Legal Practice Notes

Commercial letters of credit Commercial letters of credit (sometimes called traditional letters of credit or L/ Cs) are used to facilitate the movement of goods in both international and domestic trade. They are commonly adopted as the method of payment under contracts of sale, especially where a seller is concerned about a buyer’s creditworthiness or the legal framework of the buyer’s jurisdiction. They are also referred to as documentary letters of credit or documentary credits. By comparison, standby letters of credit form a distinct type and serve a different role. They are applied in similar situations to on demand guarantees or performance bonds, providing a mechanism to secure payment or other obligations. They operate as a form of quasi-security. For information on standby letters of credit, see Practice Note: Characteristics of standby letters of credit and Q& A: What is the...

Commercial (or corporate) benefit Once a company’s capacity and authority to enter into a guarantee have been confirmed, the next question is whether there is a commercial (or corporate) benefit in doing so. Commercial benefit can be a particular concern in finance transactions that include a guarantee, as the guarantor company is often taking on a significant contingent financial liability for the obligations of a third party (typically the principal debtor to the lender—see Practice Note: Guarantees— Whose obligations are guaranteed?). On the face of it, giving such a guarantee may not seem to be in the guarantor’s commercial interests. See the Q& A: In what circumstances do I really need to worry about commercial (or corporate) benefit? This Practice Note considers the issues that arise in relation to commercial benefit when a company provides a corporate guarantee......

Risks associated with derivative transactions Derivative dealings carry various hazards, two of which are typical across many transaction types. The first is the danger that the counterparty fails to pay sums owed, or otherwise fulfil its duties. In the most severe outcome, this arises from that counterparty’s insolvency. The second hazard appears in derivatives that schedule periodic payment dates over the term; in the intervals between such dates, amounts can accrue but are not due for payment until the next date. This creates a credit exposure, with the possibility that one party becomes insolvent before payment falls due, potentially leaving the other party unable to recover what accrued for that interval. As with other forms of credit exposure, the party at risk will seek acceptable security from the counterparty to eliminate or lessen that exposure. This practice is prevalent where one party...

Practice Note This Practice Note explores the nature of a collateral warranty, identifies which stakeholders on a construction project commonly require such warranties, and explains their rationale. It sets out the typical categories of beneficiaries and the rights they gain against the warrantor in respect of the building contract, a consultant’s appointment, or a sub-contract. As a core rule of contract law, only a party to a contract may sue on it, a principle referred to as privity of contract. Consequently, absent another direct contractual nexus, a contractor or consultant will usually owe no contractual duty of care to anyone other than its immediate client. ( That position has been adjusted by the Contracts ( Rights of Third Parties) Act 1999 which, in specified situations, enables a third party to enforce terms in a contract made by others for its benefit. For more detail see...

An introduction to commercial mortgage-backed securities Commercial mortgage-backed securities ( CMBS) are investment notes made available to investors, backed by a single loan or a pool of loans, each secured against commercial property assets (eg office blocks or factories) in each case......

This Practice Note This Practice Note outlines the principal documents needed for a commercial mortgage-backed securities ( CMBS) deal, identifying the principal parties to each, the salient issues to assess in them, and the stage in the process at which they ought to be executed. As with any financing method or transaction, there are many variations in how the detailed terms of any given transaction may function, which fall outside the remit of this Practice Note. Furthermore, unless expressly stated, the requirements of specific jurisdictions—most notably the United States—in relation to a CMBS transaction are not addressed in this Practice Note. This Practice Note should be read alongside Practice Note: Key parties, documents and terms of a commercial mortgage-back securities transaction. It focuses on documents, participants and timing considerations, rather than prescribing structures or variations, and is intended as guidance for reference purposes only......

In banking transactions, guarantees are commonly used as collateral for debt. In that setting, they comprise a contractual arrangement under which one party (the guarantor) undertakes to be answerable for the liability of another (the principal) to a further party. They do not confer rights over property. In this sense, guarantees are characterised as quasi-security. This Practice Note considers: the key characteristics of guarantees how guarantees are used in financing transactions why lenders prefer documentation to include both a guarantee and an indemnity which obligations are commonly guaranteed in finance transactions—obligations under a specific transaction or ‘all moneys’? whose obligations are commonly guaranteed in finance transactions the use of limited guarantees the importance for lenders of understanding guarantor rights and protections This Practice Note does not deal with on demand guarantees (see Practice Note: On demand guarantees and...

Practice Note This Practice Note offers practical guidance for general commercial practitioners on matters to weigh up when drafting a business-to-business agreement or arrangement intended to minimise the harmful consequences of unforeseen events, shifts in the economic climate, crisis, disaster, or other circumstances beyond the contracting parties' control. It is equally pertinent for practitioners when preparing a contract during a force majeure or other ongoing disruptive event. The Practice Note also examines illegality, hardship, business continuity, rights to terminate, and key risk-mitigation clauses, including those addressing price variation, currency exchange fluctuations, indemnities, insurance, and contract review. For a concise 'how to' guide on preparing contracts to cover unforeseen events that signposts relevant content, with links to potentially relevant issues such as clauses dealing with force majeure, and other commercial and practical considerations, see Practice Note: How to draft a contract to cover...

This glossary sets out numerous expressions frequently encountered in the restructuring arena. Words appearing in the definitions in bold are explained in other entries in this glossary. For further banking terminology, see the principal Banking & Finance Glossary. Restructuring glossary— A Acceleration: Acceleration means the agent, acting on directions from the majority lenders after an event of default, takes formal action, for example calling for early repayment of the facility. Ad-hoc committee: A temporary creditors’ group (often contrasted with a formal committee) that lacks any entitlement to official recognition. Administration: A process under the IA 1986 in which a financially distressed company is operated by an administrator as a going concern before longer-term outcomes, such as break-up and sale, are pursued. Administrator: An Insolvency Practitioner named by the court, a Qualifying floating charge holder, the directors or the company, to take...

Loan market and developments Lending to Australian corporates continues to rise, while borrowing costs have broadly steadied and most economists expect the easing cycle to begin in 2025. Syndicated lending to Australian companies expanded markedly in 2024 compared with the prior year, as borrowers pursued refinancings to secure improved pricing or extend maturities. Domestic debt capital markets were notably active, recording the busiest issuance levels of this tightening phase. A widening field of bank and non-bank lenders has also underpinned deeper liquidity, providing borrowers with a broader mix of funding options to optimise loan durations. Project finance remains buoyant, with renewables still the main engine of deal flow. Given the scale of investment needed for the energy transition and grid upgrades, momentum is expected to persist through 2030 and 2050. Meanwhile, private credit’s share of overall business borrowing is increasing rapidly......

ARCHIVED: This Practice Note has been archived and is not maintained For the 2020 version of the rule, see Incoterms® 2020 Rules— DAP Delivered at place. ICC publications appear here with permission from ICC Publishing SA. This and other ICC works can be sourced from: ICC Publishing SA, 33-43 avenue du Président Wilson, 75116 Paris, France ICC United Kingdom, 1st Floor, 1-3 Staple Inn London, WC1V 7QH, United Kingdom www.iccwbo.org Incoterms® 2010 rules were replaced by Incoterms® 2020 with effect from 1 January 2020. For the DAP term applicable from 1 January 2020, consult Practice Note: Incoterms® 2020 Rules— DAP Delivered at place. DAP (insert named place of destination) Incoterms® 2010 Guidance note This rule is usable for any chosen mode of transport and likewise where multiple modes are involved. ‘ Delivered at Place’ signifies that delivery occurs when the seller places the goods at the...

Introduction This Practice Note: sets out why lenders require particular undertakings in leveraged loan agreements outlines each undertaking’s framework and the usual permitted exceptions briefly compares how the same matters are dealt with under a high-yield bond covenant package It concentrates on four undertakings that attract the most negotiation, namely restrictions on: acquisitions disposals financial indebtedness dividends Each of these undertakings commonly features numerous exceptions, which can substantially reduce their practical effect. Those exceptions are influenced by: the target’s specific needs and existing finance documents the acquiring sponsor’s business plan and precedent loan documents the convergence of documentation techniques across the European loan, US Term Loan B ( TLB) and high-yield bond markets Over the last decade, the breadth of permitted activities within these general undertakings has expanded significantly, with sponsors selecting permissions from a range of...

Although frequently seen in the setting of disputes, and thus litigation, set-off is fundamentally a matter of substantive law. This Practice Note identifies the principal factors for assessing whether a right to set-off exists, whether legal or equitable. It does not cover bankers’ set-off, insolvency set-off or the abatement of rent; for those, see: Are there different types of set-off? For guidance on pleading a right to set-off, see Practice Note: Pleading set-off. Are there different types of set-off? At its simplest, set-off may occur where two parties owe monetary sums to one another. There are five main forms of set-off: independent set-off (also called legal set-off or statutory set-off) transaction set-off (also called equitable set-off) contractual set-off insolvency set-off bankers’ set-off (sometimes referred to as current account set-off) Their core distinguishing features are outlined in Practice Note: Types of...

What is subrogation? Subrogation is an equitable device designed to prevent unjust enrichment by allowing one party to step into another’s position and pursue a claim in that person’s name. For further guidance on unjust enrichment generally, see Practice Notes: Unjust enrichment—elements of the claim Unjust enrichment—defences When might subrogation arise? The term subrogation is a convenient description of a transfer of rights from one person to another, occurring by operation of law in a wide range of circumstances, and happening without assignment or the assent of the person from whom the rights pass. Some rights arising by subrogation have a contractual origin, as in the context of insurance contracts. Reflecting many differing situations recognised by the operation of law......

This Practice Note considers the taking of security over contractual rights in broad terms and at a high level. It covers: commonly used techniques for creating security over rights arising under contracts principal provisions to review in the agreement to be assigned, including governing law, restrictions on assignment and contractual set-off rights essential terms to be included within the security instrument practical points relating to serving notice of the security on the counterparty to the contract perfection and priority considerations and related matters Further detail on assignments by way of security, including how statutory and equitable assignments differ and why notice is served, appears in Practice Note: Assignments by way of security. What are contractual rights and when is security taken over them? What is meant by contractual rights? In essence, rights under contracts are intangible assets rather than tangible...

LMA mandate letter Mandate letters are usually executed at the outset of a transaction and are commonly appended to an agreed term sheet. Their role is to record the terms of engagement between the borrower and the financial institutions acting as mandated lead arrangers ( MLAs), bookrunners (responsible for managing the primary syndication) and, where the offer is underwritten, the underwriters. The mandate letter will typically address: the formal appointment of the financial institutions serving as MLAs, bookrunners and, where relevant, underwriters any conditions attached to the offer by those institutions to arrange, manage the syndication of and underwrite the financing (the offer), one of which will usually be the absence of any material adverse change ( MAC) affecting the market, the borrower’s business or its ability to meet its obligations under the mandate and finance documents, and ...

This Practice Note sets out: the function of the tax indemnity provision commonly included in a loan agreement, and that the usual drafting of this provision is lender‑friendly, reducing the borrower’s benefit, and offers drafting suggestions to help a borrower limit its exposure under the tax indemnity provision In the sphere of syndicated loans to corporate borrowers, standard practice is to use one of the Loan Market Association ( LMA) model facility agreements. Each of these templates: includes a standard tax indemnity provision, is prepared in a lender‑friendly manner, and assumes the relevant tax is UK withholding tax—identifying the applicable withholding tax jurisdiction is essential and, if it is not the UK, the agreement should be amended...

Promissory note A promissory note is commonly deployed in trade finance in much the same way as a bill of exchange (see Practice Note: Introductory guide to unstructured trade finance), but the key distinction is that a bill of exchange constitutes an instruction to pay (typically the drawer directing the drawee to pay the payee), whereas a promissory note is an undertaking to pay (the maker of the note undertaking to pay the payee). For further detail on bills of exchange, see Practice Note: Bills of exchange—structure and parties. Both instruments are governed by the detailed provisions of the Bills of Exchange Act 1882 ( BEA 1882). When construing and interpreting the BEA 1882 as it relates to promissory notes, Part II, in particular, must be taken into account, as it sets out specific modifications and exceptions that also apply mutatis mutandis to the rules...

This Practice Note on construing contracts examines when material from pre-contract negotiations and statements may be relied upon to assist interpretation of the agreement. When advising on contractual construction, you should have regard to: the guiding principles applied by the court when interpreting the meaning of contracts, including the need to consider the background matrix of fact (also known as the factual matrix) and the commercial context in which agreements were made—see Practice Note: Contract interpretation—the guiding principles the rules (or ‘canons’) of construction used to help ascertain the sense of a written contract—see Practice Note: Rules of contract interpretation other aids to contractual interpretation such as the parol evidence rule—see Practice Note: The parol evidence rule in interpreting contracts the admissibility of surrounding documents as an aid to construing contracts—see Practice Note: Contract...

Real estate finance is a type of secured lending. Some motivations for taking security in a real estate finance deal mirror in practice the general benefits of security seen in commercial lending (see Practice Note: Difference between security and quasi-security— Why take security and/or quasi-security?). However, security assumes heightened significance here because the borrower is commonly a special purpose vehicle ( SPV) (also referred to as a special purpose company or SPC) incorporated solely for the contemplated transaction (that is, to acquire, or to acquire and develop, a property). Consequently, the borrower will lack an operational track record and its assets will be limited to the property itself and, where relevant, the development of that property. See Practice Note: Introduction to real estate finance—the lending structure— Borrower entities in real estate finance transactions. Due to the SPV structure, a lender’s assessment of the...