arbitrary and strict concept that nevertheless seeks to protect the parties from the effects of unforeseen events or circumstances. In the context of project financings, few participants are prepared to rely on the general law (even where the doctrine of force majeure is recognised by that law) and appropriate force majeure clauses will be included in all the key project documents setting out the basis on which parties may be excused from performance in specified circumstances (but not in the loan and security documents, at least so as to benefit the borrower). Force majeure normally involves four criteria. The event or circumstance must:

• Make performance of the obligations impossible
• Be irresistible
• Be external in the sense of involving no fault or negligence on the party affected
• The party affected must have done everything in its power to perform the obligations

The precise terms of each force majeure clause will be negotiated between the relevant parties concerned and will reflect, partly, their respective bargaining positions as well as the overall circumstances of the transaction (an example is set out in Fig. 7). Further, depending on the particular circumstances, the clause may or may not apply to both parties to the contract. The clause, even in its most basic form, will be an essential tool in allocating specific project risks between the parties and will not necessarily apply to all of the obligations of a party under a contract (e.g. it may not apply to payment obligations if these are intended to be of a “hell or high water” nature).

Specimen Force Majeure Clause

1. Subject to sub-clause (3), the Contractor shall have no liability for a consequence of any of the following events if that event and consequence was neither preventable nor foreseeable:

(a) a flood, storm or other natural event or

(b) any war, hostilities, revolution, riot or civil disorder or

(c) any destruction, breakdown (permanent or temporary) or malfunction of, or damage to, any premises, plant, equipment or materials (including any computer hardware or software or any records) or

(d) the introduction of, or any amendment to, a law or regulation, or any change in its interpretation or application by any authority or

(e) any action taken by a governmental or public authority or an agency of the Economic Community, including any failure or delay to grant a consent, exemption or clearance or

(f) any strike, lockout or other industrial action or (g) any unavailability of, or difficulty in obtaining, any plant, equipment or materials or

(h) any breach of contract or default by, or insolvency of, a third party (including an agent or sub-contractor), other than a company in the same group as the Contractor or an officer or employee of the Contractor or of such a company or (i) any other similar event to any of the foregoing.

2. For this purpose an event or the consequence of an event was neither preventable nor foreseeable if and only if the Contractor could not have prevented it by taking steps which it could reasonably be expected to have taken and the Contractor could not, as at the date of this Contract, have reasonably been expected to take the risk of it into account by providing for it in this Contract, by insurance or otherwise.

3. Sub-clause (1) does not apply unless the Contractor:

(a) notifies the Owner of the relevant event and consequence as soon as possible after it occurs;

(b) promptly provides the Owner with any further information which the Owner requests about the event (or its causes) or the consequence; and

(c) promptly takes any steps (except steps involving significant additional costs) which the Owner reasonably requires in order to reduce the Owner’s losses or risk of losses.

4 It is for the Contractor to show that a matter is a consequence of an event covered by sub-clause (1), that the event and the consequence were neither preventable nor foreseeable and that it has satisfied the conditions set out in sub-clause (3).

The force majeure clause will specify the circumstances in which it will operate and will include the normal range of acts and circumstances, such as acts of God, embargos, natural disasters, earthquakes, lightning, tidal waves and (frequently subject to debate) strikes. The circumstances described may or may not be expressed to be non-exhaustive in their scope. A party claiming force majeure will usually be required to take all reasonable steps available to it to investigate the effect of the event, and it is often the case that the duration of the contract will be extended during the subsistence of the event, subject to a long-stop date when the contract could be terminated by either party.

Although a force majeure clause is not considered by the English courts to be an exemption clause, its effect will be, arguably, the same in that a party may be relieved of an obligation or liability under the contract (either by extending or suspending the time period for compliance or extinguishing it altogether) once the clause has been triggered. It comes as no surprise, therefore, that force majeure clauses are governed by similar rules to those regulating exemption clauses. In both cases, the judicial tendency is to construe the clause against the party seeking to rely upon it. Thus, the party seeking to rely upon a force majeure clause must prove that a force majeure event out of its control has occurred which prevents it from performing the contract, and that it has taken all reasonable steps to mitigate the consequences of this.

Lender requirements for project documents

Because project agreements play a central role in allocating risks between the parties in any project financing, lenders will take great care to review the terms of the project agreements to satisfy themselves that these documents accurately record the agreed risk allocation. The following are some of the key points that lenders will look out for:

• If the lenders are taking security over the project agreement, can the project agreement be assigned or is the consent of the counterparty required?
• Does the project agreement prevent the project company from charging any of the project assets?
• What rights of termination does the counterparty have for breach by the project company? Are these rights too wide? (Note that the lenders would usually seek a right to step in and cure a breach by the project company under a direct agreement with the counterparty - see section 6.6)
• The existence of any expiry or revocation provisions in relevant licences and concession agreements
• If the project agreement includes force majeure provisions, is the project company protected by similar provisions in other project agreements where the project company itself has obligations that might be affected?
• Does the project agreement contain liquidated damages provisions for a default by the counterparty? If so, are they set at a high enough level and, more importantly, are they enforceable (and not void as a penalty as might be the case in certain jurisdictions)?
• Lenders will be extremely wary of clauses in project agreements that allow the counterparty to forfeit a concession or licence interest consequent upon the default of the project company; equally, they will be uncomfortable with a partial forfeiture right (often referred to as withering clause)
• Does the project agreement grant any pre-emption rights or options in favour of a third party in the case of a project company default or where the project company is seeking to terminate (or the lenders are seeking to enforce their security)?
• If the project agreement contains any set-off clauses allowing the counterparty to set off against any non-performance by the project company any sums payable by the counterparty to the project company, then the lenders will want to ensure that the provisions only cover non-performance in relation to the project agreement in question and do not cover other non-project or unrelated contracts
• Any clauses that make the project agreement’s effectiveness conditional upon the occurrence of any events or the granting of any permits or consents will be viewed with caution and it is likely that the availability of finance itself will be conditional upon the lifting or satisfaction of such conditions
• Payment terms in project agreements must be precisely and carefully drawn, they must specify in which currency payment is required and where and how payment is to be made (usually direct to the lenders’ agent); payments should be made without reduction or withholding for taxes, unless required by law and then in such circumstances grossed up
• Where appropriate, bonding requirement (especially in construction contracts) should be clearly stated and the lenders will want to be satisfied as to the strength of the bonding company or bank and that the bonds can be assigned to the lenders.

In a joint venture agreement and, are other joint venture parties given a charge over the project company’s interest to secure any defaults by the project company? Contrast this with possible forfeiture rights mentioned above

• Are there any compulsory abandonment and “take out” provisions included in a project agreement between the sponsors that require one of them to assume the liabilities of the others in the event one wishes to withdraw from the project
• Governing law is frequently an issue as lenders in international financing transactions have a clear preference for English and New York law as opposed to local law; sometimes, especially with governmental entities, this is difficult for lenders to impose (see section 8.6)
• Arbitration clauses in project agreements are not popular with lenders that would, in most cases, prefer the legal certainty of the judicial system especially if the agreement is governed by English or New York law. However, in some jurisdictions it may be the case that the judicial system is not equipped to deal with sophisticated international disputes and in these circumstances arbitration may be the only sensible route for lenders.