Any relationship between two entities, either persons or institutions, cannot be established except in accordance with some set of rules. These rules may be unenforceable norms or customs of a group or society, or some explicit laws having a binding and enforceable authority. A contract is a formal structure of a relationship between two or more parties, binding them together into a contractual relationship; and imposing upon them certain obligations and granting them certain rights over each other. In case of any problem with these obligations or rights, law of the land would come into action. But if the contracting parties belong to different lands, then there would arise a question as to law of which land should come into force. If the contracting parties have no earlier consensus over this issue, then it is more likely that the problem would remain unresolved; and one or more parties would suffer the loss. Hence, the need to decide at the time of making contract, as to which law would be followed.
CHOICE OF LAW IN SYNDICATED LOANS AND BONDS:
Similar is the case of the financial contract. ‘Every legal issue under a financial contract must be determined in accordance with a system of law. An aspect of a contract cannot exist in a legal vacuum.'(1) Syndicated loans and bonds are mostly international in their character. They usually involve borrowers and lenders from various countries; and ‘the greater the number of countries involved the greater the number of municipal systems of law which have to be considered.'(2) As there is not single set of International laws that could effectively govern the syndicated loans and bonds, it is necessary for the parties to these contracts to choose an agreed system of law.
A syndicated loan agreement normally is contracted between the highly sophisticated institutions like banks, corporations, state corporations, and even the sovereign states themselves. It involves a number of systems of law (even a single bank operating internationally can be subject to different systems of law)(3). The international bond issues, too, involve issuers and investment banks from different countries. In some respects, international bonds (Eurobonds) are even more ‘international’ than the syndicated loans, as they are sold to the public at large, and the individuals and other entities buy and sell them in numerous jurisdictions. During this course of business a number of transactions involving numerous legal documents take place. With these transactions rights and liabilities shift from one entity to another very frequently. When i stunt driving ticket t happens in different systems of law, it creates ambiguity about which law should apply in which case. This ambiguity makes the business vulnerable to unpredictable situations. Eventually the whole business market suffers serious damage.
“In order to reduce such uncertainty to a minimum, an attempt is made in practice to apply one system of law to the transaction and to exclude as far as possible the applicability of other systems of law with which the transaction may have some connection. This is generally sought to be achieved in practice by a ‘choice of law’ clause which subjects to one governing system of law _ ‘the proper law’ _ the validity, enforceability and interpretation of the contractual and other legal documents which constitute the transaction.”(4)
The practicality provides the opportunity to the lender to have preference in ‘choice of law’, as in case of a dispute, it is his money that would need to be recovered. In case of the Euro bonds, where an investment bank helps in selling securities(5), the situation becomes different, as the lenders appear on scene after the bond is issued under certain terms including the matter of choice of law. In any case, while exercising the choice, it is preferred that such system is chosen that is familiar to the parties, so that the tendency of using certain type of financial transactions needs not to be changed. Further, the dealing with legal as well as business issues could be convenient. It is also important that the system chosen is greatly mature and the relevant jurisdiction enjoys good reputation for its impartiality. Political stability in that specific jurisdiction and convenience of language are also important factors in choosing a certain system of law(6). The incident of freezing of foreign currency accounts following imposition of emergency after the atomic tests in 1998(7), the stock market suffered such a huge loss that it took years to recover. In such a situation no serious financial activity can grow without fear of the unseen. While the enforcing forum is not less important a factor; the most significant factor of having the choice of law clause is the “insulation of the loan contract from legal changes in the borrower’s country.”(8)
While outlining the contract some of the essential documents would be prepared; for example, in case of a bond issue, the subscription agreement, the trust deed, the agreement between managers, the selling group agreement and the bond instruments themselves, and in case of the syndicated loan, the loan agreement. All of these legal documents would require validity, enforceability and when needed interpretation.(9) This could only be done under an agreed system of law.