88 4 Debt
Risks inherent in the statements of the parties (drafting risk). International loan
agreements generally tend to be longer than international agreements for the sale
and purchase of goods and services. Loan agreements define the rights and obliga-
tions of the parties and the allocation of risk in a comprehensive manner. For this
reason, the firm must pay close attention to drafting (for the flexibility of contracts
risk, see Volume II).
The four basic steps for drafting a loan agreement nevertheless are the same as
when drafting contracts in general: (1) initial understanding of the nature of the
transaction and its legal framework; (2) review of existing agreements with the
same party and other parties; (3) understanding of the core commercial terms of
the agreement; (4) drafting clauses of the loan agreement.^10
Legal framework, standardisation, tradeability. The legal framework is typi-
cally in standard form. It can be based on pre-formulated contract terms or a legal
platform (see Volume II).
The advantage of standardisation to lenders is that the terms and conditions
which are of common nature need not be repeated or specified in every loan
agreement. The individually negotiated terms can therefore be short.
For example, the World Bank group lending institutions follow the system of dividing a
loan agreement into two parts. The first part is General Conditions Applicable to Loan and
Guarantee Agreements and the second part consists of specific terms of a particular loan
agreement.
The advantage of standardisation to borrowers is that they know what kinds of
clauses to expect. The disadvantage of standardisation to borrowers is that once
the terms and conditions of lending are standardised, they can become non-
negotiable. The lending institutions typically do not allow any change in the stan-
dardised conditions on the pretext that if they allow negotiation and consequential
changes in the standardised terms and conditions in one case, other borrowers ask
for negotiations and changes in other cases as well.^11
The legal framework can also be based on a legal platform shared by many par-
ties. The use of a legal platform can reduce transaction costs for all parties.
For example, the more widespread use of standard loan agreements published by the Lon-
don-based Loan Market Association (LMA)^12 could reduce transaction costs in interna-
tional transactions. The LMA standard agreements are intended to provide banks and bor-
rowers with a common template as a basis for negotiations, to make the documentation
(^10) Agarwal VK, Best Practices in Drafting Techniques of a Loan Agreement, UNITAR
Best Practices Series in External Debt Management No 3 (2002) p 7.
(^11) Ibid, p 11.
(^12) The LMA was formed in December 1996 with the objective of encouraging the devel-
opment of the secondary loan market in Europe. The primary objectives were to bring
greater clarity, efficiency and liquidity to the then fledgling secondary market by intro-
ducing recommended forms of documentation and establishing sound, widely accepted
market practices.