Legal Aspects of Project Finance

Legal Aspects of Project Finance

 It means outlining how financial and economic/ industrial planning for the
development of the project is reflected in legal/ contractual relationships.

 To identify legal issues raised by Project Finance transactions and the

solutions that are normally developed and adopted.

 The legal framework of project finance originated in common law systems.

 Legal issues inherent to project revolve around 2 basic concepts:

◦ Project Company and its economic/legal function
◦ The network of contracts and their interconnections

 To protect the project company against any possible external interference

that might jeopardize the economic , financial legal management of the
project
The Parties and Procedures
 The risk inherent in the project development and operation may be too
onerous for the Project Sponsor and Project Lenders.

 To cope with these risks, several specialist companies and financial

institutions are formed to spread risk.

 This may lead to a transaction involving multiple parties and complicated

procedures.
The Parties
 Project Sponsor: This entity primarily procures the project and sees to its
development.

 Project Company: Project Company is the independent entity established by the

Project Sponsor for the special purpose of owning the project assets and consequently
entering into the project contracts.

 Contractor: This is the entity which handles the actual construction of the project,
makes supplies upon demands and ensures that products and services meet up with
the required standards.

 Lenders: This is the party that contributes the major percentage of the funds needed
to finance the project.

 Equity Investors and Bondholders: Depending upon the nature of the project,
some external investors may be invited to bring investment capital to supplement
equity invested by project owners.
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• The Host Government: This is the government in whose territory the
project is situated.

• Experts and Professional Advisers: These are persons and companies

contracted to render professional advice of different forms and at different
stages of the transaction.
Procedures
• Project identification by government

• Government calls for Bids to attract Sponsors

• Sponsor contracts with Advising Bank for professional financial advice

• Advising Bank forms Syndicate of Lenders

• Lenders obtain Guarantee and Insurance as Security

• Securitisation
Project agreement
 Due diligence Report – Basic document of analysis of the project feasibility
,includes the description of the legal context & an analysis of the associated risk

 Applicable Laws /Regulations & Standards

 The terms of the concession should be fixed for the life of the project;
 Project – Milestones
 Proprietary data / Secrecy agreements
 Terms of Payment/Liquidity Damages
 Project Termination/ Arbitrage

 Consequential Losses /Defect Liability Period

 Code of conduct /Safety
 The concession period should be extended by any period of 'force majeure', or
burdensome events that occur outside of the control of the parties
Operation and maintenance agreements
The quality of the operator and its effectiveness in operating the project are
key concerns of lenders. A project that is operated poorly will suffer
mechanical breakdowns, government fines and potentially mandated shut-
downs, and low productivity. All of these threaten the cash flow upon which
the lenders depend.
• The operator should be given proper incentive to run the project properly
and efficiently

• The operator should be subject to penalties if certain operating targets are

not met

• The lenders should be able to remove – or bring about the removal of – the
operator for poor performance

• The lenders should be allowed some control of the dismissal of an operator

for poor performance through the termination rights that Project co has
under the operation and maintenance element of the project agreement.
Special Terms Ex : Covid-19
 COVID-19 Clause: The Parties are aware of the current outbreak of
the Coronavirus worldwide which is or may impact normal
business and execution of this Contract. The Parties agree that
Covid-19 is a force majeure event and  XYZ is entitled to time
extension, or other reasonably required contract adjustments, if any
consequences whether directly or indirectly resulting out of, or in
connection with the coronavirus outbreak at XYZ’s or its sub-
supplier’s place of business, lead to delays in delivery of goods or
provision of services, supplies or delays in sub-supplier’s
obligations or otherwise affect XYZ’s contractual obligations or
duties. The actual impact if any will be communicated to the
customer as and when the impact is realized by XYZ