Choice Of Law In Syndicated Loans And Bonds



Any relationship between two entities, whether it is people or institutions, can only be established in accordance with a set of rules. These rules may be unworkable norms or customs of a group or company, or explicit laws with binding and enforceable authority. A contract is a formal structure of a relationship between two or more parties, binding them in a contractual relationship; and imposing certain obligations on them and granting them certain rights over each other. In case of problem with these obligations or rights, the law of the country would come into force. But if the contracting parties belong to different lands, then the question arises as to which law should enter into force. If the contracting parties have not reached consensus on this issue, it is more likely that the problem remains unresolved; and one or more parties would suffer the loss. Hence the need to decide, at the time of the conclusion of the contract, the law to be followed.


The case of the financial contract is similar. "Any legal matter that is the subject of a financial contract must be settled in accordance with a system of law. An aspect of a contract can not exist in a legal vacuum. (1) Most syndicated loans and bonds are international in nature. They usually involve borrowers and lenders from various countries; and "the greater the number of countries involved, the more municipal law systems to consider" (2). In the absence of a single set of international laws that can effectively govern syndicated loans and bonds, it is necessary for the parties to these contracts to choose an agreed legal system.

A syndicated loan agreement is normally concluded between very sophisticated institutions such as banks, corporations, state companies and even sovereign states themselves. It involves a number of legal systems (even one single bank operating internationally may be subject to different legal systems) (3). International bond issues also involve issuers and investment banks from different countries. In some respects, international bonds (Eurobonds) are even more "international" than syndicated loans because they are sold to the general public, and individuals and other entities buy and sell them in many jurisdictions. During this activity, a number of transactions involving numerous legal documents take place. With these transactions, rights and liabilities are very frequently transferred from one entity to another. When this occurs in different legal systems, it creates an ambiguity as to the law applicable in such a case. This ambiguity makes the company vulnerable to unpredictable situations. Eventually, the entire corporate market suffers serious damage.

"In order to minimize this uncertainty, one seeks in practice to apply a system of entitlement to the transaction and to exclude as far as possible the applicability of other legal systems with which the transaction may have some connection. is generally sought in practice by a "choice of law" clause subordinating to a single system of law the applicable law, the validity, the enforceability and the interpretation of the contractual legal documents and other acts constituting the transaction. "(4)

The practical side offers the lender the possibility of having a preference regarding "choice of law", because in case of dispute, it is his money that should be recovered. In the case of Eurobonds, when an investment bank helps with the sale of securities (5), the situation is different because lenders appear on the scene after the issuance of the 39 obligation under certain conditions, in particular as regards the choice of law. Anyway, in the exercise of the choice, it is better to choose a system known to the parties, so that the tendency to use certain types of financial transactions is not changed. In addition, the treatment of legal and business problems could be practical. It is also important that the chosen system is very mature and that the relevant court enjoys a good reputation for its impartiality. Political stability in this specific jurisdiction and the convenience of language are also important factors in the choice of a certain system of law (6). The incident freezing accounts in foreign currency after the imposition of an emergency after the 1998 atomic tests (7), the stock market suffered a loss so huge that it took years to recover it. In such a situation, no serious financial activity can develop without fearing the invisible. Although the enforcement forum is not a less important factor; the most important factor of the applicable law election clause is "the isolation of the loan agreement from changes in legislation in the country of the borrower" (8).

While underlining the contract, some of the essential documents would be prepared; for example, in the case of a bond issue, the subscription agreement, the trust deed, the contract between the managers, the sales group contract and the bond instruments themselves, and in the case of syndicated loan, the loan agreement. All of these legal documents would require validity, enforceability and interpretation where necessary (9). This could only be done within the framework of an agreed system of law.

The determination of rights and responsibilities and the interpretation of legal documents would imply a number of relevant laws for the different issues. These may include securities law, the principles of the contract, the interpretation of contract law, insolvency law, the law of negotiable instruments, and so on. All these laws should relate to a single system of law, so as to make their interpretation and implementation possible (10).

There are more than 310 jurisdictions in the world, grouped into nine categories: Traditional English, American Common Law, Mixed Roman / Common Law, Germanic and Scandinavian, Franco-Latin / Germanic, Franco-Latin Traditional, Emerging Jurisdictions, Islamic Jurisdictions Unallocated courts and courts (11). These categories are further combined into three main types: common law, Napoleonic and Roman-German jurisdictions (12). This large number of jurisdictions is naturally likely to pose a problem in the case of international syndicated loans and bonds in which different legal systems would be applied. involved. It therefore becomes imperative to have a "choice of law" clause in the legal documents.


The term international, in syndicated bonds and bonds, involves several laws, forums and jurisdictions. The conflict of laws, in such a case, is natural. The combination of laws, given their different approaches, is not a viable proposition. The harmonization of financial laws at the international level remains an idealistic suggestion. Thus, in order to form, interpret and execute international contracts, it is necessary to adopt a single legal system. This, the parties to a contract can choose when concluding the contract. This is done to ensure the validity, enforceability, and interpretation of all legal documents relevant to syndicated loan and bond agreements. This helps eliminate the uncertainty and unpredictability of the fate of a contract. In ideal, it is an external law, which has the potential to isolate the loan agreement legal changes, especially in the country of the borrower. English law worthy of playing such a role. There is another benefit to choosing it: it requires no link from the lender or the borrower with England.

The fundamental importance of the inclusion of the "conflict of laws clause" in the international syndicated loan agreements and the legal instruments of the bonds is to remove the uncertainty regarding expectations regarding the contract, in providing a viable legal mechanism to solve all problems. legal issues that may arise from time to time.


1). Wood, P R (1995) Regulation of International Loans, Bonds and Securities; London: Sweet & Maxwell P-61

2) Slater R (1982) "Syndicated loans" presented to the Conference on the Transnational Law of International Business Transactions in Bielefeld, Germany, 5-7 October 1981, in the Journal of Business Law, pages 173 to 199.

3) Cranston R (2003) Principles of Banking Law; 2nd ed. Oxford: Oxford University Press; p 438

4) Tennekoon R (1991) The law and regulation of international finance; London: Butterworths; p 16

5) Mishkin F (1992) The economics of money, banking and financial markets; 3rd ed. New York: HarperCollins Publishers; p 286

6) Paul C & Montagu G (2003) Companion banking and capital markets; 3rd ed. London: Cavendish Publishing; p 94

7)., at visited on the 14-05-2005

8). Wood P R (1995) Regulation of International Loans, Bonds and Securities; op cit

9) Tennekoon R .. op cit

ten). Slater R (1982) op cit

11). Wood PR (1997) Maps of Global Financial Law; London: Allen & Overy; p 9

12). Wood, PR (2005) Introductory lectures on financial law at Oxford and Cambridge, op cit.

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